Red Back Mining Inc. said Monday it has launched a $513-million friendly takeover bid for Moto Goldmines Ltd. to acquire the high-grade Moto gold mining project in the Democratic Republic of Congo.
The all-stock bid, which triggered a 7.2 per cent drop in Red Back's shares, will boost the company's production to more than a million ounces when the mine enters production, the company said.
"I think it's a good deal for Red Back. Based on my numbers, it would certainly be accretive," said Haywood Securities analyst Kerry Smith, who covers both Red Back and Moto. He said the mine could start producing around 2012.
Vancouver-based Red Back will pay 0.45 of each of its shares for one share of Moto, an offer that represents a 40 per cent premium on Moto based on the 20-day volume-weighted average of both companies' stock.
However, following a 42 per cent surge in Moto's shares on Thursday and Friday last week, the offer was only a 4.4 per cent premium on Moto's shares based on Friday's close.
Around mid-afternoon Monday, Red Back stock was down 75 cents at $9.70 a share, which Mr. Smith attributed to concerns about the dilutive impact of the transaction as well as unease about Moto's sharp rise last week.
He also noted that entering the Democratic Republic of Congo raises the risk profile of the company, which could deter some shareholders.
Moto, which is based in Australia, was up 5 cents at $4.55 a share.
Moto owns 70 per cent of the gold project, which should produce around 500,000 ounces in its early years of production, has 5.5 million ounces of reserves, and will cost about $438-million (U.S.) to build, according to a feasibility study released in March.
Red Back, which produced 260,000 ounces last year from its two mines in Ghana and Mauritania, said the acquisition will allow it to speed up development of the project.
Speaking on a conference call, Red Back chief executive officer Richard Clark said the company would probably be able to pay for the development out of cash flows from other mines, but said it would also look at gaining access to credit.
"We're definitely going to look at debt facilities. It's just a good business practice," he said.
In February, Red Back raised $165-million in an equity offering, one of a number of mid-sized to large miners that have taken advantage of rebounding commodity markets to raise funds.
Following a sharp drop in resource stock valuations last year, signs of an economic rebound have put the issues back in favour, while credit markets have thawed somewhat following last year's freeze-up.
This has prompted speculation that larger players could swoop in to pick up junior miners that are still struggling to fund projects.
Under the agreement, which is expected to close in August, Moto will not solicit additional offers, and has agreed to a break fee of $15.3-million (Canadian).
Earlier this year, Randgold Resources Ltd. was reported to have held talks with Moto about a possible acquisition, but no deal materialized.