With an increasingly hostile 4-way merger battle raging elsewhere,
Under the plan, Rio Narcea will acquire all of Defiance’s shares at the rate of one of its own shares for every 5.25 shares of Defiance. The deal values Defiance shares at 53 apiece, which represents a 37% premium over the issue’s closing price on June 29, the day before the deal’s announcement.
The scheme is subject to regulatory approval, and requires the go-ahead from at least two-thirds of the votes cast by Defiance shareholders at a special meeting planned for late August. The deal includes a $1.2-million break-fee payable by Defiance.
The plan also calls for Defiance CEO John Hick to remain as a director of Rio Narcea and become the company’s vice-chairman. Defiance’s non-executive chairman Cliff Davis would also join Rio’s board. The transaction is expected to close in early September.
Defiance’s key asset is the permitted Tasiast gold project in Mauritania, West Africa, where measured and indicated resources tip the scales at 12.1 million tonnes running 3.1 grams gold per tonne, including 9 million tonnes of reserves grading 3.1 grams gold. About 65% of the tonnes are found in primary mineralization; the balance is oxide ore. An additional 12.4 million tonnes of inferred material runs 2.25 grams gold. The estimates are based on a cutoff grade of 1 gram gold.
A bankable feasibility study by
Tasiast carries a price tag of US$48.4 million, and assuming 100% equity financing and a gold price of US$400 per oz, an internal rate of return of 22.5%. The rate of return climbs to 32% at a gold price of US$450 per oz., and falls to 12.7% at US$350 per oz.
Defiance CEO John Hick says Tasiast remains open at depth, and that the roughly 10 deep holes completed so far have shown higher grades — some exceeding 10 grams gold.
“It’s good hard rock, which would be quite amenable to underground mining,” Hick says. “It’s always been our view that the deposit is amenable to underground development as the open pit progresses.”
Rio Narcea plans to make a production decision soon, with the aim of achieving production in two years.
Rio Narcea CEO Alberto Lavandeira says the first order of business is to review the project’s capital costs. He also figures mining costs can be reduced substantially by using Spanish contract miners.
Lavandeira says there is an inferred resource of about 1 million tonnes grading about 2.2 grams in the existing pit design, which is currently being treated as waste. Drilling is expected to bring those resources into the reserve category, thereby reducing the stripping ratio and costs by about 10% each.
Construction would be partially funded by projected cash flows from Rio Narcea’s Aguablanca nickel project, northwest of Seville, Spain. That mine is expected to begin producing later this year.
Rio Narcea’s plan for Tasiast differs from that proposed in the existing feasibility study. Lavandeira expects to make a production decision by the fall, followed by production in the first quarter of 2006. “I will not take bets on this, but it will be very close to that [estimated startup date],” says Lavandeira.
The construction phase is expected to last about 18 months. Rio Narcea is also considering acquiring a used plant, or at least the main components.
In the end, Rio Narcea says the acquisition of Defiance will help boost its annual gold production to more than 300,000 oz. in three years. By comparison, Rio Narcea expects to produce 90,000 oz. gold at a cash cost of US$240 per oz. from its existing operations in 2004.
“The larger company will be able to participate in a strong nickel and gold market,” says Lavandeira. “We have no nickel hedging and only minimal gold hedging, with full participation in the upside.”
Rio Narcea chairman Chris von Christierson says Tasiast is a perfect fit for its existing gold operations and its Salave project, which is due to come on-stream in two years. “We like this project on a technical basis,” he says. “We’ve been on the ground and through the feasibility study, and we think we can handle the technical challenges pretty well. It also gives us a foothold in the West African gold province, undoubtedly one of the world’s great gold provinces. The acquisition gives us the critical mass we’ve been seeking in the gold business.”
Defiance also holds exploration permits covering some 16,000 sq. km in Mauritania, and Rio Narcea will review these properties to determine their future.
Rio Narcea is shifting to underground mining at its El Valle and Carles mines in Spain’s Asturias region. Nearby, the company has begun a feasibility study of the recently acquired Salave gold project. Meanwhile, construction is nearing completion at the Aguablanca nickel-copper-platinum-group-element deposit in the country’s southwestern region. The company also holds a 6,000-sq.-km land package, mostly in Spain but including part of Portugal.
Shares of Rio Narcea were off 17, or 6.1%, at $2.63 following the news on June 30; Defiance shares were 8, or nearly 21%, higher at 47.
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