Endeavour Silver Corporation (EXK) have just announced that they have entered into a definitive agreement whereby Endeavour will acquire 100% interests in AuRico Gold's operating El Cubo silver-gold mine in Guanajuato State, Mexico and the Guadalupe y Calvo silver-gold exploration project in Chihuahua State, Mexico, for total consideration of up to US$250 million.
So, as this is our second largest holding in the silver space we tracked down Hugh Clarke, the vice president of Corporate Communications who is currently in New York, to get his thoughts on this deal, he commented as follows:
The acquisition of El Cubo is an important milestone in the Endeavour Silver's growth profile and history. This lifts us into the mid-tier of the silver sector and that's been our goal for the past while. El Cubo doubles our reserves, triples our resources and increases our production of silver and gold. All this with minimal dilution to the existing shareholders. It's a perfect fit….this is what we do. We acquire under appreciated assets; give them some care, some money and some time and unlock their true value. In our short history, we've done this before; firstly at Guanacevi, Durango and then at Guanajuato. We believe we have the talent and the resources to do this again at El Cubo.
Our attention is drawn to the doubling of reserves and the tripling of resources which bodes very well indeed for the future. Also of note is that for the first quarter, 2012, production was 209,440 oz silver and 4,543 oz gold, or 459,305 oz silver equivalent, so an income stream already exists, hit the ground running as they say.
On Closing, Endeavour will pay AuRico Gold (NYSE:AUQ) US$200 million, comprised of, at Endeavour's election, up to US$100 million of the purchase price in Endeavour common shares and the balance in cash Post-Closing, AuRico Gold will be entitled to receive up to an additional US$50 million in cash payments from Endeavour upon the occurrence of certain events during the three years following Closing, for total consideration of up to US$250 million
Endeavour has sufficient cash on hand (current working capital approximately US$170 million) to meet the minimum cash requirements for Closing and is in the process of securing a bank line of credit which is expected to provide sufficient cash to meet the maximum cash requirements for Closing
Closing of the transaction is subject to customary closing conditions including receipt of regulatory approvals
The transaction is subject to a standard review by the competition and anti-trust commission of Mexico, with Closing anticipated within 45 business days
On closing, Endeavour will pay AuRico Gold US$200 million, comprised of, at Endeavour's election, up to US$100 million of the purchase price in Endeavour common shares and the balance in cash. Post-closing, AuRico Gold will be entitled to receive up to an additional US$50 million in cash payments from Endeavour upon the occurrence of certain events during the three years following closing.
El Cubo is a producing silver-gold mine located in the southeast part of the historic Guanajuato mining district in central Mexico, only 10 kilometers (km) from Endeavour's operating Guanajuato silver-gold mine in the northwest part of the Guanajuato district (see attached map).
Guadalupe y Calvo is an advanced silver-gold exploration project located in the historic Guadalupe y Calvo mining district in Chihuahua State, Mexico, approximately 300 km southwest of the city of Chihuahua. AuRico Gold recently announced an updated resource estimate and preliminary economic assessment envisioning a combined open pit and underground silver-gold mining operation at Guadalupe y Calvo.
The acquisition of the El Cubo mine is an excellent fit within Endeavour's growth strategy of buying mines in historic mining districts where management can create shareholder value by bringing its expertise and capital to bear on expanding reserves and resources, improving mine and mill operations and growing silver and gold production. El Cubo complements Endeavour's Guanajuato mine and should provide operational synergies going forward, as well as boosting Endeavour's silver production to immediately move it into the mid-tier of primary silver producers, with little or no equity dilution to shareholders.
The acquisition of the Guadalupe y Calvo project also fits well with Endeavour's growth strategy as it is located in an historic mining district and has good exploration upside to increase silver-gold resources and the potential to become Endeavour's fourth mine. Endeavour plans to further explore Guadalupe y Calvo with additional drilling before re-assessing its mining potential.
For AuRico Gold, this announcement follows the recent signing of a definitive agreement with respect to the divestiture of AuRico Gold's Australian mines and is consistent with AuRico Gold's strategy of focusing on its large, low cost, core assets. AuRico Gold is now directing all of its attention to delivering value for shareholders from its three operating mines, including Young-Davidson where first production is imminent, and its development pipeline in Mexico and Canada.
Bradford Cooke, Chairman and CEO of Endeavour, commented, "El Cubo's proximity and similarity to, and potential synergies with, our Guanajuato mine, make El Cubo a logical and strategic acquisition for Endeavour that will have an immediate and sizable impact on our production, reserves and resources with minimal or no dilution to our shareholders. We hope to replicate at El Cubo the same types of exploration and operational successes that we have engineered at our Guanacevi and Guanajuato mines."
