‘PIPE IN THE GROUND’
Toronto company Continental Gold sees $1.4B buyout as a way to help mitigate risk
Work set to begin on Trans Mountain
TORONTO China’s Zijin Mining Co. Ltd. on Monday extended its shopping spree of Canadian junior mining assets, announcing a $1.4-billion all-cash purchase of Toronto-based Continental Gold Inc. at a 29-per-cent premium to its share price during the past month.
Through the deal, Zijin, a diversified miner with gold, copper and zinc assets, gains Continental’s prized Buritica project, a mine that’s under construction just outside Medellin, Colombia that’s expected to produce roughly 300,000 ounces of gold per year beginning in 2020.
The move follows Zijin’s $1.86-billion takeover in late 2018 of Nevsun Resources Ltd., a Canadian junior miner that was developing a copper-gold project in Serbia.
It also comes as the price of gold has risen 15 per cent since June to about US$1,464 per ounce, that has spurred a flurry of mergers, asset sales and investments in Canada’s precious metal exploration space.
Paul Begin, chief financial officer of Continental Gold, said his company had decided to sell now given that other companies with a single gold mine have run into various operational and security issues in recent years.
Even though gold prices are rising, he said it made sense from a risk-mitigation perspective to take Zijin’s buyout offer now, which took months to negotiate.
“I think we’re all bullish on the price of gold in the long term, but nobody has a clue in the short term,” said Begin.
“What if gold prices go down US$150 during ramp up?”
“Zijin doesn’t have any experience in Colombia, and we have obviously had some incidents in the past,” Begin told Reuters.
“But if a major security incident happened at any project, it would be considered a material adverse change and they would have an out if they wanted to,” he said.
Although the company has several exploration projects, its Buritica project had attracted interest from investors including a $33-million investment in June by the billionaire Eric Sprott, who purchased 10 million shares, or about five per cent of the company, at $3.10.
Buritica was about 76 per cent constructed as of July, according to Continental’s website.
With a 14-year mine life, Buritica is expected to produce around 300,000 ounces of gold per year at an all-in sustaining cost of $600, which qualifies it as a lower cost producer.
Begin said Continental had opened its data room to possible suitors as a defensive measure after Colorado-based Newmont Goldcorp Corp. purchased a 20-per-cent stake in the company in 2017 for US$109 million.
Begin said they wanted to know what other companies would be willing to pay for its shares in case
Newmont ever bid for the company.
That never happened, however, and Begin said, “Zijin made us an offer we couldn’t refuse.”
Under the deal, Zijin will pay $5.50 per share, which represents a 29-per-cent premium to the volume-weighted average price during the past month.
It is also a 13-per-cent premium to Friday’s closing price, but the stock had shot up 16.7 per cent last week, from $4.17 to $4.87.
Continental closed Monday at $5.39 up 10.7 per cent in Toronto.
“We expect a positive reaction from Continental shares following the announced agreement,” Mark Mihaljevic, an analyst with RBC Dominion Securities, wrote on Monday.
Begin said that the key to the deal was that Zijin agreed to pay allcash, a rarity in the precious metals sector where most major mergers have been primarily stock-based transactions.
He said he thinks Newmont was distracted by its purchase of Vancouver-based Goldcorp for $10 billion earlier this year, and has been focused on its newly expanded portfolio of mines. Last week, for example, Newmont sold Goldcorp’s Red Lake mine to Australia’s Evolution Mining Ltd. for $375 million.
Newmont’s former chief executive Gary Goldberg had also expressed concerns about Continental’s ability to ensure the security of its workforce, after the company faced three separate attacks that resulted in 10 fatalities.
“The security of the people around the project … does not currently meet our expectations,” Goldberg said in an October 2018 earnings call.
According to a news release, Newmont has agreed to support the deal with Zijin, which will return roughly $260 million to the company.
A spokesman for Newmont declined to provide further comment.
The transaction requires approval by two-thirds of Continental’s shareholders and is expected to close early next year.
The deal marks the second acquisition of a Canadian gold miner in as many weeks as miners look to boost reserves and take advantage of firmer bullion prices.
Last week, Canada’s Kirkland Lake Gold Ltd offered to buy Detour Gold in an all-stock deal valued around $4.3 billion.
The deal also requires Canadian and Chinese government approvals, Begin said.
Canada last year blocked a proposed $1.5-billion takeover of construction company Aecon by Chinese state builder China Communications Construction Co Ltd on national security grounds.
I think we’re all bullish on the price of gold in the long term, but nobody has a clue in the short term.