Alamos Gold (TSX: AGI; NYSE: AGI) is offering to buy the shares it doesn’t already own in Carlisle Goldfields (TSX: CGJ) for $28.5 million, so it can gain a 100% interest in the Lynn Lake gold project in Lynn Lake, Man.
The gold miner owns a 25% interest in the project and a 19.9% interest in Carlisle through a November 2014 agreement between its predecessor, AuRico Gold, and the junior. Under the agreement, Alamos has the right to earn up to 60% of Lynn Lake by spending $20 million and delivering a feasibility study on the project within three years.
BMO analyst Brian Quast says it’s a “wise move” that Alamos consolidates its ownership in the Lynn Lake asset for $28.5 million, and removes the earn-in agreement.
It’s also a great deal for Carlisle. Abraham Drost, Carlisle’s president and CEO, says the firm was “concerned” about staying on track as a junior development partner if Alamos went ahead with the earn-in, and that the company would “expose our shareholders to significant dilution risk to meet our share of spending commitments.”
But the premium share deal allows Carlisle’s shareholders to participate in Alamos’ three gold mines — Young-Davidson in Ontario and the Mulatos and El Chanate mines in Mexico — as well as development projects, plus future upside in the Lynn Lake project. “Given that it’s a share deal, we participate in an active way. And it’s a great leverage to the Alamos portfolio,” Drost says.
Under the deal, Alamos would issue 5.4 million shares, or 2.1% of its current share balance. Carlisle shareholders would receive 0.0942 of an Alamos share for each share held and 0.0942 of a three-year warrant, with a $10 exercise price.
Excluding Alamos’ existing stake and Carlisle’s $5 million in cash, the deal values the junior at 60¢ apiece. This represents a 62% premium to Carlisle’s Oct. 14 close, and a 117% premium to its 30-day, volume-weighed average price.
Desjardins analyst Michael Parkin says the 62% premium is in line with the average 54% premium paid for developers since 2011, but adds it’s a “bit steep” when compared to the average 46% premium paid since 2014 in similar transactions.
That said, Parkin notes the acquisition cost of US$4 per oz. silver resource is “relatively low.”
Lynn Lake, which offers Alamos a low-risk growth opportunity, has five near-surface deposits with a measured and indicated resource of 2.75 million oz. gold from 40.5 million tonnes at 2.11 grams gold per tonne. It has another 2.28 million oz. in inferred from 51.8 million tonnes at 1.37 grams gold.
In February 2014, a preliminary economic assessment on the project’s two main deposits — the MacLellan mine and the Farley Lake mines — indicated strong economics for a 12-year mine, with annual production of 145,000 oz. gold and all-in sustaining costs of $644 per oz. It had an after-tax net present value of $257 million and a 26% internal rate of return, using a US$1,100 per oz. gold price and a 5% discount rate.
Drost believes Lynn Lake could play an “important part” in Alamos’ development, and would “compete well internally for investment dollars.”
He says that “we would have loved to build it, but we would be very happy to have Alamos build it.”
The transaction should close in December, pending approval from Carlisle’s shareholders.
Meanwhile, Alamos has cut its semi-annual dividend to 1¢ per share from 3¢ to reflect the weak gold price environment, and reinvest capital into growing production.
The dividend cut could save the company $10 million a year, Raymond James’ analyst Phil Russo notes.
Carlisle closed Oct. 15 up 70% at 63¢ per share, while Alamos shares fell 5% to $6.09.