For Iamgold Corp. , the $608-million acquisition of a little-known Ontario gold explorer is a step toward two key company goals – offsetting an Africa-heavy portfolio and propelling it toward a goal of doubling production in five years.
Toronto-based Iamgold is offering $3.30 a share for Trelawney Mining and Exploration Inc. , which gives it control of a large gold deposit practically in its backyard, thousands of kilometres from Iamgold's key producing assets in South America and Africa.
"The acquisition of Trelawney creates a larger and more geographically balanced portfolio of long-life gold assets for Iamgold," Steve Letwin, the company's chief executive officer, said Friday.
The all-cash acquisition comes as gold companies' equity valuations flounder, sliced in half in some cases from year-ago levels by investors abandoning the sector in favour of less risky, higher-yielding assets. Ballooning costs for everything from raw materials to skilled labour are also fuelling investor concerns.
Iamgold's offer for Trelawney is a 37-per-cent premium to recent trading activity but a far cry from its year-ago high of nearly $6 a share.
Even as gold trades at near all-time highs, gold company valuations have also been hurt as investors seek direct exposure to precious metals through exchange-traded funds rather than through the companies that mine them.
Companies operating in some emerging nations have been especially punished, analysts say, because investors want to avoid political risks which in extreme cases can see them lose their mines altogether.
Some say the Iamgold deal could be the start of a trend of Canadian gold companies looking for more acquisitions at home. Jennings Capital suggested in a research note that a rival bidder could even emerge for Trelawney.
"We believe there remains a strong possibility of a competing offer for Trelawney," Jennings said.
Iamgold produces most of its gold from mines in South America and in Africa, where operations in Mali and Burkina Faso account for half its output.
Mr. Letwin said the Mali mines have not been affected by upheavals such as the separatist mutiny that left half the country in the hands of rebels and Islamists. Even so, he said he is regularly accompanied by bodyguards while in Africa.
But when looking for his next acquisition, the 30-year resource industry veteran was emphatic in an interview earlier this month that he was eyeing targets only in North and South America, and that he wanted to bring more balance to Iamgold's portfolio.
While Trelawney's Côté Lake gold deposit in Northern Ontario will need to go through permit and environmental reviews, it certainly fits that goal.
Mr. Letwin said it could be a mine in five years, adding substantial production to Iamgold's portfolio at the same time as its $1.5-billion expansion program at its other mines.
"[Côté Lake]will produce from 400,000 ounces to 500,000 ounces a year and will move us to the 1.5 million ounce to 1.6 million ounce range," Mr. Letwin said. Iamgold's current production is about 850,000 ounces per year.
Mr. Letwin would not say how much it would cost to develop the project, but analysts say it would be in the $1-billion range. Iamgold will finance the Trelawney purchase with its $1.4-billion cash position before the acquisition was announced.