After pursuing Quebec-focused Aurizon Mines (ARZ-T, AZK-X) for years, Alamos Gold (AGI-T) has finally gone hostile, announcing a $780-million, cash-and-share bid for the junior gold miner.
Alamos’ offer, which breaks down to $4.65 per Aurizon share, or 0.2801 of an Alamos share, represents a 40% premium over Aurizon Mines’ closing share price on Jan. 9.
The merger would combine two single-asset gold miners with mines in safe jurisdictions to create a leading intermediate gold company, with production of 320,000 to 370,000 oz. gold per year over the next two years, and 500,000 oz. gold by 2016.
A debt-free, low-cost miner, Alamos owns the Mulatos mine in Mexico’s Sonora state, which produced 200,000 oz. gold last year, as well as development projects in Turkey — including Agi Dagi, Kirazli and the earlier-stage Camyurt — that will come on stream in 2014.
Aurizon owns the Casa Berardi underground mine in the Abitibi region of northwest Quebec, which produced 137,000 oz. gold last year, and which Alamos sees producing 150,000 oz. a year from 2014 through 2017, with additional open-pit production.
On the news, Alamos Gold shares ended the day down $2.02, or 12% at $14.90, while shares in Aurizon leaped $1.14, or 33%, to $4.55.
In a press release the day after the offer was made, Aurizon said it is evaluating the bid and expects to form a special committee of the board of directors to help make a recommendation to shareholders. It says shareholders should not take any action until the board examines the offer.
On a conference call to discuss the bid, McCluskey sought to reassure investors of the rationale behind a merger between a low-cost, open-pit, heap-leach producer and an underground miner.
“We’re unlikely to find an asset with the attractive economics that Mulatos possesses, but that shouldn’t limit us as a mining company from acquiring things that we see as valuable, and where we think we’re going to create value for our shareholders,” he says. “Frankly, if we didn’t think there was an opportunity to get the mine back to previous production and cost levels, we wouldn’t be that interested in it. It’s just that we think together, the company is a much stronger company than either asset is apart.”
Cash costs at Mulatos last year were expected to average US$445 to US$470 per oz. gold, including a 5% royalty, while total cash costs at Casa Berardi in Aurizon’s recently reported third quarter of 2012 were US$759 per oz. gold, with average costs for the year expected to reach US$694 per oz. gold.
In 2011, however, cash costs at Casa Berardi were only US$537 per oz. gold, on strong production of nearly 164,000 oz. gold.
McCluskey points to his company’s positive record on the mergers and acquisitions front, which has allowed it to increase reserves, resources and production, while holding the line on costs.
Alamos’ sterling M&A record began with Mulatos, which it built into a world-class asset after paying $10 million for it in 2003. The company recognized early that the market had “mispriced the risk profile of Mexico,” McCluskey says.
In 2010, Alamos paid $90 million for its Turkish assets, which represent $600 million in net asset value, and are on pace to achieve production four years after acquisition.
“We have not pursued growth for growth’s sake,” McCluskey says. “I’ve taken this position since founding the company. We choose to grow only where growth will create real value, producing strong margins and generating substantial cash flow.”
McCluskey says the merger would be accretive to net asset value, production, cash flow and resources.
The company says that cash costs would remain relatively steady over the next few years and remain in the lower half of its peer group.
In addition to slashing most of Aurizon’s general and administrative costs — about $15 million — the merged company would find some $5 million in tax savings from having a Canadian operation, and could use $30 million in tax losses against income generated from Casa Berardi.
On the conference call, the company executives also stressed that in the mid- to long-term, Alamos would remain predominantly a low-cost, open-pit, heap-leach gold producer.
With regard to its long pursuit of Aurizon, McCluskey notes that Alamos has tried to pursue a friendly bid for the company, but it has been unresponsive.
“We have made multiple approaches to Aurizon over the years. I sent a rather lengthy letter to the chairperson of the company just over a year ago — I think I received a two-line response in return,” he says.
While Alamos negotiated a confidentiality agreement with Aurizon in 2008, he says the two sides could never agree on a date for a site visit.
“The reality is that there’s just never been any interest at all on [Aurizon’s] management side to pursue a combination, or even explore whether it would be an accretive and attractive value proposition for the shareholders of both companies. We worked on it and we saw clearly that it was, so we decided to take our proposal directly to the shareholders.”
Alamos made the offer based on publicly available information, but notes that Aurizon is covered by eight analysts, and that the mine is a “known quantity” that has been operating for six years. While Aurizon has other properties in Quebec, including the feasibility-stage Joanna, Alamos has not assigned them any value.
A feasibility study on Joanna last year showed disappointing economics.
In a separate release, Alamos announced that it now owns or controls 16% of Aurizon’s outstanding shares. Of those, Alamos says it recently acquired 14.3% of Aurizon’s shares, or 23.5 million shares in total, from “certain shareholders” of Aurizon. The vendors agreed to a price of $4.65 per share, but were paid in 6.6 million shares of Alamos (the same exchange ratio of 0.2801 of an Alamos share to 1 share of Aurizon, as it has offered for the entire company).
Alamos says it has additional support from the “select few” major institutional shareholders of Aurizon that it has approached.
The company will pay out a maximum $305 million in cash, and issue a maximum of 23.5 million shares.
The offer expires on Feb. 19 and is subject to a few conditions, including that Aurizon not adopt a shareholder rights’ plan, which could prevent shareholders from accepting the offer. To be approved, two-thirds of Aurizon shares must be tendered to the offer.
The bid does not require approval of Alamos shareholders, since it will be fully financed. Alamos has more than $350 million in cash and equivalents.
Alamos has applied to list its common shares on the New York Stock Exchange.
Alamos shares have traded in a 52-week range of $13.84 to $21, with 120.9 million shares outstanding, while Aurizon shares have traded in a window of $3.15 to $5.75, with 164.6 million shares outstanding.
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