MergeCo Portfolio

Here are my top resource stories of the morning with some additional thoughts on each.

AuRico Gold and Alamos Gold – (AUQ:TSX) (AGI:TSX) – A merger between two lower cost gold producers this morning. The merger will create a new intermediate gold producer with mines in Canada and Mexico. MergeCo will operate 3 mines (Young-Davidson,Mulatos, and El Chante.)

I listened to the conference call this morning to get the details.

The transaction is a structured as a merger of equals (1 share in each company = 1 new share in merged company). The total value of the deal is ~$1.5 billion.

An additional SpinCo named AuRico Metals will be spun out to to shareholders. AuRico Metals will own AuRico’s Kemess project, a 1.5% net smelter return royalty (“NSR”) on the Young-Davidson mine, AuRico’s Fosterville and Stawell royalties. The MergeCo will also fund AuRico Metals with $20 million and own a 4.95% equity stake.

The deal is expected to close in the second quarter pending shareholder approvals. It is highly likely this deal goes through with large break fees of US$28.4 million termination fee payable to Alamos, US$37.5 million termination fee payable to AuRico.

This looks like a good combination in my opinion. The new company is expected to produce 375k-425k ounces in 2015. A strong portfolio of development assets has the potential to increase production to 700k ounces. Three advanced stage projects include Kirazlı, Ağı Dağı & Esperanza with further projects including Lynn Lake and Quartz Mountain.

A strong balance sheet that with 427 million in cash + investments with $333 million in debt. The ability to generate free cash flow at current gold prices will help fund organic growth.

The new management team will be lead by CEO John McCluskey (Alamos) and will be a combination of executives from both companies.

John McCluskey , President and CEO of Alamos, stated: “We are very pleased to bring this transaction forward to the benefit of both sets of shareholders. Alamos has remained disciplined in its growth initiatives, building and preserving a robust balance sheet for the right opportunity. We believe the addition of the flagship, long-life Young-Davidson mine is just that opportunity. The combination of diversified production from three mines and a pipeline of low-cost growth projects in safe jurisdictions equate to a leading gold intermediate and a significant re-rate opportunity for our collective shareholders.”

Scott Perry , President and CEO of AuRico stated: “This merger with Alamos represents a logical business combination that will create a premier intermediate gold producer with a diversified asset base that includes three low-cost producing mines, a significant organic growth profile, a pipeline of high-quality development projects, all of which is underpinned by a solid balance sheet and led by an experienced and proven management team. We are confident that our shareholders will benefit from the value creation opportunities that will be realized through an expanded and more diversified asset base and enhanced cash flow generating capabilities. Shareholders will also benefit from the creation of SpinCo as they retain ongoing exposure to significant unlocked value in the highly prospective Kemess project, and stable, diversified sources of royalty revenue.”

Read: Alamos Gold and AuRico Gold to Combine

Related: The good news at Aurico Gold keeps coming… or Alamos Gold has one of the best balance sheets in the mining industry

Ivanhoe Mines – (IVN:TSX) – Ivanhoe has released additional drill results from the Kipushi Project in the Democratic Republic of the Congo.  Drill results continue to hit high grade world class zinc intercepts including 85 m of 49% Zn.

“Our underground drilling program at Kipushi is continuing to deliver exceptionally high-grade intercepts in several target areas, while leading to an improved understanding of geology and structural controls on the mineralization,” said Robert Friedland, executive chairman of Ivanhoe Mines Ltd.

“While the world’s biggest zinc mine in Australia is winding down operations due to depletion of its ore, the timing to look at bringing Kipushi back into production couldn’t be better. Kipushi hosts the richest zinc-copper deposit in the world, with many drill intercepts in the Big Zinc zone recording grades between 40% and 60% zinc.”

Ivanhoe continues to move the project forward and is preparing a resource estimate for the Big Zinc zone which will likely be followed by a PEA.

Ivanhoe stock has had a wild ride in 2015 hitting a high of $1.19 and currently trading at 89 cents. Chinese company Zijin Mining Group Co purchased 9.9% of IVN at $1.36 per share in March. The Chinese are long term thinkers as IVN develops 3 world class assets that are located in what many investors would deem “risky” jurisdictions.

Read: Ivanhoe Mines reports additional high-grade zinc, copper, silver and germanium drill results from ongoing exploration program at the Kipushi Mine in the Democratic Republic of Congo

Related: “Right next to Klowezi.. You found what!?”- Ivanhoe Mines awakens on possible D.R.Congo developments

Mart Resources – (MMT:TSX) – Mart has released a February production at the Umusadege field in Nigeria. Production averaged 19,230 bopd in February with a total downtime of 2 days.

Mart continues to struggle with loss and or theft on production.  The news release states total production was 538,330 barrels of oil and an estimated 448,140 bbls after deduction of combined pipeline and export facility losses for February 2015.

Mart has a pending takeover bid from JV partner Midwestern for 80 cents. The stock is currently trading at 53. It is obvious the market is heavily discounting the odds of this deal being completed.

The deal is expected to close shortly after a shareholder meeting in June pending Midwestern entering into a financing agreement by mid May.

Mart is also dealing with a investigation of CEO Wade Cherwayko who is currently on a leave of absence. The board continues to look into the conduct of Mr. Cherwayko who plays a key role in Mart’s Nigerian dealings.

The market hates uncertainty and that is reflected in the current stock price.

Discuss in CEO Live – What is catching your eye today?

This is not investment advice.All facts are to be checked and verified by reader. Owner owns a position in Mart Resources. As always please do your own due diligence.