Alamos Gold Inc. (TSE:AGI)(NYSE:AGI) is buying Esperanza Resources (CVE:EPZ)(OTCQX:ESPF), a precious metals exploration and development company focused on advancing its main Esperanza gold project in Morelos State, Mexico, for in a deal valued at C$69.4 million.
According to the terms of the deal, Esperanza shareholders will fetch 85 Canadian cents in cash for each share held, a premium of nearly 29 per cent over the company's closing price on Thursday. Shares of Esperanza rocketed to 89 cents on Friday morning, above the offer price, up by almost 35 per cent.
The companies said in a joint statement that the friendly bid values Esperanza's equity at about C$68.4 million on a fully diluted, in-the-money basis. The company's shareholders will also get around 5 million Alamos warrants in total, and existing warrant holders will be issued approximately 2 million Alamos warrants, which will be listed for trading on the Toronto Stock Exchange.
The news highlights the current state of the mining sector, as more and more intermediate to large cap miners look to snag junior explorers at a discounted price in a depressed market for cash-strapped Canadian juniors, as they look to diversify and expand their asset base. Through to the close of markets on Thursday, Esperanza's shares had dropped more than 32 per cent this year.
"Esperanza is an excellent strategic fit within our existing portfolio and in our view, is one of the best undeveloped opportunities and significant open pit targets in Mexico. We have followed Esperanza's progress for some time and see this as a truly compelling opportunity for our shareholders," said president and CEO of Alamos, John A. McCluskey, in a statement announcing the combination on Friday.
"While the transaction represents less than 5% of our market capitalization, it has the potential to grow our production in Mexico by more than 50%, or nearly 30% on a consolidated basis."
The Esperanza gold project, an open pit, heap leach property with all-in sustaining costs expected to amount to below $900 per ounce, is to add measured and indicated resources of 1.5 million ounces of gold and 16 million ounces of silver in Mexico, growing Alamos' presence in the region. Average annual production potential for the project is anticipated at more than 100,000 ounces.
The deal will give Esperanza shareholders an immediate premium, said president and CEO of the junior mining company, Greg Smith, and will give it the ability to fund the development and construction of its main asset. "The cash consideration provides liquidity and value certainty while the warrants ensure Esperanza shareholders will retain exposure to the success of the Esperanza gold project going forward," added Smith.
The acquisition is to be accretive to Alamos' net asset value, earnings and cash flow, with virtually no dilution to its shareholders, said Alamos in the release. The established Canadian gold producer, with $490 million of cash and equivalents, owns and operates the Mulatos mine in Mexico, and has exploration properties both in Mexico and Turkey.
According to a preliminary economics report released in September 2011, the Esperanza gold project is expected to produce a total of 0.6 million ounces of gold, at an average rate of 103,000 ounces per year, and average cash costs of US$499 per ounce, over a six year initial mine life. Using a modeled gold price of US$1,150 per ounce, the after-tax internal rate of return was projected at 26 per cent, with a net present value of C$122 million, at a 5 per cent discount rate.
Esperanza's board has already approved the transaction, with senior officers and board members already agreeing to vote in favour of the deal, representing about 6 per cent of the company's stock. The deal, the terms of which include a C$2.7 million break fee to Alamos, still needs regulatory and shareholder approvals.
As a result of the friendly offer, Esperanza said it terminated its agreements with Pan-American Silver (TSE:PAA) (NASDAQ:PAAS) from May of this year, which saw the company agreement to buy three advanced stage gold projects, with Pan American also set to invest $335 million and to provide a $15 million stand-by credit facility to Esperanza. Esperanza said it has no further obligations under these agreements.