Alamos Gold (TSX: AGI; NYSE: AGI) is acquiring Argonaut Gold (TSX: AR) and its past-troubled Magino mine in northern Ontario in an all-share deal valued at US$325 million to become Canada’s third-largest gold producer.
The transaction, scheduled to close in July, is expected to create US$515 million in cost-savings over about two decades of production from Alamos’ Island mine and the neighbouring Magino located northeast of Lake Superior, the companies said Wednesday. Alamos will use Magino’s larger mill and tailings facilities instead of Island’s. Total Alamos output is expected to increase by about a quarter to around 630,000 oz. gold per year.
“The addition of Magino will make Alamos a stronger company and enhance our unique position as a growing intermediate producer, with declining costs, and one of the lowest political risk profiles in the sector,” Alamos president and CEO John McCluskey said during a webcast.
“With respect to our whole phase three expansion and some of the aspects of going into that, the fact that we were just about to practically rebuild a new mill. We just don’t have to do that now,” McCluskey said. “There were costs that we were going to incur this year on the tailings lift for our existing tailings facility, about US$20 million in costs. That’s just something we don’t have to do at this point.”
The acquisition gives Alamos a fourth long-life producing asset in addition to its two mines in Ontario – Young-Davidson and Island – and Mulatos in Mexico. It has the Lynn Lake development project in Manitoba, which received federal environmental approval last year, as well as others in Turkey and Oregon.
Shares in Alamos rose more than 7% on Wednesday in Toronto to C$19.79 apiece, valuing the company at C$7.9 billion. They’ve traded in a range of C$14.80 to C$20.20 over the past 52 weeks.
Magino costs
Argonaut started commercial production at Magino in November after construction costs almost doubled to nearly C$1 billion and led to the ouster of a CEO before a mill problem postponed output.
The Reno, Nev.-based company estimated the mine would cost C$510 million to build in 2020 but inflation and other challenges increased the final tally to C$980 million. Founder, president and CEO Peter Dougherty left in late 2021.
After it poured first gold at Magino on June 15, production was delayed while the mill was repaired for 20 days in September, causing Argonaut to miss last year’s guidance. Argonaut sold another 1% output stream to Franco-Nevada (TSX: FNV; NYSE: FNV), which has a 3% net smelter return royalty, to shore up its finances.
In the Alamos deal, Argonaut’s other assets such as the Florida Canyon mine in the United States, as well as the El Castillo Complex, the La Colorada operation, and the Cerro del Gallo project in Mexico, are to be placed in a separate company, at least for the moment known as Spin Co. The plan is to list Spin Co. on an exchange and Alamos would invest US$10 million for a 19.9% stake.
Premium paid
Alamos plans to issue 20.3 million shares valued at about US$276 million as part of the deal. The acquisition valued Argonaut at a 34% premium based on Argonaut’s and Alamos’ closing prices on Tuesday on the TSX. Each Argonaut common share outstanding will be exchanged for 0.0185 Alamos common shares and one share of Spin Co. It will give Alamos 95% of the combination and Argonaut 5%. The deal implies an estimated total consideration of 40¢ per Argonaut common share or US$325 million, the companies said.
The company’s resource now stands at more than 5 million oz. and there are plans to hike production to 900,000 oz. a year by expanding and tweaking Magino’s mill with feed from Magino and Island, the CEO said.
“We had some pretty tough critics from our side go up and look at the mill and they really liked what they saw,” McCluskey said. “That permanent tailings facility at 150 million tonnes, it’s hard to put a price on that. If you were settled on the path to permitting a facility like that today that could take up to a decade. With an ever growing mine and mineral reserve at Island Gold, that’s a big de-risking event for us.”
