Avocet Mining Plc said on Tuesday it plans to buy Wega Mining ASA for about $108 million in a shares and debt deal that would create a gold company with annual output of about 300,000 ounces.
Under the recommended deal, Avocet proposes to provide a finance facility of $65 million for completion of Oslo-listed Wega's 90 percent-owned Inata gold project at Burkina Faso.
The acquisition of Wega provides Avocet with an immediate opportunity to more than double its production and resources in the short term, as well as enter into West Africa, one of the most exciting gold regions in the world, Avocet Chief Executive Jonathan Henry said.
Avocet, which operates in South East Asia, forecasts the combined company would have gold production in 2011 of about 280,000 ounces and is targeting output of more than 300,000 ounces in 2013.
By 0911 GMT, shares in Avocet were up 10 percent at 77.25 pence, while Wega was up 11.5 percent at 1.45 crowns.
This looks like a positive development for Avocet although somewhat challenging in that it is a new jurisdiction for the company and a completely new departure from its experience in the Pacific Region, Arbuthnot Securities said in a note.
As part of the three-stage deal, Avocet acquired almost 16 percent of Wega for $5 million. It plans to invest a further $25 million via a convertible loan and then acquire Wega at a ratio of 0.23 Avocet shares for each Wega share.
Wega shareholders will hold about 38 percent of the enlarged group.
PRODUCTION, RESERVE BOOST
The combined group will have three operating gold mines from the third quarter -- Inata and Avocet's Penjom and North Lanut mines in Malaysia and Indonesia respectively.
The purchase will raise Avocet's attributable reserves about 146 percent to 1.4 million ounces and attributable resources, including reserves, by 91 percent to 4.5 million ounces.
About $56 million of the project finance facility has been drawn to date, together with hedging arrangements where 350,000 ounces of gold have been forward sold over 54 months at an average price of $958/oz.
Every deal comes with some noose around your neck, said Henry regarding the hedge and debt arrangements, although he added some people saw the hedge as a positive based on spot prices of about $895 an ounce.
Inata is due to start commercial output in the third quarter.
Ambrian Capital estimates cash costs at Inata of about $514 an ounce, although Henry expects these costs to decline as Burkina Faso is looking to cut the price of diesel. Diesel accounts for about 35 percent of the total cash cost.
AIM-listed Avocet will acquire a number of other projects and strategic investments as part of the acquisition. Henry said the group valued all other projects, with the exception of Inata and the Koulekoun project in Guinea, as zero and will assess Wega's shareholdings in Merit Mining Corp and Metallica Mining following the deal. (Editing by Andrew Macdonald)