The Condor Gold Deal: What You Need To Know

Metals Exploration's Growth Strategy and Condor's Asset Potential

Don’t let perfect be the enemy of good

Now that the dust has had some time to settle, here are my thoughts on the Condor Gold take-out deal.

We'll start with a reminder of the situation.

Metals Exploration PLC (MTL.L), with a market cap of £100 million, is proposing to acquire Condor Gold PLC (CNR.L), which has a market cap of £59 million. Condor shareholders will vote on the deal on January 6, and it should complete a fortnight or so after that.

Metals Exploration, which is 38% owned by billionaire property magnate and now Reform Party Treasurer, Nick Candy, has a producing gold mine in the Philippines and has been a rare mining success story under CEO Darren Bowden.

What was previously a, shall we say, problematic gold project is now producing over 80,000 ounces per annum at around $1,125/oz, beating guidance on both counts. Over the next two and a half years, the forecast is that it generates US$160 million (£125 million) in cash flow.

However, after that, the gold runs out. It needs another asset. Hence its interest in Condor, which has its 2.5 million shovel-ready, open-pittable ounces at its La India project in Nicaragua and could be producing 120,000 ounces annually within 2 years. At the time of the announcement, Metals Exploration was trading at 5.7p and Condor at 22p. Metals Ex is now at 5.8p and Condor at 29p. The market likes the deal - even if Condor’s shareholders don’t.

For each share in Condor Gold, you will get:

• 9.9p in cash

• 4.0526 shares in Metals Ex

With Metals Ex now at 5.8p, this amounts to 23.5p plus 9.9p - 33.4p per Condor share. This is a decent enough uplift from the 22p where this was trading prior to the announcement, and it’s a win for readers. But it is not the home run many were hoping for.

However, Condor Gold shareholders will also receive two Contingent Value Rights (CVRs) of:

• 5.5p when La India commences production (likely in two years' time)

• 5.5p if the gold reserves at La India are increased (Metals Ex has committed to at least 40,000 metres of drilling over the next 5 years).

It is possible that this mine does not go into production and you don’t get the first payment. It is also possible they don’t discover any more gold and you don't get the second payment.

However, Metals Ex is acquiring this project to get it producing, and if you listen to the CEO talk, it's clear Bowden is a competent person with a proven record, who wants to this producing within two years.

It is also generally thought that La India is probably a 5 million ounce deposit, so the probability is that the resource increases.

At the moment, the market is behaving as though these CVRs have zero value. In my view, they will come good - with the production more probable and more likely to come sooner than the reserve increase - but you will have to wait.

All in all, it amounts to 44p per Condor share. But 11p of it is jam tomorrow, not today. In fact, not even jam tomorrow, but jam several years from now.

Bidding War Coming?

In theory, between now and January 6, any other company can step in with a higher bid, although, with Christmas looming, that is now looking increasingly unlikely. To scupper this deal cleanly would probably require a bid of above 45p a share.

Calibre Mining (CXB.TO) is a C$2 billion market cap gold producer, which owns the asset next door. Its mill is only operating at 60% capacity, and it needs feed, which it could have trucked over from La India. Moreover, Calibre’s production numbers this year have been a big disappointment - unlike Metals Ex, it has fallen well short of guidance - and Condor’s La India would have sorted all its issues.

It probably could have had Condor for 36p earlier in the year, but for reasons we will probably never know - I suspect ego - the deal did not go through.

It could still come in with an offer, but I’m not holding my breath. I rather suspect there is too much bad blood.

Nevertheless Calibre could pay 75p for Condor and the accretive value would still dwarf the purchase price. But that would probably require Calibre’s management eating some humble pie which it is probably not prepared to eat.

We shall see. It’s Christmas, the time of good will, here’s hoping they can let bygones be bygones. :)

So what to do now?