Red Eagle Mining (RD.V) has now completed the financing needed to start the construction of the San Ramon underground mine in Colombia and the mine is currently being built with an anticipated start-up date in the second half of 2016. Now the financial aspect of its flagship project been completed, Red Eagle started to focus on the next step in its development process; it’s currently competing with Batero Gold (BAT.V) to gain control of CB Gold (CBJ.V).
These are the final few days to tender CB Gold shares to Red Eagle
Shareholders representing 48% of CB Gold’s total amount of outstanding shares have already tendered their shares to Red Eagle, and this convinced the company to extend the final acceptance date by another two weeks. Also keep in mind the 48% is based on the total amount of outstanding shares of CB Gold which includes the rather questionable friendly private placement wherein Batero Gold has acquired an additional 11.5M shares of CB Gold.
However, the TSX Venture Exchange hasn’t given its final approval for the transaction yet, and if one would exclude these shares from the share count, more than half of the CB Gold shareholders have now accepted the Red Eagle offer (as of at the end of August). We expect this number to increase to in excess of 55% within the next few days as we have received more enquiries about how CB Gold shareholders can tender their shares to Red Eagle Mining, so it does looks like Red Eagle has won this battle.
The company has already announced it intends to take up all the tendered shares as Red Eagle has waived the minimum condition for its offer, subject to the shareholder’s rights plan being reversed by the BCSC on Thursday. Once it obtains 50% of CB Gold’s shares, Red Eagle will effectively be in control of CB Gold and its Vetas project and we think the company won’t lose any time and will want to start exploring the land package as soon as possible.
The extended offer will now expire on September 14th, so if you still own some shares of CB Gold and would like to tender your shares to the Red Eagle offer, you’re almost out of time and we’d urge you to take action now.
The crash of the Colombian Peso is a huge bonus for Red Eagle
We already explained numerous times before that a strong US Dollar is actually a huge advantage for Red Eagle Mining. On top of that, the Colombian economy is quite dependant on its oil exports which resulted in a double-whammy for the Colombian Peso.
Whereas the feasibility study used an USD/COP exchange rate of 1900 for calculation purposes, the Colombian Peso has now lost in excess of 50% of its value and is currently trading at an USD/COP rate of 3,100 per US Dollar (63% lower). Red Eagle is obviously not allowed to include the lower Peso in a new NPV guidance without completing an entirely new feasibility study, but we have tried to find out what the impact could be on the fair value of San Ramon.
We have outlined 4 different scenario’s using an USD/COP exchange rate of 2500 and 3000, and using an COP-denominated opex of 30% and 40% of the AISC. According to our calculations, the AISC will fall by $72-177/oz, depending on the used exchange rate and ratio of COP denominated operating expenses.
Okay, that’s great, but what does this mean for the NPV? Let’s calculate the impact of the conservative scenario (an exchange rate of 2500 and a 30% ratio) and the impact of the more aggressive scenario. We have calculated the pre-tax NPV5% and the after-taxNPV5% using a flat rate tax of 40%.
If you also use an USD/CAD exchange rate of 1.31 and 168M outstanding shares, the impact of the weak Colombian Peso could add between C$0.11 and C$0.28 per share to the current NPV/share of C$0.41. This means that we are expecting the current fair value of Red Eagle to be C$0.52-C$0.69 per share, leaning towards the higher end of this guidance considering the current USD/COP exchange rate is even more favorable than the exchange rate we used in our calculations.
Red Eagle Mining has recently closed an US$19M capital raise and it will be interesting to see if it will hedge a part of these dollars to take advantage of the current excellent USD/COP exchange rate.
Conclusion
Red Eagle has started the construction of the San Ramon mine which should be up and running in the second half of next year. Instead of sitting on its hands, Red Eagle has gotten into a takeover battle with Batero Gold to gain the control of CB Gold which owns another underground gold project in Colombia.
We expect Red Eagle to own in excess of half of CB Gold’s outstanding shares by the end of this month, and we are already looking forward to see the company unveiling its plans for the Vetas gold project.
Disclosure: Red Eagle Mining is a sponsoring company. Please see our disclaimer for current positions.
