After pursuing Quebec-focused Aurizon Mines (ARZ-V) for years, Alamos Gold (AGI-T) has finally gone hostile, announcing a $780-million cash-and-shares bid for the junior.
Alamos’ offer, which breaks down to $4.65 per Aurizon share or 0.2801 of an Alamos share, represents a 40% premium over Aurizon Mines closing share price on Jan. 9.
The combination would put together two single-asset gold miners with mines in safe jurisdictions to create a leading intermediate gold company with production of 320,000-370K oz. gold per year over the next two years, and 500,000 oz. gold by 2016.
A debt-free, low-cost miner, Alamos owns the Mulatos mine, in Mexico’s Sonora state, which produced 200,000 oz. gold last year, as well as development projects in Turkey (Agi Dagi, Kirazli and the earlier-stage Camyurt) that will start to come onstream starting in 2014.
Aurizon owns the Casa Berardi underground mine, in Quebec, which produced 137,000 oz. gold last year, and which Alamos sees producing 150,000 oz. a year from 2014 through 2017.
On the news, Alamos Gold shares ended the day down $2.02 or 12% at $14.90, while shares in Aurizon leaped $1.14 or 33.4% to $4.55.
In a press release the day after the offer was made, Aurizon said it was evaluating the bid and expected to form a special committee of the board of directors to help make a recommendation to shareholders. It said shareholders should not take any action until the board can examine the offer.
On a conference call to discuss the offer, McCluskey sought to reassure investors of the rationale behind a merger between a low-cost, open-pit heap-leach producer and an underground miner.
“We’re very unlikely to ever find an asset with the attractive economics that Mulatos possesses, but that shouldn’t limit us as a mining company from acquiring things that we see as valuable and where we think we’re going to create value for our shareholders,” he said. “Frankly if we didn’t think there was an opportunity to get the mine back to previous production and cost levels, we wouldn’t be that interested in it. It’s just that we think together the company is a much stronger company than either asset is apart.”
Cash costs at Mulatos last year were expected to average US$445-470 per oz., including a 5% royalty, while in Aurizon’s most recent reported quarter (the third quarter of 2012) total cash costs at Casa Berardi were US$759 per oz. But in 2011, cash costs at Casa Berardi were only US$537 per oz. on strong production of nearly 164,000 oz.
McCluskey also pointed to his company’s positive record on the M&A front, which has allowed it to increase reserves, resources and production while holding the line on costs.
Alamos’ sterling M&A record began with Mulatos, which it built into a world-class asset after acquiring it for only $10 million in 2003. The company recognized early on that the market had “mispriced the risk profile of Mexico,” McCluskey said.
In 2010, Alamos paid $90 million for its Turkish assets, which now represent $600 million in value, and are on pace to achieve production just four years after acquisition.
“We have not pursued growth for growth’s sake,” McCluskey said. “I’ve taken this position since founding the company. We choose to grow only where growth will create real value, producing strong margins and generating substantial cash flow.”
McCluskey said the merger would be accretive to net asset value, production, cash flow and resources.
The company says that cash costs should remain relatively steady over next few years and remain in lower half of its peer group.
On the conference call, company executives also stressed that in the mid- to long term, Alamos remains predominantly a low-cost, open-pit, heap leach gold producer.
With regard to its long pursuit of Aurizon, McCluskey noted that Alamos has tried to pursue a friendly bid for the company, but it has been unresponsive.
“We have made multiple approaches to Aurizon over the years, I sent a rather lengthy letter to the chairman of the company just over a year ago, I think I received a two-line response in return,” he said.
While Alamos did manage to negotiate a confidentiality agreement with Aurizon in 2008, the two sides could never agree on a date for a site visit, he said.
“The reality is there’s just never been any interest at all on the management side to pursue a combination or even explore whether it would be an accretive and attractive value proposition for the shareholders of both companies. We worked on it and we saw very clearly that it was, so ultimately we decided to take our proposal directly to the shareholders.”
Alamos also announced today that it now owns or controls 16% of Aurizon’s outstanding shares. Of those, the mid-tier says it recently acquired 14.3% of Aurizon’s shares, or 23.5 million shares in total, from “certain shareholders” of Aurizon. The vendors agreed to a price of $4.65 per share, but were paid in 6.6 million shares of Alamos (the same exchange ratio of 0.2801 of an Alamos share to 1 share of Aurizon as it has offered for the entire company).
Alamos says it has additional support from the “select few” major institutional shareholders of Aurizon that it has approached.
The company will pay out a maximum of $305 million in cash, and issue a maximum of 23.5 million shares.
The offer will expire on Feb. 19 and is subject to a few conditions, including that Aurizon not adopt a shareholder rights’ plan, which could prevent shareholders from accepting the offer. To be approved, two-thirds of Aurizon shareholders must be tendered to the offer.
The bid does not require approval of Alamos shareholders since it will be fully financed. Alamos has more than $350 million in cash and equivalents.
Alamos noted that it has applied to list its common shares on the New York Stock Exchange.
Aurizon Mines has not yet issued a response to the offer.
Alamos shares have traded in a 52-week range of $13.84-21 with 120.9 million shares outstanding, while Aurizon shares have traded in a window of $3.15-5.75 with 164.6 million shares outstanding.