Rene Marion, President and CEO of AuRico Gold, commented, "AuRico Gold is pleased to have reached an agreement with Endeavour Silver on the El Cubo and Guadalupe y Calvo properties. AuRico Gold views Endeavour as a logical owner for these properties and are solid operators positioned to deliver on the potential we see at both the El Cubo and Guadalupe y Calvo properties. We look forward to participating in the future success of these two assets through our potential ownership interest in Endeavour and through the future receipt of the contingent payments."
El Cubo Highlights
Producing silver-gold mine currently operating at 1,200 tpd with 965 employees
61 mineral concessions covering 8,144 hectares, including several mine adits, ramps and shafts and a 400 tpd leach plant, plus a lease until May 2013 on the adjacent Las Torres Mine, which includes a 2,000 tpd flotation plant owned by a subsidiary of Fresnillo plc
Q1, 2012 production was 209,440 oz silver and 4,543 oz gold, or 459,305 oz silver equivalent
Proven and Probable Reserves (Dec 31, 2011) of 18.5 million oz silver and 322,000 oz gold
Measured and Indicated Resources (Dec 31, 2011) of 8.3 million oz silver and 269,000 oz gold
Inferred Resources (Dec 31, 2011) of 26.7 million oz silver and 548,000 oz gold
Guadalupe y Calvo Highlights
Advanced silver-gold exploration project
9 mineral concessions covering 54,872 hectares, including several old mine adits and shafts
Indicated Resources (Dec 31, 2011) of 7.6 million oz silver and 126,000 oz gold
Inferred Resources (Dec 31, 2011) of 4.4 million oz silver and 67,000 oz gold
Preliminary economic assessment (Mar 5, 2012) evaluated the potential for a combined open pit and underground mine producing on average 968,100 oz silver and 17,600 oz gold annually (1.9 million oz silver equivalent at a 55:1 gold: silver ratio) for the first 8 years of production
After tax NPV at a 5% discount rate is US$93.4 million and the IRR is 27.9% with an initial capital cost of US$85.9 million at a silver price of US$26.35/oz and a gold price of US$1,450/oz
Endeavour plans to complete a more detailed assessment of the El Cubo mine operations, mine plan, reserves and resources in order to develop its own long term growth plan and provide 2012 guidance on production, cash costs, capital and exploration programs and budgets after Closing
Endeavour also plans to complete a more detailed assessment of the Guadalupe y Calvo resources and exploration targets in order to develop its own long term growth plan and provide 2012 guidance on exploration programs and budgets after Closing
Transaction Rationale for Endeavour
Adds a third producing silver-gold mine to Endeavour's mine portfolio and launches Endeavour into the mid-tier of primary silver producers
Adds an advanced gold-silver exploration project to Endeavour's exploration portfolio with the potential to become Endeavour's fourth mine
Accretive to Endeavour on all financial measures
Increases 2012 silver production by at least 12% to 4.8 million oz based on Q1, 2012 production and six months production. Revised production guidance will be provided post-Closing
Increases proven and probable reserves by 110% to 35.3 million oz Ag and 477% to 389,500 oz Au, measured and indicated resources by 41% to 55.0 million oz Ag and 135% to 686,800 oz Au, and inferred resources by 88% to 66.1 million oz Ag and 331% to 800,800 oz Au
Potential to reduce cash costs at El Cubo through operational synergies with the Guanjuato mine
Substantially increases Endeavour's prospective mineral land-holdings and exploration potential in Mexico
Transaction Rationale for AuRico Gold
Completes AuRico Gold's divestiture process of non-core mines and enables AuRico Gold to direct its full attention to its core portfolio of large, low cost gold mines, projects, and exploration portfolio
Total proceeds of up to US$250 million including significant cash proceeds of a minimum of US$100 million on Closing
Significant upside participation potential through AuRico Gold's potential shareholding in Endeavour of up to US$100 million
Potential for further cash payments of up to US$50 million within three years of Closing
With any new acquisition we as investors will need to be patient as a certain amount of re-structuring takes place and the team at Endeavour implements the actions necessary to stream line the present operational process. Time will tell, but it looks good to us and it will therefore remain as part of our core position in our silver portfolio.
Our overall strategy remains unchanged in that we have no interest in the stock market in general and concentrate our focus and invest our cash in the acquisition of both physical silver and gold, a small number of the associated producers and a few well thought options trades. This strategy is working well for us, however, it won't suit everyone as our needs, objectives, aversion to risk, etc, are all unique to us as individuals. So go gently and build your portfolio with care and patience.
Disclosure: I am long EXK.