Red Back: Big growth through DRC

After kicking the tires for over two years, Red Back Mining (RBI-T) finally decided to take the plunge.

The company is making an all share offer valued at $513 million for Moto Goldmines (MGL-T) — with each Moto share being exchanged for 0.45 of Red Back stock. The offer represents a 40% premium on 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 the market, 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 region where Moto is locate.”

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

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 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 is comprised of one half of the Kilo-Moto gold belt in northeastern DRC — is one of sub Saharan Africa’s richest projects.

Moto Goldmines, which has completed a feasibility study on the project, has managed to put 112 million tonne grading 3.1 for 11.3 million oz. of gold in the indicated resource category.

In early March of this year, the company released an optimized feasibility study which 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 bee operating at the site for five uninterrupted years – evidence, Dinning said, 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.

Reaching such and agreement with Okimo was key to the company being able to secure the government approval which has eluded other western miners in the region. While some companies in the copper region still wait for the resolution of the mining review, Moto signed its joint venture in early March of this year.

The conclusion of that deal with the government, combined with Red Back’s familiarity with the issues of the DRC, helped usher in 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 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 merged company with the remainder being held by Moto’s 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 projects 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 the company require more funds, he says the company’s strong balance sheet means it would be able to secure debt financing at rates much more favourable than what Moto would have been able to attain.

If it does move the mine into production swiftly, Red Back would position itself as one of the key gold players 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 June 1, Red Back shares finished 6% or 65 lower at $9.80 on 5.5 million shares traded, while Moto shares 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 $3.00 on May 22.