Wednesday, 3 August 2011

May 2011 Pacific Gold?

Gran Colombia Gold (TSXV: GCM) and Medoro Resources (TSXV: MRS), two companies in which mining heavyweight Serafino Iacono has an interest, have agreed a friendly merger. With Iacono as the pivotal link it would be no surprise to if the company was renamed Pacific Gold to add to his other natural resources companies Pacific Rubiales and Pacific Coal!

The merger pairs GCM, a 100,000 oz/y Au producer with an exploration company that has one of the largest gold resources found to date – current cash flow and long-term production growth. Thus company hopes to grow production from 109,000 oz Au in 2011 to over 630,000 oz Au in 2016! Punchy!

It is understood that the market likes the idea of the merger, but the fall in the stock price of GCM and MRS indicates that it perhaps does not like its terms. While general economic conditions have seen most resource stocks slide, in the week following the merger announcement GCM has fallen from C$1.60 to C$1.34 while its bedfellow has slid from C$2.12 to C$1.86. Those terms include each MRS shareholder receiving 1.20 common shares of GCM, plus 0.50 of a GCM common share purchase warrant for each MRS share meaning that upon completion existing GCM and MRS shareholders would each own approximately 50% of the combined company on a fully diluted basis.

The merger will tease out a few administrative synergies to reduce costs, which will presumably include pruning the merged board. The merger presentation says it will initially have a whopping twenty directors! This includes more than its fair share of political heavyweights as between them the companies have almost recreated President Uribe’s cabinet with mining and energy minister Hernan Martinez, former Minister of Foreign Affairs and Minister of Culture Maria Consuelo Araujo, and former Vice Minister of the Interior and Justice, Ricardo Lozano. How many politicians does a board need?

Other synergies could be seen in the community and sustainable development department programmes to face the joint challenges of their respective projects. However, the main benefit will be the much stronger technical team under Don East, Jose Oro and Vicente Mendoza that will result.

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