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TABLE OF CONTENTS Jun 16 - 22, 2014 Volume 100 Number 18 - 0 comments

Mandalay acquiring Elgin for $70M

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By: Matthew Keevil

VANCOUVER — Toronto-based gold miner Mandalay Resources (TSX: MND; US-OTC: MNDJF) had been on the lookout for an acquisition to boost its near-term production profile, and it has apparently found a fit in Elgin Mining (TSX: ELG, TSXV: ELG) and its Bjorkdal gold mine in Sweden’s Skelleftea district. Mandalay tabled  a friendly cash-and-share deal for Elgin on June 4, with the acquisition value pegged at $70 million.

Under the offer, Elgin shareholders can choose 37¢ in cash or 0.4111 of a Mandalay share for each share held. The choice would be subject to pro-ration based on a maximum 50 million aggregate shares of Mandalay and up to $25-million aggregate cash. 

Based on the closing price of Mandalay and Elgin shares on June 3, the offer represents an 85% premium for Elgin shareholders.

As a condition, Elgin must resolve outstanding reclamation obligations relating to its former coal operations in Kentucky. The company reported $1.2 million in restricted cash securing $2.6 million in reclamation bonds posted with state agencies at the end of March. According to Elgin president and CEO Patrick Downey, the company is negotiating a settlement with the requisite state and federal agencies.

In connection with the transaction, Mandalay has agreed to provide Elgin a $5-million convertible bridge loan. The proceeds would help repay a bridge loan from Sprott Resource Lending, which contains restrictions on Elgin’s ability to satisfy its Kentucky coal reclamation obligations.

Meanwhile Mandalay exceeded its 2013 guidance by cranking out 127,000 equivalent oz. gold from its Costerfield gold–antimony mine in Australia and Cerra Bayo gold–silver mine in Chile. 

The company posted net income of US$29.4 million, or 9¢ per share for the year, and settled on a dividend policy wherein it will pay shareholders 6% of the trailing quarter’s gross revenue.

Bjorkdal is a mechanized underground and open-pit mine with an automated processing plant producing gravity and flotation gold concentrates. Elgin’s 2014 production guidance at Bjorkdal ranges from 44,000 to 49,000 oz. gold, with all-in sustaining costs at US$1,088 to US$1,207 per oz. 

Adding Bjorkdal’s forecast production for the second half of 2014 to Mandalay’s production guidance, the company’s annual gold-equivalent production guidance would jump to 152,000 to 167,000 equivalent oz. gold.

“Bjorkdal has a number of interesting advantages, and it’s a mine with a long track record,” commented Mandalay CEO Brad Mills during a conference call, noting that the operation has produced in excess of 1 million oz. gold over its life.

“From our perspective it has a large resource base, and we expect there will be significant resource growth through dedicated exploration. The orebody is essentially open in almost all directions, and it’s an immature district from an exploration perspective, with little regional work done. There are lots of previously identified gold anomalies and drill intercepts that need to be followed up on,” he added.

As of April 2013 Bjorkdal hosted open-pit reserves of 5.5 million proven and probable tonnes grading 1.05 grams gold per tonne for 185,200 contained oz., while the undeground tacks on 2.1 million proven and probable tonnes averaging 2.07 grams gold for 139,100 contained oz.

Global measured and indicated resources add 18 million tonnes of 1.78 grams gold for 1 millon contained oz., while inferred resources total 11 million tonnes averaging 2.08 grams gold for 753,000 contained oz.

Downey speculated that the open pit has eight more years of mine life, with 70% of the mine’s gold expected to come from underground this year.

Elgin has undertaken a variety of cost-cutting measures on Bjorkdal’s underground operation. It has moved away from contract mining, and saw its cash cost per ounce produced improve by 24% during the fourth quarter.

“We expect we’ll be able to achieve significant growth and improvement in costs over the next 12 to 36 months. That’s typical with a lot of Mandalay assets, as we’re acquiring for upside opportunities,” Mills noted. “If you can improve the dilution and keep pushing that underground grade up and displace some of the lower-grade open-pit ores that will help significantly. We believe the engineering staff at the mine is competent, but a bit young and inexperienced. Elgin did a great job bringing costs down, but we’re going to look at a complete redesign of the mine plan.”

Mills also noted that the acquisition would result in a 17% de facto increase on an annualized dividend basis. 

Assuming US$1,250 per oz. gold Bjorkdal would add $3.6 million in cash to the dividend pool, and bump payments from 3.176¢ per share on an annualized basis to 3.73¢ per share.

Elgin shares rose 63% on 7.1 million traded after the offer news, en route to a 32.5¢ close at press time. Shares have traded within a 52-week range of 9¢ to  35¢. There are 173 million shares outstanding for a $56-million market capitalization.

Mandalay shares were flat after the announcement, though they saw an uptick in trading volume, closing at 89¢, with 1.3 million shares traded. 

Shares have traded within a 52-week range of 60¢ and $1.09. There are 341 million shares outstanding for a $304-million market capitalization.

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Related Press Releases
Mandalay Resources Provides 2015 Year-End Exploration Updates for Its Costerfield, Bjorkdal and Cerro Bayo Mines
Mandalay Resources Corporation Announces Production and Sales Results for the Fourth Quarter and Full Year of 2015
Mandalay Resources Corporation Announces Production and Sales Results for the Third Quarter, 2015 and Announces Management Changes


Elgin Mining's Bjorkdal gold mine in Sweden's Skelleftea mining district. Credit: Mandalay Resources
Elgin Mining's Bjorkdal gold mine in Sweden's Skellefte...

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