Vanstar Mining Resources (VSR.V) has entered into an agreement with IAMgold (IAG, IMG.TO) whereby the latter will acquire Vanstar to get its hands on the 25% stake in the Nelligan gold project in Québec as well as the underlying royalties owned by Vanstar Mining. This also means IAMgold is taking total control again of the Bousquet-Odyno exploration project in Québec.
The details of the offer
As part of the arrangement, Vanstar shareholders will receive 0.2007 shares of IAMgold per share of Vanstar they own. Based on the pre-announcement share price, this represented a value of C$0.69 per share of Vanstar. Based on the current share price of C$3.16 for IAMgold, the offer has a value of approximately C$0.63 per share of Vanstar.
Vanstar will hold a shareholders meeting in January and it is widely expected the transaction will be approved at said meeting. However, it is always possible a third party may pop up and try to acquire Vanstar Mining as a 20% carried interest in what currently is a growing multi-million ounce gold project (2 million ounces in the indicated resource category and 3.6 million ounces in the inferred resource category).
The break fee is just C$2M which is relatively low and especially now the fair value of the offer is just C$37M, we can’t rule out a third party kicking the tires of Vanstar. Unfortunately Vanstar hasn’t filed the Management Information Circular yet, and we are anxiously awaiting that document as it will indicate if Vanstar has held serious conversations with any other parties in the past twelve months.
From an economic point of view, IAMgold can create the most value by acquiring the minority stake in the project it doesn’t own yet considering the company is on the hook for 100% of the funding package given Vanstar’s 25% stake (to be reduced to 20% upon the completion of a feasibility study) is a carried interest. Vanstar won’t have to cover a single dollar of any exploration expenses, any study expenses, or construction expenses as the agreement with IAMgold allows for it to repay its 20% share of the capex from the incoming cash flow once the project is in commercial production. Needless to say this type of carried interest would be of interest to a royalty company as well, but we would expect IAMgold to bring this one home. The smartest decision it can make for its shareholders as it will have to pony up 100% of the capex anyway.
Conclusion
We think it was inevitable to see IAMgold making a run for Vanstar Mining but we are surprised by the timing. As IAMgold still has its hands full with the final construction stage of the large Cote Lake gold project in Ontario we were expecting another round of drilling on IAMgold’s dime this winter. Still, the mid-tier producer – which once had senior-tier ambitions before the ever-increasing capex at Cote Lake almost blew up the company – has other plans.
If no competing offer comes along, Vanstar’s shareholders shouldn’t hold out for something better but either sell to IAMgold or sell on the open market and redeploy the cash in other beaten-down names in the junior gold sector.
Disclosure: The author has no position in Vanstar Mining anymore. Vanstar Mining is a sponsor of the website. Please read our disclosure.
