Alamos Expands Into Turkey (October 05, 2009)

Management at Alamos Gold (AGI-T, AGIGF-O) will have to put down their English-Spanish dictionaries and pick up some Turkish phrase books after their purchase of two gold projects from Fronteer Development Group (FRG-T, FRG-X) and Teck Resources (TCK. B-T, TCK-N) in Turkey.

Toronto-based Alamos Gold is expanding out of Mexico, forking out US$40 million and issuing 4 million shares to Teck (60%) and Fronteer (40%) to acquire 100% of the Agi Dagi and Kirazli gold projects in an emerging gold-copper district in northwestern Turkey. (A third party has a 2% net smelter return royalty on production from Agi Dagi.)

“We’ve been active for a number of years in Mexico and have been pursuing acquisitions there, but we had to recognize that these assets truly represented a compelling opportunity and they were for sale,” John McCluskey, president and chief executive of Alamos Gold told analysts and investors in a conference call. “Turkey is located at the crossroads of the world — between Asia, Europe and Africa — and while it has had a history of 9,000 years of mining, it is significantly underexplored.”

McCluskey noted that the democratic country is not only a member of the European trading community, a founding member of the G-20 and a longstanding ally of the West, but that it has brought in a new mining code (1995), boasts an attractive tax regime, and can point to 14 mines that are currently in production — five of which are gold mines. Four other gold mines are under development.

With one operating mine in Mexico — Mulatos in Sonora state — McCluskey said he was excited about “evolving from a one-mine to a multi-mine company,” and said the acquisition would represent a 75% increase in Alamos Gold’s total measured and indicated resources and a 55% increase in its inferred resources. He also noted that production could start in Turkey as early as 2013.

According to a June 2007 National Instrument 43-101-compliant resource, the two properties host measured and indicated oxide resources of 1.29 million oz. gold and 8.4 million oz. silver in three deposits, plus inferred oxide resources of 702,000 oz. gold and 5.25 million oz. silver at a cutoff of 0.5 gram gold per tonne.

In the measured and indicated category, there are 37.1 million tonnes grading 1.09 grams gold per tonne and 7.04 grams silver, while in the inferred category, there are 19.8 million tonnes grading 1.1 grams gold and 8.25 grams silver.

The oxide resources are open for expansion and significant sulphide resources are also contained within the three deposits.

Since publishing the resource estimate, Fronteer and Teck have completed an additional 81 holes of core and reverse-circulation drilling on the three main mineralized zones.

Apart from the defined gold resources, just five holes have been completed on other targets on the concessions and Alamos believes there is potential to develop additional resources over time.

The Biga mineral district features a growing number of high-sulphidation epithermal gold and associated porphyry copper-gold deposits, and Alamos believes it may bear comparison with world-class districts such as Yanacocha, Pierina, and Alto Chicama in Peru.

Agi Dagi is roughly 50 km southeast of Canakkale, near the town of Can. Kirazli is about 25 km by paved road northwest of Agi Dagi. The region is well serviced with electricity, transmission lines, and electrical generating facilities.

The combined properties have the immediate potential to be developed into low-cost oxide gold heap-leach operations. The projects include an established camp facility, available water supply, are located on the power grid, and are road-accessible.

Preliminary metallurgical studies on oxide materials from all three deposits indicate average recoveries of about 90%, rapid leach times, and low reagent consumptions.

“This is a mineral system we’re very familiar with,” McCluskey said, noting that his company’s Mulatos mine in Mexico is part of an epithermal, high-sulphidation, disseminated gold system. “These (Turkish projects) are near-surface deposits and the metallurgy is very simple. It’s well within our existing management and technical capability.”

(Mulatos is 220 km by air east of the Mexican city of Hermosillo in the Sierra Madre Occidental mountain range of Sonora state, about 300 km south of the U. S.-Mexico border. McCluskey expects the mine will produce about 170,000 oz. gold this year and will see modest growth in 2010 and 2011 based on incremental improvements in operations, followed by a significant production increase in 2012.)

The Turkish properties are fully permitted for exploration and drilling permits have recently been renewed. There remains, however, about one year’s worth of work to secure the additional permitting required for the construction phase.

The agreement to sell the Agi Dagi and Kirazli projects does not include the Halilaga property, a copper-gold porphyry project in Turkey also owned by Teck (60%) and Fronteer (40%).

When asked by an analyst on the conference call why Alamos Gold — an unhedged gold producer with more than $140 million in cash — chose to include shares as part of the purchase price, Mc- Cluskey replied it was a minor dilution and left cash to look at other possible acquisitions.

“Cash is allocated to a number of things and part of the advantage is you can use your shares as currency and we thought that was a good approach to this transaction,” he explained. “It’s a very minor amount of dilution and it wasn’t much of a knock on our balance sheet that would leave us with about $115 million in cash once we pay it out, so we have a very strong cash position to undertake other possibilities we’re looking at and working on Mulatos for the time being.”

He added that Alamos Gold, which has doubled the size of its management team in the last year, continues to look at opportunities and is interested in projects at various stages along the development curve, although he sees the best leverage is the preproduction stage. “The best value. . . is to acquire ounces at a reasonable cost and then undertake feasibility and construction of the mine,” he told analysts. “That would be our preferred target but we are open to discussion that may involve companies that are in production and we have no objection to do doing a deal like that as long as we see it is an accretive business transaction for our shareholders.”

Mark O’Dea, Fronteer’s president and CEO, explained that the sale of the company’s 40% interest in the Turkish projects would give it more leeway to develop its existing pipeline of gold projects in Nevada.

“We were minority partners in these two gold projects, a non-operating minority partner, and our focus is on building low-cost gold projects that we control and operate and those projects are in Nevada,” he told The Northern Miner, speaking of the company’s Long Canyon, Sandman and Northumberland projects. “So this transaction is an important catalyst to increase our focus in Nevada, boost our treasury and move our Nevada projects forward toward feasibility.”

McCluskey noted that the project had not been high on Teck’s priority list. “The area hasn’t had a lot of work in the last year and a half,” he said. “It obviously was not a high priority for Teck, and over the last year and a half it has been sitting on the sidelines, so that’s probably one of the reasons it came up for sale and we feel very fortunate to have been the successful bidder to acquire it.”

At presstime, Alamos traded at $9.63 in a 52-week range of $3.50- 11.30; Teck traded at $28.95 in a 52- week range of $3.35-36.38; and Fronteer traded at $4.52 in a 12-month window of $1.55-5.16.