Alamos to buy Argonaut for US$276M

Alamos Gold is to buy distressed gold developer Argonaut Gold for US$276 million in an all-stock deal to obtain the Magino mine adjacent to its Island Gold mine in Ontario, Canada. The integration of the two operations is expected to create one of Canada's largest and lowest-cost gold mines, with shared infrastructure expected to generate synergies of US$515 million. 

"The acquisition firmly positions us as the third largest gold producer in Canada," said Alamos Gold chief executive John McCluskey during a conference call.

The transaction will see each Argonaut share exchanged for 0.0185 of an Alamos share and one share of a spinout company, which implies consideration of C40c per Argonaut share, a 34% premium to Argonaut's closing price on March 26. Alamos expects to issue 20.3 million shares as part of the transaction, representing an equity value of $276 million. Upon completion, Alamos and Argonaut shareholders will own 95% and 5% of the pro forma company, respectively.

"We believe this transaction provides a unique opportunity to place Magino in the hands of a well-capitalised and well-run company, which will be able to realise significant synergies given the proximity of the adjacent Island Gold Mine. With adequate capital and an optimal expansion at Magino, the mine will deliver significant value to all stakeholders," said McCluskey.

The addition of Magino is expected to increase Alamos' combined gold production to over 600,000ozpa, with a longer-term production potential of over 900,000ozpa. Production in 2024 from Magino and Island Gold is expected to be 280,000oz, increasing to over 400,000ozpa following the completion of the phase three expansion in 2026. The two deposits host reserves of 4.1Moz, and total reserves and resources of 11.5Moz, supporting a mine life of more than 19 years. Alamos Gold produced a record of more than 529,000oz of gold in 2023.

Operating synergies include using a larger centralised mill and tailings facility at Magino, with capital savings of $140 million, with the mill and tailings expansions at Island Gold no longer 2km haul distance from Island gold shaft to Magino mill. The deposits are within 300m of each other and are expected to generate savings including capital savings of $40 million, operating savings of $375 million, procurement savings, tax synergies including tax pools that can be used at the company's other Canadian assets through 2028, and lower G&A costs. "With a much stronger balance sheet, has fin cap to complete the ramp up and optimisation of the Magino mine, unlocking its full potential," said Argonaut Gold chief executive Richard Young.

Argonaut's assets in the USA and Mexico will be spun out to its existing shareholders as a newly created junior gold producer. This will own the Florida Canyon mine in the USA and El Castillo, La Colorada and Cerro del Gallo in Mexico.

Magino distress

The transaction continues the recent pattern of single-asset companies going into development, becoming distressed and vulnerable. This follows B2Gold's acquisition of Sabina Gold & Silver, and Calibre Mining's acquisition of Marathon Gold.

Argonaut has struggled with the Magino development. Its capital cost almost doubled in under two years from an initial C$480-510 million in October 2020—itself much higher than the $321 million in the 2017 feasibility study—to C$980 million. Production was also delayed from the original March 2023 date, and Magino produced its initial 3,295oz during the June quarter. It is due to produce an average of 115,700ozpa over its 17-year mine life.

To pay for the cost blowout, in March 2022, Argonaut announced a forward sale of 40%-45% of company-wide gold production at $1,916/oz to provide cash flow certainty during the rest of the build. Gold has traded above that level for much of the past year, meaning the Magino cost overrun has profoundly impacted the company's finances beyond higher costs. Argonaut if far from the only company that has sought to put some gold price protection in place, which has also limited its potential future income.

But fund-raising did not end there. In July 2022, the company raised C$195.3 million in equity to satisfy the conditions for a $250 million debt facility, including mandatory gold hedging of 300,000oz between 2023 and 2027 and a Canadian dollar-to US dollar foreign exchange hedging programme. In addition to increasing its debt load, Argonaut sold its non-core Ana Paula gold project in Guerrero, Mexico, in March 2023 to Heliostar Metals for $10 million, plus an additional $20 million in deferred payments. But even that was not enough. It followed this with an C$80 million bought deal financing to fund the development and optimisation of Magino and its Florida Canyon mine.

Alamos is to provide Argonaut with a private placement equity financing of C$50 million priced at an 8% discount to obtain a 14% interest in Argonaut, to provide the junior with immediate liquidity. It will also invest US$10 million when the spinout company goes public to obtain a 19.9% interest.