Eldorado Gold Is Buying Integra: Is It A Good Deal?
May 15, 2017 2:00 PM ET|3 comments| About: Eldorado Gold Corporation (EGO), Includes: ICGQF, OR, SAND
Gold Mining Bull
Summary
Eldorado Gold has announced it will acquire Integra Gold for C$590 million to develop its Lamaque project in Quebec.
Once in operation, the mine could produce 123,000 ounces of gold per year at all-in sustaining costs of $634 per ounce over 10 years.
This deal makes sense for Eldorado Gold as it previous sold its Chinese assets and is looking to diversify to safer mining jurisdictions.
The deal is likely better for Integra Gold shareholders, however, as I'll explain below.
Eldorado Gold to Buy Integra Gold
In a surprising announcement Monday, Eldorado Gold (NYSE:EGO) says it will buyout Integra Gold (OTCQX:ICGQF) for total consideration of C$590 million, to develop Integra's Lamaque property in Quebec.
Under the terms of the deal, Integra Gold shareholders will receive a combination of Eldorado shares and cash. The deal values Integra Gold at C$1.2125. This deal is valued at C$590 million, which represents a premium of 52% to Integra's May 12 closing price and a 46% premium to the volume weighted average share price for the 20-day period ending May 12.
The deal is subject to Integra shareholder approval and the deal is expected to close in July 2017.
For some background, Eldorado first invested in Integra back in 2015, when it bought 52.05 million common shares of Integra at a price of $.28 per share (on the TSX), for gross proceeds of $14.57 million. That turned out to be a real smart move as Integra shares have traded well above that price for over a year now.
Check out this chart from Integra's corporate presentation below, which shows the wild ride it has been for shareholders.
Personally, I've been a shareholder of Integra Gold for several years now and I own shares in my real-life gold portfolio, which I update monthly. The position currently makes up approximately 4% of my total holdings. I am up over 200% on my position.
Integra's Lamaque project in Val d'Or, Quebec, carries strong economics based on its 2017 preliminary economic assessment. Using a gold price of $1,250 or C$1,625, the project carries an after-tax net present value (5% discount of C$362.5 million and a rate of return of 43%.
The mine is estimated to produce 123,000 ounces of gold per year on average at all-in sustaining costs of $718 per ounce. Initial capital requirements are C$175 million or C$111 million when you include pre-production revenue from gold sales.
Integra has done a great job growing this resource base. As of March 2017, the resource contains 1.917 million indicated gold ounces (at 7.09 g/t) and 1.34 million inferred gold ounces (at 5.86 g/t). When I first covered Integra Gold way back in September of 2014, the project only had a resource base of approximately 1 million gold ounces. The stock traded at $.30 per share.
As a long-term Integra Gold shareholder, I love this deal. It gives us an immediate premium of 52% and puts the Lamaque project in stronger hands as Eldorado has more than enough funds to get Lamaque to production and has an experienced mining team.
This is also good news for Osisko Gold Royalties (NYSE:OR), as the company owns a 2% NSR on the project (Eldorado will have the right to buy back 1% of this royalty for $2 million, which will likely happen). It's also good news for Sandstorm Gold (NYSEMKT:SAND), which owns a 2% royalty on the Roc d'Or East Extension at Lamaque.
The deal is less attractive for Eldorado in the short-term given the substantial premium it is paying for shares of Integra it doesn't already own. That has been reflected in the sell-off in shares today.
However, I think the move makes sense for Eldorado long-term as it looks to diversify its assets into politically favorable jurisdictions, and grow its low-cost gold production. And despite the rapid resource growth at Lamaque over the past few years, the project still carries considerable exploration upside, as made evident by recent drilling results.
With total liquidity of approximately $1.1 billion, including $873.9 million in cash, cash equivalents and term deposits at the end of Q1, Eldorado has more than enough funds to complete this acquisition and explore and advance this project.
This is a high-quality project that Eldorado is adding to its portfolio and honestly, I don't think the company is done just yet as there are plenty of acquisition/consolidation opportunities in Quebec. I will be covering other potential takeover targets shortly, so look out for future articles and please follow me for updates.
Disclosure: I am/we are long ICGQF, SAND, OR.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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