Research Capital says buy
Argentina Gold Corp ARP
Shares issued 33,113,389 Dec 8 close $2.96
Wed 9 Dec 98 Research
Russ Cranswick says why
HIGHLIGHTS
Barrick held exclusive and confidential takeover negotiations with ARP
until 5:00 p.m. Dec. 8, 1998.
The meeting concluded with Barrick willing to pay $5.50 per share in cash
if it could get lock-up agreements with principal shareholders.
ARP rejected Barrick's offer.
On the morning of Dec. 9, 1998, Barrick announced that it owns 9.9 per cent
of ARP and that it is offering $4.00 cash per share for the rest.
With fundamentals still suggesting a valuation in the $2.20 to $3.00 per
share range, it is clear that Barrick;
a) is well ahead of all others in interpreting results to date because of
its adjacent Pascua/Lama experience;
b) needs to pay a premium for an early stage play in a rising market; and
c) would prefer to have the whole belt tied up, rather than another major
as a partner.
With ARP having set the stage for a bidding war (i.e.. Newmont versus
Barrick), the big question is, "Does Newmont have enough incentive to
play?"
With Barrick's friendly offer and current trading well beyond fundamentals
(i.e.. discounting more than 10 million ounces at Veladero), we conclude
that Barrick wants ARP bad enough that aggressive speculative investors may
want to hold on for bids in excess of $5.50.
SUMMARY
Following the Dec. 8 mid-morning halt, Argentina Gold announced late in the
evening that it had been in exclusive takeover discussions with Barrick
Gold. Apparently, these negotiations concluded with Argentina Gold
rejecting a Barrick cash offer of $5.50 per share. This offer was
contingent on principal shareholders entering into lock-up agreements with
Barrick.
On the morning of Dec. 10, Barrick announced that it currently owns 9.9 per
cent of Argentina Gold and launched a $4.00 per share cash offer for all of
the company's outstanding shares. This offer is conditional on Barrick
acquiring 50.1 per cent of ARP's fully diluted shares and puts a fully
diluted value of $147-million on the company. Barrick says that the offer
represents a 70 per cent premium to the average of ARP's trading price in
the past 20 trading days.
VALUATION
We have previously stated that, based on $20 (U.S.) per ounce of
potentially mineable gold-only resources estimated for the Amable zone, and
a $10 (U.S.) per ounce global gold-only resource multiple for the Filo
Federico and NW Target zones, we could see a value in the $2.20 per share
range. This number could range up to $3.80 per share if all currently
indicated resources on the property were taken at face value as uncut,
gold-equivalents and were multiplied by the higher $20 (U.S.) per ounce
multiple. Barrick's current offer could be reflecting significant upside
for potentially economic gold resources, it may be recognizing more of a
contribution from silver, or it could only be partially related to either
of these aspects.
DISCUSSION
With fundamentals based on a conservative interpretation of technical data
released to date suggesting a valuation in the $2.20 to $3.00 range,
Barrick's $4.00 offer, and its willingness to pay $5.50 per share,
demonstrate that it has a number of very significant reasons to want to own
Argentina Gold and its assets. These could include:
1) Through its extensive work at the adjacent Lama and Pascua properties,
and elsewhere in the El Indio belt where it owns the producing El
Indio and Tarnbo mines, Barrick must see features in results to date
from Veladero that suggest significant upside potential going forward.
2) Barrick may feel that its experience in the belt, and the wealth of
technical expertise in the company, can advance its already 40 per
cent owned Veladero program faster than continuing with Argentina Gold
as operator (i.e.. it could make Veladero have a nearer term impact on
Pascua/Lama development and economics).
3) Barrick could be looking at the Amable zone as a potential high grade
starter pit that could enhance payback of the very high capital cost
for developing Pacua/Lama.
4) By owning Argentina Gold, Barrick would tie up a substantially bigger
portion of the Argentine side of the El Indio belt (i.e. ARP's Rio
Frio land package lies east of both Barrick's Lama property and
Veladero, and also covers 30 kilometres along the Chile/Argentina
border adjacent to Barrick's El Indio and Tambo operations).
5) Additional land on the Argentine side of the border could expand
Barrick's options for infrastructure and tailings placement related to
Pascua/Larna+/-Veladero development.
6) Barrick may simply want to eliminate the threat of Newmont becoming
more entrenched in its back yard.
In this well orchestrated game of chess, Newmont is clearly the pawn. The
million dollar question is whether or not this is by its own design... Is
it there merely as an investor? Is it there to make Barrick's life
miserable? Has it seen enough technical merit to justify jumping into a
bidding war with a company that has both significant resources and is well
entrenched in the belt?
Clearly, Newmont's next move, or its lack of one, will dictate just how
much Barrick will pay for what it obviously wants and/or needs badly.
While it is uncertain exactly how much of Argentina Gold that the Lundins
or their friends and associates control, it would be a fair bet that it is
enough to thwart a hostile takeover. This suggests that eventually, to be
successful, Barrick will have to satisfy management with its offer. Since
$5.50 was rejected once already, it is a reasonable assumption that a
winning bid would have to be better than that.
POSSIBLE SCENARIOS GOING FORWARD
Worst Case Median Case Best Case -----------------------------------------
No Newmont Barrick ups Newmont count- counter bid to $5.50 ers (likely
offer -$5.50) -50.1% tender Newmont Pandemonium to Barrick's doesn't $4
offer counter offer Barrick $5.50 Winning bid offer accepted is $6 - $10
per share
CONCLUSION & INVESTMENT OPINION
We admit that once market valuations get well beyond the available
technical data, we are out of our depth. However, given the above
scenarios, we recommend that more conservative investors sell into current
strength, but that more aggressive speculative traders and investors hang
on for what could be a very wild ride. Feeding the speculative frenzy of a
potential bidding war will be the Dec. 11 release of what could be more
strong results from the "sweet spot" area of the Amable zone.
Our accumulate recommendation goes to a speculative buy and our 52 week
target price is being reset at $6.50.
(c) Copyright 1998 Canjex Publishing Ltd. canada-stockwatch.com |
