Will There Be a Bidding War for Aurelian Resources?

Despite the run-up in prices for bullion, the small cap gold space has been a disappointment for investors. For those who own Aurelian Resources Inc. (AUREF.PK), the ongoing development of new mining laws in Ecuador has made things much worse.

Fortunately for them, Aurelian received a C$1.2-billion friendly all-stock takeover offer from Tier 1 producer Kinross Gold Corp. (KGC) that sent shares of the junior miner up more than 40% on Thursday. And, Aurelian may have more room to run if a bidding war emerges as some analysts are predicting.

Michael Gray, analyst at Genuity Capital Markets told clients that:

We believe that Kinross’ bid will be the start of a bidding war for one of the most coveted undeveloped gold deposits in the world.

He suggested that Kinross must have “sufficient in-country intelligence” to convince them to jump the gun with a bid in light of Ecuador’s political uncertainty. The new mining laws are expected to be revealed soon.

Wendell Zerb at Canaccord Adams called the chances of a rival offer “moderate” at roughly 50% given Fruta del Norte’s high profile and high quality. The analyst suggested Barrick Gold Corp. (ABX) and Newmont Mining Corp. (NEM) as the most likely candidates.

He told clients:

We feel that a partial cash bid would be preferable for Aurelian shareholders, given that under the terms of this proposed deal, they would still be subject to political risk in Ecuador through their ownership of Kinross shares.

Although other producers are interested in Aurelian’s Fruta del Norte project, which is Ecuador’s largest gold deposit with 13.7 million ounces of gold and 22.4 million ounces of silver, the uncertainty of the restructuring of the country’s mining laws will likely scare many others off, said Michael Curran at RBC Capital Markets. As a result, the analyst told clients that there appears to be a low probability of a competing bid.

The government of Ecuador’s new mining mandate was revealed in April, 2008 and its forced Aurelian to suspend its drilling activities. On July 18, Aurelian said a draft law was completed after finding a previous version “reasonable.”

Why then, would an Aurelian shareholder not wait for a recovery in the share price pending the new draft legislation, Credit Suisse analyst Anita Soni asked.

Comments

[Clavis:]

This all looks very strange to me. Perhaps I am thick but I do not understand what the shareholders of Aurelian are getting, no cash just shares in Kinross, tied into warrants cashable in five years?
Aurelian has $45 million in the bank and good recent new drilling results to disclose, so enough cash till end 2009. There also appears to be a 10% dilution of the shares to suit Kinross.
Ok, I know that the government is yet to confirm the new mining laws but this is far to cheap for the greatest undeveloped gold mine in the World, why has Aurelian management rolled over at the first bid, what has been going on?

2008 Jul 27 12:30 PM

[jock:]

The draft mining law (which I read in Spanish) looks reasonable. Aurelian is worth about $20/share I believe. Why would their board accept an offer now worth $6.30? Why didn't they say: "thanks for the offer, but it's a STINK bid"? It's the biggest and best gold discovery worldwide in at least 10 years.

Shareholders, write the company and the Ontario Securities Commission (as I have.) This is highway robbery by a board that is at least STUPID and at best acting against shareholder interests!

2008 Jul 27 01:19 PM

[TrevTones:]

Dear Jock, can you give us a bit more on what you perceived as "reasonable" with regard to the new Ecuadorean mining law? I own a lot of Kinros and am getting killed and need to make a decision as to whether to hang in there on sell. Please elaborate on what you found as "reasonable". Thanks.

2008 Jul 27 02:58 PM