Red Back Bets On DRC With Moto Bid

After staring into the dirty water more than two years, Red Back Mining (RBI-T, RBIFF-O) has finally decided to take the plunge.

The company is making an all-share offer valued at $513 million for Moto Goldmines (MGL-T, MTOGF-O) — with each Moto share being exchanged for 0.45 of a Red Back share. The offer represents a 40% premium over Moto’s 20-day weighted average using Red Back’s closing price on May 29.

While the Democratic Republic of the Congo (DRC) can still send shivers of trepidation through investors, Red Back’s desire to become Africa’s best growth story for gold outweighed any reservations it might have about doing business in the notoriously tricky region.

“There’s been a lot of progress made there since two years ago in terms of certainty of contracts,” Richard Clark, Red Back’s president and chief executive said in a conference call associated with the deal. “There’s been progress in the DRC politically, particularly in the region where Moto is located.”

Moto chief executive Andrew Dinning backs Clark’s analysis, pointing out that the headlines read in the West are generated from the Kivu region of the DRC — some 500 km south of where Moto sits. And 500 km over a rugged terrain with minimal road infrastructure is a long ways away, he adds.

Still Clark didn’t shy away from the fact that Red Back will have to spend more on security than it has at its two other key gold projects — Tasiast in Mauritania, and Chirano in Ghana.

“Will it involve more security than Ghana? Absolutely,” Clark said. “That is just the nature of the beast . . . we’re not jumping in with our eyes closed in any way, shape or form.”

Political and security issues aside, there is little doubt that the Moto project — which comprises half of the Kilo-Moto gold belt in the northeastern DRC — is one of sub-Saharan Africa’s richest projects.

Moto Goldmines, which has completed a feasibility study on the project, has delineated an indicated resource there of 112 million tonnes grading 3.1 grams gold for 11.3 million oz. gold.

In early March, the company released an optimized feasibility study that put reserves at 42.3 million tonnes grading 4 grams gold for 5.5 million oz.

While the reserves posted in the initial feasibility study from 2007 counted only open-pittable resources from six deposits on the property, the most recent study included underground resources.

The study also predicted a mine life of 16 years based on a throughput rate of 2.8 million tonnes per year with gold production over the first five averaging 484,000 oz. per year.

Moto, which has been operating at the site for five uninterrupted years — evidence, Dinning says, of the lack of turmoil in the region — has a 70% interest in the project. The remaining 30% is held by the government entity Okimo. The joint venture calls for Moto to come up with all the financing for development, but once in production it would be reimbursed for Okimo’s share.

The agreement with Okimo was key to the company’s ability to secure the government approval that has eluded other Western miners in the region. While some companies in the copper belt to the south still wait for the resolution of the mining review that began in late 2007, Moto signed its joint venture in early March.

The conclusion of that deal with the government, combined with Red Back’s familiarity with the DRC, helped drive the offer, Clark said.

“It is important for everybody to understand and recognize that the Lundin group, which Red Back is a part of, has been operating in the DRC longer than anybody,” Clark said. “We are very politically connected, we’re connected to the security situation, and we’ve been following Moto’s region for quite a while because that was the project that was of most interest to us. We are confident that we can construct a mine in the near term there.”

Clark said he expected Moto shareholders to vote on the offer within the next 60 days and for the deal to be completed by early August.

Once finalized, the deal would have Red Back shareholders controlling 82% of the merged company with the remainder being held by Moto shareholders.

For his part, Dinning says the offer represents the best way for Moto shareholders to partake in the development of the mine. That is because, being a one-project company, it would have been difficult for Moto to raise the funds necessary to get the mine into production.

That isn’t a problem for Red Back. With expansion projects at its Tasiast and Chirano mines complete and with $160 million in working capital funds sitting in the bank, and cash flows coming in from its other two mines, Clark is confident that Red Back can fund development without any outside help.

But should more funds be required, he says the company’s strong balance sheet means it would be able to secure debt financing at much more favourable rates than Moto could.

If it does move the mine into production swiftly, Red Back would position itself as a key gold player in Africa.

“We’re targeting and working hard to bring this project into the multi-tens of millions of ounces. It has that potential and we think Tasiast in Mauritania might have similar potential,” Clark said. “So we think this will be a fantastic company, and we encourage others to recognize the growth story.”

In Toronto on the news, Red Back shares finished 6% or 65¢ lower at $9.80 on 5.5 million shares traded, while Moto stock finished 15¢ or 3% higher at $4.65 on 1.3 million shares. Much of Moto’s gains had already come in the days leading up to the announcement as the company’s shares closed at $3 on May 22.