With capital being hard to come by, miners are turning to more creative ways to finance production.
Keegan Resources (KGN-T) and PMI Gold (PMV-T) have put their weight behind the growing argument that more miners need to consolidate if projects are going to be pushed into production in the current environment where both debt and equity financings are hard to come by.
The deal represents a merger of equals, with the two company’s shareholders taking an equal part in the new company, which will be called Asanko Gold.
“The beauty about this merger is not only that it elevates us into becoming a leading gold development company, but it also puts $343 million of cash into treasury,” Keegan’s CEO Peter Breese said on a conference call, “so there’s no need to issue new equity or take on debt in the near term.”
The roughly $186 million in cash that PMI shareholders will gain access to is a key component to the deal. When combined with its current cash reserves, it will allow the new company to get its Obotan project into production by 2014.
But the access to capital comes at a bit of a cost to PMI shareholders, as Keegan’s neighboring Esaase project, which is expected to reach production by 2017, does have a lower average grade, making the merger dilutive on a grams per tonne basis to PMI shareholders.
Still, the company’s CEO, Collin Ellison, said the merits of a deal far outweighed any negatives given the current state of the finance world.
“The merger removes financial uncertainty and brings another project with significant size that can be further optimized. It gives benefit to our shareholders through increased production, longer life and cost savings,” Ellison said on the same conference call. “It’s not a normal situation that you have two companies with projects at a similar stage, of similar resource size that can help each other build a mining camp. It’s a fairly unusual opportunity and beneficial to both companies' shareholders.”
He also noted that the ability to avoid debt markets means that production from Obotan will be un-hedged, giving investors direct access to gold prices through the company’s equity.
On the synergy side the two executives were short on specifics, saying only once they sat down and did any optimization analysis in January would they have any concrete numbers. But they expect synergies on both the capex and operation side of things, and with the two projects only being separated by a small forest, it isn’t hard to conceive that the synergies could be significant.
PMI’s Obotan is expected to turn out 200,000 oz. of gold per year, starting in 2014, while Keegan’s Esaase project is slated to contribute between 150,000 and 200,000 oz. per year by 2017. The two properties sit side-by-side on Ghana’s prolific Asankrangwa gold belt.
Esaase has measured and indicated resource of 68.9 million tonnes grading 1.73 grams gold for 3.83 million oz. of gold, while Obotan has measured and indicated resources of 44.79 million tonnes grading 2.16 grams gold for 3.11 million oz.
The plan will be to use Keegan’s capital to help drive development of Obotan and then fund Esaase out of cash flows generated from the mine.
By combining the land packages, the newly formed Asanko Gold will control roughly 1,000 sq. km and will have consolidated the 70-km of strike length along the belt.
As for the merged company’s name, Breese says it has to do with showing connection and commitment to the address of the two future mines as Asanko is the name of a gold area in the country.
“We’re partners with Ghana and by renaming the company it will gives us a lot of presence in country,” Breese said. “We will be the largest land package holder and one of the largest producers of gold going forward in the country.”
The Asankrangwa gold belt is the middle of three prolific gold belts in the southwestern part of the country. To the south lies the Ashanti gold belt while to the north lies the Sefwi belt. All three belts run in a parallel northeasterly direction. With the completion of the merger, Asanko will control roughly three quarters of the Asankrangwa belt.
The deal calls for PMI shareholders to get 0.21 Asanko shares for each PMI share, while Keegan shareholders do nothing. That balancing out will give both shareholders an equal stake in the 171.7 million shares outstanding of the merged entity.
The two companies have similar market caps with Keegan’s coming in at roughly $325 million, while PMI is close to $335 million. The combined company will have about $340-million in cash on hand and no debt.
In Toronto on Dec. 4, the day the deal was announced, Keegan shares closed 1.5% or 6¢ higher at $3.97 a share while PMI shares were up 12% or 9¢ to 81¢ per share.
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