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Alamos Gold Inc. is making a takeover bid for Aurizon Mines Ltd. that values the Vancouver-based company at $780-million.LISI NIESNER

Why would anyone want Aurizon Mines Ltd.?

That's the question Alamos Gold's investors appear to be asking themselves today. On the same day the miner launched a $780-million hostile bid for Aurizon, its shares slumped nearly 10 per cent.

It's a fair question. Aurizon is struggling, and its stock chart is ugly. Since peaking around $7.75 in late 2010, its shares have steadily declined, falling to a low of $3.15 in late December, off 60 per cent from their peak.

The outlook isn't very promising either – at least not in the short-term. Lately Aurizon's lived through a miner's worst nightmare: higher costs and lower grade ore. When the company reported third quarter earnings in November, cash costs jumped to $759 (U.S.) per ounce, compared to $497-million during the same quarter a year earlier, and its ore grade plummeted 24 per cent.

Plus, next year production will fall because new infrastructure is being installed in order to mine new areas east of the existing shaft.

So even though gold prices remain relatively strong, Aurizon is another cautionary tale for miners around the world: shore up your operations, or you'll get punished. (Just ask Barrick Gold Corp. about that.)

Why then, would Alamos want Aurizon? Chief executive officer John McCluskey believes he can pull off a turnaround.

"If we didn't think there was a possibility to get the mine back on track to previous production and cost levels, we wouldn't be that interested in it," he said on a conference call Monday. "It's just that we think… [Alamos] is much stronger company together than either asset is apart."

It would be a unique marriage. Alamos is known for its low operating costs, and its flagship in Mexico is an open-pit mine, while Aurizon's main project is an underground operation. But that's never deterred Mr. McCluskey from eyeing Aurizon, which he says he's done for years. In fact, the two miners even signed a confidentiality agreement in 2008, but nothing came of it.

"We have made multiple approaches to Aurizon over the years," he said on the conference call. "I sent a fairly lengthy letter to the chairman of the company just over a year ago. Frankly, I received a two line response in return and the reality is that there's just never been any interest at all on Aurizon's side, on the management's side, to pursue a combination or even explore whether it would be an accretive and an attractive value proposition for the shareholders of both companies. We worked on it. We saw very clearly that it was, and so ultimately we decided to take our proposal directly to the shareholders."

Aurizon has yet to comment on the proposal. However, Alamos said it reached out to "a few" of Aurizon's shareholders ahead of time and they were on board – which makes sense because the only near-term saviour for Aurizon was to strike some acquisitions, but new deals wouldn't be very accretive given the company's current share price.

As part of its hostile bid, Alamos acquired a toehold in Aurizon shares, representing 16 per cent of the outstanding stock. That makes Alamos Aurizon's largest shareholder.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 27/03/24 4:00pm EDT.

SymbolName% changeLast
ABX-T
Barrick Gold Corp
+4.22%21.99
AGI-N
Alamos Gold Inc
+6.99%14.55
AGI-T
Alamos Gold Inc Cls A
+6.88%19.72

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