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Andean Subject of Gold Major Bidding War

September 3, 2010

“One of the world’s most prospective gold companies, Andean Resources Ltd., has become the subject of a bidding war between two Vancouver-based global gold majors. Andean, based in Australia, has rocketed to international industry prominence in the past two years through the rapid development of its high-grade, low-cost Cerro Negro gold project in Argentina.

Goldcorp Inc. and Andean said Friday they had reached an agreement for Goldcorp to acquire all Andean shares through a combination of shares or cash that values Andean at 3.6 billion Canadian dollars (US$3.4 billion). Under this arrangement, each common share of Andean will be exchanged for either 0.14 shares of Goldcorp or a cash payment of C$6.50/share, subject to an aggregate maximum cash consideration of C$1 billion. “

Source: Wall Street Journal, September 3, 2010

Observations:

  • Cerro Negro contains 2.1 million ounces of gold and 20.6 million ounces of silver in probable reserves. At capacity of 285 thousand ounces this will result in a mine life of only 7 years.
  • Average cost of production is projected to be $60 per ounce, resulting in a production margin of over 90%.
  • Goldcorp currently offers $3.4bln, while Eldorado’s offer priced about 2% lower was rejected 2 weeks ago. Eldorado has made a new offer today.

Implications:

  • Goldcorps shares dropped slightly less than Eldorado shares upon the offers, indicating investors believe Goldcorp to be able to achieve more synergies. Although Eldorado is growing fast and building a strong portfolio of assets, the geographic and operational variance between the projects hinders the realization of synergies.
  • The gold business is experiencing a boom and a strong increase in M&A activity due to the high price levels. Exploration costs for gold deposits account for nearly half of the total global exploration costs.

©2010 | Wilfred Visser | thebusinessofmining.com

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