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Argentina: More Gold M&A on the Way
Marc Davis, and

As the excitement surrounding the $3.6 billion buyout of tiny Andean Resources by Goldcorp Inc. subsides, investors are wondering who’s up for grabs next among Argentina’s other emerging success stories.

The task has been simplified by the fact that only two gold juniors have to date made sufficiently impressive gold discoveries to attract takeover speculation. One is Mansfield Minerals (TSX.V: MDR), which has been quietly developing its Lindero gold discovery since as far back as 1999.

The other is Extorre Gold Mines (TSX: XG), which burst onto the mining scene just over six months ago after it was spun-off from high-flying Exeter Resource Corp. (TSX: XRC) (NYSE-AMEX: XRA). Extorre inherited the high-grade Cerro Moro deposit from its parent company. However, only a hostile takeover could wrestle Cerro Moro from Extorre any time soon, according to the company’s management.

Having just completed a $40 million equity financing, Extorre says it’s committed to building considerably more value into the project by way of drill-defining plenty more high grade gold and silver. To date, a total of 612,000 ‘indicated’ ounces of gold equivalent (gold and silver combined) have been found in just one of the deposit’s many veins. All told, Extorre is targeting a two-million ounce resource in the same proximity and geological environment as Andean’s richly mineralized Cerro Negro deposit.

A third company worth mentioning is Australia-based Troy Resources NL (TSX: TRY) (ASX: TRY), which is an existing gold miner in Australia and Brazil. Troy is gearing up for its first gold pour this autumn at its low-cost, high-grade Casposo gold/silver project in Argentina’s mining-friendly San Juan Province.

This new mine is now fully funded and is therefore not for sale, according to Troy’s president Paul Benson – at least not for now. With 70 more drill targets, there’s plenty more upside potential for the discovery of significant additional ounces in the ground, he says. Furthermore, with a current reserve base of only 341,400 ounces of gold and 11.2 million silver ounces, it almost certainly does not meet the minimum size threshold to interest much bigger gold miners at this time.

That leaves Mansfield Minerals sitting pretty. The company has long groomed its ‘company-maker’ Lindero deposit for the right suitor. With gold prices vaulting to record highs, the timing is excellent, according to Mansfield’s president, Gordon Leask. This is why a bankable feasibility study (a final blueprint for a mine) is underway.

However, the company has already published key independently-assessed financial projections by way of a pre-feasibility study. One that unequivocally attests to the viability of a future gold mine based on current reserves of 1.9 million ounces. There’s also a further drill ‘inferred’ resource of one million ounces. This needs to be more clearly defined by way of additional in-fill drilling to be considered completely reliable.

Hence, “advanced talks” with one or more sizeable, expansion-minded gold mining companies are making headway, according to Leask. This surely comes as no surprise to the various mining analysts who have been covering this low-key gold story for nearly a decade.

Among the more recent enthusiasts is Joe Mazumdar, a mining analyst for the Canadian stock brokerage firm Haywood Securities Inc. After having crunched the key metrics in Mansfield’s pre-feasibility study, Mazumdar wrote a research report last April on the company encouragingly entitled: “Low Hanging Fruit.”

“The quality of the asset has been underpinned by its simplicity and low technical risk. It is the equivalent of a ‘mine on training wheels,’” he asserted in a 39-page report. Hence, his conclusion that Mansfield is “a prime candidate for takeover” and that the company could fetch “premiums of up to 250 per cent from its current price” in a takeover scenario.

But Lindero’s allure hasn’t gone unnoticed by a number of gold-hungry producers, according to Leask, who declines to elaborate. But he notes that there’s a scarcity of bargains in the junior gold space.

At least seven potential suitors, including Yamana Gold Inc. (TSX: YRI) (NYSE: AUY) and Eldorado Gold Corp. (TSX: ELD) (NYSE: EGO), have been identified by Haywood Securities among the world’s relative few mid-tier gold miners. (Notably, Eldorado just lost out in the takeover battle for Andean Resources after its US $3.4 billion proposal was outbid by Goldcorp).

So what is it about Lindero’s economic modeling that gives it so much credibility? Apparently, the deposit can produce around 160,000 ounces per annum in the first few years at a modest cost of US $373 an ounce. This is because much of the high-grade mineralization is near surface. And this scenario would offer an anticipated payback on capital costs within two years, based on minimum gold prices of US $1,100.

Furthermore, the deposit also benefits from being well suited to an open pit (quarry-like) heap leach (low extraction cost) mining operation. All told, a minimum 9.5-year mine life will translate into average annual yields of around 150,000 gold ounces for the bulk of the mine’s life – and at an average cash cost of US $407 per ounce.

Additionally, the renowned engineering firm that conducted the company’s pre-feasibility study, AMEC Americas Ltd., calculated a pre-tax net present value of US $490 million for the Lindero deposit, assuming US $1,100 gold prices. (NPV is a pivotal decision-making metric that is defined as the risk adjusted value of the deposit once all the borrowed capital costs are repaid).

Another Canadian investment bank, Paradigm Capital Inc., also views Mansfield as an obvious takeover candidate. In a research paper discussing the company’s pre-feasibility study, senior mining analyst Don MacLean made a good case for a likely takeover.

The Paradigm report, which was published last March, noted that Mansfield only has approximately 44 million shares outstanding and a low market capitalization. The report’s takeover conjecture comes into clearer focus when considering the fact that Paradigm assigned an after-tax net present value (NPV) of US $242 million to Lindero, based on US $1,100 gold prices. By using a much more cautious after-tax evaluation than the pre-tax version assigned by AMEC, Paradigm still was able to deduce that Lindero is worth more than three times the actual value of Mansfield, itself.

The Haywood research report also points to the fact that geopolitical considerations also weigh in Lindero’s favor. In particular the project is located in a remote, economically underdeveloped region of Salta Province. that is actively soliciting foreign investment. Hence, Salta’s pro-mining government is actively soliciting foreign investment and is therefore supportive of Lindero, according to Leask. Similarly, the federal government is also onside, he adds.

This favorable situation, along with the absence of any environmental challenges, explains why Leask expects a mining permit to be issued before year’s end.

Mansfield Minerals, Extorre Gold Mines and Troy Resources may be well ahead of the pack towards producer status. But a growing number of other ambitious gold explorers are aggressively working to validate their own gold discoveries in Argentina. All of which have a shot at becoming the next ‘home run’ takeover success story.

The principals of and do not directly or indirectly own shares in any of the companies mentioned in this article.


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