VANCOUVER – In one fell swoop, Esperanza Resources (EPZ-V) has gained three advanced-stage gold projects, $35 million in funding, and a new major shareholder in a deal with Pan American Silver (PAA-T) that vaults the junior ahead in its mission to become a mid-tier gold producer.
Pan American took over Mindfinders in early 2012 primarily to gets hands on the Delores silver mine, but it also took on Mindefinders' earlier-stage assets. One of those was the La Bolsa gold project, a small but construction-ready gold oxide deposit in Mexico. Similarly, Pan American bought out Aquiline Resources in early 2010 for the Navidad project, but the deal also added the Calcatreu project in Argentina and the Pico Machay project in Peru to Pan America's portfolio.
All three are advanced-stage projects with good resources and healthy economics, but they are too small for a major like Pan American. They needed to be moved to a smaller company that wanted to get its start by building a series of small, low-cost mines, ideally in a deal that still provided Pan American with exposure to some of the projects' future upside.
Enter Esperanza Resources, a company with precisely that goal. In addition, half of Esperanza's management team came from Minefinders, which means they are already know the folks at Pan American and are familiar with La Bolsa. It was the perfect match, and out of that match came a dream deal for Esperanza.
For just 50.9 million shares and 10 million warrants, Esperanza is buying La Bolsa, Pico Machay, and Calcatreu from Pan American. Each warrant can be exercised for $1.80 into a full EPZ share until May 2017; if PAA exercises all 10 million warrants it would add $18 million to Esperanza's coffers.
Pan American is also subscribing for 20.6 million EPZ shares at $1.70 apiece, which represents a 29% premium to the junior's 20-day volume-weighted average share price and a 48% premium to the company's share price the day before the deal was announced. That transaction will put $35 million into Esperanza's bank account, funds that will go a long ways towards getting La Bolsa built.
"We are very excited to launch Esperanza on a path to becoming a profitable mid-tier gold producer," said Greg Smith, Esperanza's president and CEO. "This transaction provides a clear path to profitable production with the addition of La Bolsa, a project that complements our flagship Esperanza project very well."
The private placement will also position Pan American as Esperanza's largest shareholder. When the placement closes Pan American will own 20.7% of Esperanza's outstanding share count; if PAA were to exercise all of its EPZ warrants its ownership in the junior would climb to 28%. Three Pan American representatives – president and CEO Geoff Burns, COO Steve Busby, and executive vice-president Michael Steinmann – will also join Esperanza's board of directors.
On top of being Esperanza's largest shareholder, Pan American might also become the junior's bank: the major is also providing Esperanza with a $15-million standby convertible credit facility. If Esperanza needs additional funds to get La Bolsa built, it will be able to draw from the facility anytime over the next 24 months.
Esperanza may or may not need to tap into that credit facility. The $35 million it gained in the private placement might be enough to build its first mine, as a 2010 pre-feasibility study pegged the costs to develop La Bolsa at just $31.4 million.
La Bolsa is home to an oxidized blanket of gold-silver mineralization that contains 15.6 million proven and probable tonnes grading 0.63 gram gold per tonne and 9 grams silver per tonne. That reserve is enough to feed an 8,500-tonne-per-day open pit mine for six years, though Esperanza is optimistic the mine life can be extended through additional drilling as the deposit remains open both down dip and along strike.
The planned mine at La Bolsa mine would produce 40,000 oz. gold and 52,000 oz. silver annually. Silver output is constrained by the type of mineralization, which limits silver recovery to just 7%. Gold recoveries are expected to average 72%, using a carbon adsorption recovery system.
La Bolsa should be able to produce an ounce of gold for US$510, net of silver credits. Using a gold price of US$1,200 per oz., a silver price of US$18 per oz., and a 5% discount rate, La Bolsa carries a pretax net present value of US$91.3 million and is expected to generate a 34% pretax internal rate of return.
Minefinders was primed to start construction at La Bolsa when it was acquired by Pan American. Now Esperanza is taking up the cause – and it should be a speedy effort, as La Bolsa is fully permitted for construction.
"The La Bolsa project enjoys low capital and operating costs and has an attractive rate of return," said Smith. "La Bolsa could be a relatively low-risk entry point for Esperanza as we move towards becoming a producer… We could be producing gold from La Bolsa in the first half of 2014."
An operational gold mine at La Bolsa would generate cash flow that Esperanza could use to fund construction of its flagship project, the Esperanza project in Mexico. The company plans to develop the oxidized gold-silver skarn deposit at its namesake project into an open pit, heap leach operation. A feasibility study is currently underway.
Next up in Esperanza's newly-expanded project pipeline is Calcatreu, a high-grade epithermal gold-silver project in Rio Negro, Argentina. A previous owner advanced Calcatreu to feasibility level in 2005, with a study that showed positive economics. However the project was forced to the back burner when the province of Rio Negro banned the use of cyanide, which is needed to recover precious metals from the rocks at Calcatreu.
All that changed in January 2012, when Rio Negro lifted the cyanide ban. Now Esperanza plans to start fresh with the project, with new exploration efforts to expand the deposit. Resources currently stand at 8 million indicated tonnes grading 2.63 grams gold and 26 grams silver plus 3.4 million inferred tonnes grading 2.06 grams gold and 17 grams silver, but the primary vein system remains open down dip and the structure hosting it remains open along strike.
"We believe Calcatreu has significant potential for expansion," said Smith. "However, given the inflationary environment in Argentina right now, we believe this is a longer-term project for Esperanza."
The third project in the Pan American deal is Pico Machay, an epithermal gold deposit in the Huancavelica department of southern Peru. Pico Machay is the least advanced of Esperanza's three new projects but Smith says they are more than happy to have the project in Esperanza's pipeline.
"Pico Machay will not be a focus for us right away, but it is a great project," Smith said. "It is in a good area in Peru, a pro-mining area with good infrastructure. We will start by drilling and working on a preliminary economic assessment, and go from there."
News of the Pan American deal added 14¢ to Esperanza's share price, lifting it to $1.29. The company has a 52-week trading range of 99¢ to $1.70 and has 78.8 million shares outstanding.
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