Teranga consolidates in Senegal

Teranga Gold (TSX: TGZ; US-OTC: TGCDF) finally has all of the Oromin Joint Venture Group (OJVG) in Senegal to itself.

It was an arduous process, replete with lawsuits and thwarted acquisition efforts, but the matter was finally brought to a conclusion via the sale of a gold stream to Franco-Nevada (TSX: FNV; NYSE: FNV).

The deal with Franco-Nevada gives Teranga an upfront injection of US$135 million — enough cash to consolidate ownership in the gold asset  and shore up its balance sheet, by paying down a good chunk of its debt.

On the acquisition side, the money gets Teranga the remaining 56.5% interest in the OJVG that it doesn’t already own. The company will take that stake by making two transactions. The larger of the two is buying privately held Bendon International’s 43.5% stake in OJVG for $105 million. That leg should take care of a lawsuit that Bendon had filed against Teranga regarding the company’s earlier acquisition of Oromin Exploration.

 In the second leg Teranga will buy privately held Badr Investment & Finance’s 13% stake in the project for $7.5 million.

With the OJVG all to itself, Teranga can now mine the Golouma open-pit and underground deposits and the Masato deposit. Taken together, the deposits have proven and probable reserves of 28.01 million tonnes grading 2.59 grams gold for 2.34 million oz. gold.

The deposits are close to Teranga’s Sabodala mine, which, Teranga has long argued, will allow it to unlock synergies that wouldn’t be available to another operator.

As for the stream with Franco-Nevada, it requires Teranga to deliver 22,500 oz. gold per year — 11% of production based on this year’s level — for the first six years, followed by 6% of production after that. On delivery Franco-Nevada will pay 20% of the spot gold price.

The stream agreement has an initial 40-year term and is expected to close on Jan. 17, 2014.

While most of the new capital will go towards acquiring the OJVG, Teranga will also firm up its balance sheet by paying down $30 million of the $60 million it owes Macquarie.

Teranga’s president and CEO Richard Young pointed out on a conference call that reducing debt protects the company from debt-covenant violations that could arise in a sustained, low-gold-price environment.

“We believe in higher gold prices, but we want to have protection against lower prices as well,” Young said.

The reaction from the market was positive, as the deal inspired a rally in Teranga’s share price, which climbed 25%, or 11¢, to 55¢ in on Dec. 12, while Franco-Nevada shares were off 2% to US$38.57 per share in New York.

Scotiabank analyst Leily Omoumi calls the deal positive for Teranga — especially because it could resolve the legal issues with Bendon.

The cost to attain such a resolution, however, was richer than the price paid for Oromin’s 43.5% stake back in October. That acquisition had cost Teranga US$90 per oz. in the ground, compared to the US$137 per oz. in the ground it is paying with the latest acquisition.

Bendon’s insistence that it would not accept equity as compensation for its stake no doubt forced Teranga to find an alternative source of cash, and Franco-Nevada was able to step in.

From Franco-Nevada’s point of view, the deal gives it cash flows from ongoing operations — Scotiabank analyst Tanya Jakusconek estimates the deal would generate $28 million in revenue, based on the 22,500 oz. minimum using a US$1,250 per oz. gold price — but as with all Franco-Nevada deals, the key is the long-term upside potential.

Franco-Nevada’s senior vice-president of business development Paul Brink said on the conference call that the company was mostly excited about the project’s prospects.

He pointed out that Teranga controls much of a 70 km regional shear zone in the Birimian belt that is highly altered, with significant heat sources, which could translate into more discoveries in the years to come.