European Minerals to merge with Lero Gold

In a stock transaction valued at about C$60 million, cash-poor European Minerals (EPM-T, EUM-L) is acquiring Lero Gold‘s (LER-V) treasury along with its two exploration projects in Central Asia.

Under the deal, Lero shareholders will get one share of European Minerals for each share of Lero, a 9% premium over Lero’s 20-day volume-weighted average trading price.

When the transaction is completed, European Minerals will own 81% of the combined company and Lero investors about 19%.

Even before the deal closes, Lero Gold will loan European Minerals US$25 million of a US$40 million bought deal financing it concluded on April 18.

European Minerals needs the cash to advance its projects. Currently it is commissioning its Varvarinskoye process plant in Kazakhstan where commercial production is forecast to start by the end of the third quarter of 2008.

The Varvarinskoye gold-copper mine, about 130 km southwest of Kustanai in northern Kazakhstan, is expected to produce 149,000 oz gold and 26 million lbs copper annually in its first three years of production.

European Minerals celebrated its first gold pour in late December. Since then, four consignments of ore containing about 3,300 oz gold have been sent for processing.

The commissioning of the flotation circuit began in February. The plant produced its first gold and copper concentrate from the flotation circuit in March and the company expects to ship this for processing this month.

To help pay for all of this, European Minerals finalized a project debt facility in 2006. At the end of last year, European Minerals had drawn down US$60.2 million, of which US$32.5 million is due within twelve months.

As a condition of the debt facility, European Minerals had to implement a hedging facility by entering into monthly U.S. dollar flat forward gold sales over an 8-year term. The company has sold forward 443,000 oz gold at a price of $574.25 per oz.

The so-called “Varvarinskoye hedge” is unmargined with deliveries of gold into the hedge originally scheduled to start in the first quarter of 2008. But the company’s gold production couldn’t meet its hedge commitments due to delays during the commissioning process. As a result, the commitments that matured in the first three months of this year were settled with cash payments of US$6.2 million.

European Minerals concedes that further cash payments are likely necessary to settle future commitments as they fall due. In December 2007, the company completed a private placement of 17.4 million shares at C$1.28 per share, to raise US$22 million.

In addition to getting cash from Lero, European Minerals will inherit its two exploration projects in Central Asia. Lero is exploring advanced-stage gold deposits in the Tien Shan gold belt in the Kyrgyz Republic (the Taldybulak Talas gold copper deposit) and the Rudny Altai belt in the Republic of Kazakhstan (the Karchiga VMS deposit).

Lero announced a National Instrument 43-101 resource on the Karchiga deposit on April 22. The resource incorporates Lero’s 1,879 metres of confirmation drilling in the fourth quarter of last year and 86 historical drill holes and 10,330 metres of trench work undertaken by the Soviets.

At a 0.50% copper cut-off, Karchiga has an indicated resource of 4.75 million tonnes grading 2.46% copper. In addition, there is an inferred resource of 2.81 million tonnes grading 1.81% copper.

Lero points out that it has only explored 5% of Karchiga’s total licence area. But based on estimates that the deposit contains more than 258 million lbs of high-grade copper metal, the company could fast-track the project to construction and production within three years, if prefeasibility and scoping studies prove positive.


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