Gold producer Rio Alto Mining (TSX: RIO; NYSE: RIOM) is acquiring developer Sulliden Gold (TSX: SUE, US-OTC: SDDDF) in a friendly $300-million, all-share deal to create a new mid-tier gold firm with low-cost operations in Peru.
Under the agreement, Rio will exchange 0.525 of its share for each Sulliden share. The offers values Sulliden at $1.12 per share, marking a 43.4% premium over the company’s May 20 close.
“We believe this is a logical and ideal transaction for the shareholders of both companies,” Alex Black, Rio’s CEO, said during a joint conference call with Sulliden. “The combination of our assets provides for a strong portfolio of operating and development assets focused in Peru — a world-class and highly prospective jurisdiction.”
The deal will combine Rio Alto’s producing La Arena gold oxide mine in the La Libertad region, with Sulliden’s Shahuindo gold development project — 30 km north in Cajabamba — to produce 300,000 oz. gold a year at attractive costs starting in 2016.
La Arena should turn out 200,000 to 220,000 oz. gold this year at cash costs of US$629 to US$695 per oz., with Shahuindo adding 100,000 oz. a year, once it comes online.
Asked how the deal came about, Black said Rio was looking for growth opportunities, while Sulliden was examining financing avenues to develop Shahuindo, providing a perfect acquisition opportunity. “We were both in the right place at the right time . . . it is as simple as that.”
Sulliden’s CEO Peter Tagliamonte added that the deal “just made sense,” arguing there are many synergies resulting from the two projects being close together and from Rio Alto’s proven abilities in the technical and social realms when it came to building an open-pit heap-leach mine at La Arena. Rio Alto expanded the project’s initial 10,000-tonne-per-day capacity to 36,000 tonnes, just 18 months after start-up.
Black said his team would apply the same template it used at La Arena to build Shahuindo, while keeping the “big picture in mind.”
“It is not often in the mining business that you can acquire a carbon copy of a current mine right next door. This opportunity is unique,” Black told analysts on the call.
Rio expects to break ground at Shahuindo in 2015, with first production in late 2015 or early 2016.
A 2012 feasibility study envisioned it costing US$132 million to build a 10,000-tonne-per-day, open-pit heap-leach mine at Shahuindo, delivering an average 85,000 oz. gold a year over a 10-year life at cash costs of US$550 per oz.
Black kept his cards close to his chest regarding development options, but did say Shahuindo would benefit from Rio Alto’s existing facilities, personnel and cash flow, adding that initial costs should come in below the US$132-million estimate. Shahuindo could also grow to 30,000 tonnes per day.
Once the transaction closes, the combined firm would boast a US$664-million market capitalization and US$45 million in cash, plus a strong cash flow from La Arena, which could partly fund Shahuindo’s development.
Sulliden’s flagship project will increase Rio Alto’s 1 million oz. in oxide reserve by 95%, and add 2.4 million oz. to Rio’s 5.4 million oz. in measured and indicated.
Both Shahuindo and La Arena have expansion and resource upside, Black said.
But analysts covering Rio appeared less optimistic about the deal. “At first glance, the transaction appears slightly dilutive,” BMO analyst Brian Quast penned in a note.
“It is the right asset for Rio Alto (location, product and quality of asset) but the price seems high to me, particularly given current market conditions,” Christos Doulis, an analyst at PI Financial, wrote in an email.
Nevertheless, Black appeared confident in the transaction’s worth.
“If you look at this deal on a short-term basis, you can read into it whatever you like . . . but we will show medium- to long-term value add,” he said on the call.
Raymond James analyst Chris Thompson, who covers Sulliden, agrees. Sulliden is set to benefit from Rio Alto’s technical expertise and Rio could enjoy a market re-rating, he wrote, describing the deal as a “win-win.”
As part of the transaction, Sulliden shareholders will also receive 0.10 of a share in a new spinout company for each share held. The spinout firm will have Sulliden’s East Sullivan exploration project in Quebec and either $25 million in cash or $15 million in cash and $10 million in Rio Alto shares. The value of this entity is not included in the deal.
The acquisition should close in late August, and requires approval from two-thirds of Sulliden shareholders and from the majority of Rio shareholders. Both companies said they would hold shareholder meetings in July.
Once approved, two Sulliden nominees will join Rio’s board, and Sulliden shareholders will hold 48% of the combined company.
The transaction has a reciprocal $15-million break fee and a $2-million cost-reimbursement fee.
On the acquisition news, Sulliden soared 33% to close May 21 at $1.04, while Rio Alto fell 8% to $1.96.
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