Highland Gold buys Kekura field for $212 mln
MOSCOW. April 2 (Interfax) - Highland Gold Mining (HGM) plc has bought the Kekura gold deposit in the Chukotka region for $212 million, the company said in a statement.
HGM said it bought 100% of CJSC Bazovye Metally, which holds the mining and exploration rights to the Kekura gold deposit and surrounding license area, for a consideration of $212 million. An additional $11 million will be paid in H2 2013 to a contractor upon the successful launch of the pilot plant, which is currently being completed. The consideration will be in cash and will be funded via a new debt facility of $250 million with Gazprombank , which will also allow for additional group operational working capital. The acquisition has received approval to proceed from the Russian anti-monopoly authorities.
The Kekura deposit is located in the Chukotka region, approximately 120 km due south of Bilibino and 250 km east of the company's Klen development project. Chukotka is one of the fastest growing, investment-friendly gold producing regions in Russia with significant exploratory potential, HGM said.
Based on historical exploration activity, a JORC compliant resource audit by Micon International in 2012 estimated the Kekura deposit resources at approximately 2.89 Moz (Indicated & Inferred) at an average ore grade of 8.69 g/t. Preliminary studies confirm that the asset can be mined by open pit method, while production will employ conventional gravity and CIL processing technology. Initial testwork indicates favorable ore metallurgy and yielded high metal recoveries by gravitational concentration alone.
A 150,000 tonne per annum pilot plant is currently under construction, with commissioning expected during H2 2013. The pilot plant is expected to operate through to the end of construction and commissioning of the envisaged main processing facility. This is expected to be fully operational by 2017, with anticipated production ranging from 180,000 - 220,000 oz of gold per annum via 800,000-1,000,000 tonnes of ore being processed each year over a minimum ten year production life.
According to VTB Capital Nikolai Sosnovsky, Highland Gold overpaid for the license.
"Chukotka is the most complicated region in Russia in terms of mining and, accordingly, the implementation of projects there requires a high concentration of effort, spending and professionalism. Infrastructure is lacking in the region, there is no electricity, there is nowhere to hire people, equipment and supplies can only be delivered seasonally. The company paid almost $80 per ounce of reserves for Kekura, and it sold Mayskoye there for just $20," Sosnovsky said.
At this point, it is too early to discuss the benefits Highland Gold could get from buying Kekura, he said.
"Any blunder could result in serious delays, so it's difficult to say exactly what economic benefit the company could get at such a license cost, since investments in Kekura are around $500 million," Sosnovsky said.
Last summer, Highland Gold bought the Klen gold deposit in Chukotka from a company affiliated with Millhouse at the high price of $135 per ounce. The development of Klen will also require a large amount of spending in the near future.
"Given the fact that Highland's main project, Mnogovershinnoye, will be depleted by 2016, meaning that current operating cash flows will dry up, and the fact that Klen and Kekura are planned for launch only in 2017, a significant concentration of costs in the medium-term seriously raises risks," Sosnovsky said.
However, according to Uralsib Capital analyst Valentina Bogomolova, the price of Kekura is completely reasonable.
"Judging by the multiples, this time things aren't as bad as they were when Klen was purchased. The feasibility study will have to be looked at in more detail, which will show how much investment is needed to development the project and what the cost of production will be. But based on the JORC reserves that Highland presented, the appraisal of the Kekura deposit for the deal looks even a little cheaper in terms of the multiples than Highland itself is traded; that is, completely sensible, based on the available data," Bogomolova said.
In Bogomolova's view, Highland has long been working in Chukotka, which means that Kekura fits decently into its current asset portfolio.
"There is a very high gold content in the ore at the deposit. If the ore is also good for extraction, this is an excellent acquisition, although it does increase the debt burden," Bogomolova said.
HGM's main projects are located in the Khabarovsk territory (Mnogovershinnoye, Belaya Gora, Blagodatnoye), the Transbaikal territory (Novoshirokinskoye, Lyubov, Taseevskoye), Chukotka (Klen and adjacent Verkhne-Krichalskaya) as well as in Kyrgyzstan (Unkurtash).
Highland Gold's main shareholder is Millhouse, which represents the interests of Roman Abramovich and his partners (they control 32.6% through Primerod International Ltd). Members of the board of directors and management (mostly Eugene Shvidler) own 8%. As of the beginning of May, Prosperity Capital structures owned 5.1% of the company's shares. In the middle of June, JP Morgan structures consolidated 5.01%.