Barrick makes bid for Sutton

In a move aimed at securing its first African mine, Barrick Gold (ABX-T) has offered to acquire all the outstanding shares of Sutton Resources (STT-T), 85%-owner of the Bulyanhulu gold deposit in southern Tanzania.

Based on Barrick’s closing price of $28.60 on Feb. 16, the offer of 0.46 of a Barrick share per Sutton share puts a value of $13.25 on each Sutton share and represents an 89% premium over Sutton’s $7 closing price on that same day.

The value of Barrick’s offer for Sutton’s 39.6 million outstanding shares, fully diluted, is $525 million. (At the time of its bid, Barrick owned no Sutton shares.) The final cost to Barrick will be lower, however, as Sutton has no debt and US$40 million in cash. As well, another infusion of US$16 million in cash is expected from the imminent exercise of Sutton stock options.

Barrick’s offer is expected to close in mid-March but remains conditional on the acquisition of at least 75% of Sutton’s shares on a fully diluted basis.

Sutton’s board of directors is unanimous in its recommendation that shareholders accept Barrick’s offer.

“This is a terrific opportunity for Sutton and Barrick to get together to work on a project that I have looked hard at for the past five or six years,” says Sutton President Michael Kenyon. “Bulyanhulu is near and dear to our hearts, and I’m absolutely convinced it’s a terrific stepping stone to greater opportunities in the general area. . . . Our team here — management, the engineering group, the exploration group — is pleased as well. It’s an opportunity to turn the burners up with Barrick and get this thing under way as quickly as possible.”

When asked about accepting Barrick shares rather than cash, Kenyon replies: “We requested that [because] we consider Barrick to be the best gold company in the world. It was a perfect way for us and our shareholders to be able to ride along, not only with Barrick’s other assets, but with the development of this property.”

Says Randall Oliphant, Barrick’s chief financial officer: “We’ve paid full value. Based on the existing reserves, it’s a modest rate of return, but, by applying our development team and our financial expertise, we’ll be able to improve on that in the longer term. We expect to retain all of Sutton’s employees, and the senior management of Sutton will remain involved with us to ensure that this is a success.”

A 1998 feasibility study by Kilborn Engineering Pacific delineated reserves in Bulyanhulu’s Reef 1 structure of 10 million tonnes grading 11.65 grams gold per tonne, equivalent to 3.8 million recoverable ounces gold. With the recent addition of 2.9 million tonnes grading 11 grams gold to the Reef 1 West resource, the property’s total reserves and resources now exceed 21.4 million tonnes grading an average of 12.8 grams gold per tonne, or 8.8 million contained ounces.

Originally, the underground mine was expected to enter production late next year at the daily rate of 2,500 tonnes. Average annual output was pegged at 350,000 oz. gold, with some byproduct silver and copper, while total cash costs were projected at US$163 per oz. gold, including royalties for the Tanzanian government, which owns the remaining 15% interest.

Once Sutton is acquired, Barrick will undertake a full review of Bulyanhulu, including drilling, and studies into the viability of increasing mining rates.

Sutton’s other promising projects in Tanzania are the Kabanga and Kagera nickel-cobalt properties, both of which are expected to be sold following the acquisition by Barrick.

At Kabanga, Sutton recently received a new resource estimate and mine development study from partner Anglo American (ANGLY-Q), which is earning a 60% interest in the project from Sutton. Anglo has so far completed nearly 40,000 metres of diamond drilling, mostly on the North deposit.

Using a 0.8% nickel cutoff grade, Anglo estimates there are 15.5 million tonnes grading 2.43% nickel, 0.3% copper and 0.18% cobalt in the North deposit, plus 5.8 million tonnes of 1.5% nickel, 0.19% copper and 0.11% cobalt in the Main deposit. Both deposits remain open, and other targets have yet to be tested.

A prefeasibility study is examining the viability of a mine capable of producing more than 35 million lbs. nickel and 2.5 million lbs. cobalt annually for at least 15 years. The Kabanga sulphides are said to exhibit good metallurgical response and good metal recoveries to concentrates.

Outside Tanzania, Sutton’s assets include the Marudi gold project in southern Guyana. While two gold deposits at Marudi are described as having open-pit potential, their small size and remoteness have so far rendered them uneconomic.