Ron Little

One of the surprise deals of 2007, even for those involved, came from Ottawa-based mining company Orezone Resources last October when CEO Ron Little announced that it would be buying out its much larger partner in a West African gold mine.

The deal saw Orezone pay $200 million in cash and shares to Gold Fields for its share in the Essakane gold mine in Burkina Faso.

Although Mr. Little said the plan all along was to work alongside the fourth-largest producer in the world, the new deal means that Orezone has now moved from being a company focused mainly on exploration, to an intermediate producer with annual gold production expected to reach 292,000 ounces by 2010, at cash operating costs of US$356 per ounce. With gold hitting a record high around $860 in recent days, it looks like the purchase was a wise move.

Mr. Little shared the inside story, and the scariest moments of the deal, with the OBJ.

OBJ: What were the circumstances surrounding this deal?

LITTLE: Starting with the project itself, we were in a 60/40 relationship with our partner Gold Fields from South Africa. We had just completed the feasibility study on the project and the reserve was a million and a half ounces on their side and a million ounces on our side.

An analyst report came out and said that this is a good project, but the million and a half for Gold Fields is less than one per cent of their net asset value, so Gold Fields came to us. I think they were shocked at the comment from the market and they realized they were going to do a lot of work and put up a lot of money for only one per cent ... They said they either needed all of the project, so Orezone sell our 40 per cent, or they would entertain us buying their 60 per cent.

Because their ounces are in South Africa, they trade at a discount to North American companies ... so it was a short conversation as to the price they were willing to pay. We weren't going to sell at a discount so we asked, "How much is it to buy you out?" We bought their 60 per cent for what we were trading at for 40 per cent.

OBJ: This seemed to be a very unusual deal in many different ways, wasn't it?

LITTLE: This was certainly a rare deal, for a junior to buy out a major. The gentleman who is helping us build the mine, he used to be the CEO of one of Canada's bigger gold mining companies. His words were, "You just pulled a miracle deal. You just bought out a major and you raised money in one of the worst markets."

OBJ: How did the credit meltdown affect your ability to raise money for the deal?

LITTLE: In a way it worked in our favour because the mining market has very few large-scale projects that come to build every year. In the bank's eyes, this is a very solid asset – it's part of their diversification. Once we went to our bankers with Gold Fields' price of $200 million, the banks said the funds that buy these resource stocks have a clear indication of where you're going now. Companies like us have a much higher valuation when we're a producer. This is where the funds like to come in and finance, when they think you're at your lowest level before you build. There was no problem getting interest to buy out Gold Fields from an equity standpoint.

OBJ: What would you say was the scariest part of this major deal?

LITTLE: When you look at how mining deals are financed, people will either do a bought deal or a marketed deal. But because this deal was going to change the face of the company, we thought the prudent thing to do would (be a marketed deal and) tell our existing shareholders what we were doing and why and also talk to new investors because we needed to expand our base.

Normally what happens is your stock comes under pressure because people know you're going to issue stock. The new investors who are buying in would rather buy at a lower price obviously, but as you do your marketing, the stock will usually go back up, it may even go higher than where you started.

In our case the stock went down from $1.80 to $1.60 and we had another three or four days of marketing still lined up. The stock was just coming back and gold prices were up, the market was very strong and we approached our brokers and said we'd like to close the deal. They said they had a lot of meetings next week and let's let it hang for a few days. On the Monday gold dropped $50 and so did our stock price. We went from $1.60 to $1.25. That's called the CEO nightmare. Ironically, even though the market got weak, there was a rush because people wanted to buy more stock. They loved you at $1.50 but they love you even more at $1.25.

OBJ: But you went ahead with it anyway.

LITTLE: The issue then became, is it still accretive? We went back and looked at the numbers and said even at this level, take the money, we know we control our own destiny, we have the whole project. For a company our size, this turns us from a junior explorer to a mid-sized producer. That's really where the sweet spot is in the market. Mid-tier producers usually get the better multiple, they trade at a higher value per ounce and they get more liquidity because these are the stocks that go up the most or the major companies buy them out. We knew that doing this would give us better multiples and we would have better take-over visibility from any major company. If we walked away from the deal because of the price, Gold Fields would have sold their 60 per cent to someone else and we would be at the mercy of another partner.

And then the market ground even further down and if we had not closed on that day, we never would have got the deal done. It hurt, but we got it done.

THE EXPERTS SAY

Orezone is in charge of its own destiny now and on the flipside of that, it is responsible for its own capital. That capital is a fairly sizeable commitment that's needed to put Essakane into production. They're going to have to raise (more money) in order to fund the capital for construction alone, otherwise, it's not going to get built. The market is becoming aware of this issue and may keep pressure on a company that is required to raise such a significant amount of capital. However, the Essakane project will be a company maker for Orezone. With gold being the price it is, the last time that gold tried to break the $850 mark was in the early '80s and we have broken that record now.

Other than the fact that this was a smaller company buying out a larger one, it's not that unusual. Gold Fields had its own commitment closer to home in South Africa. They did two deals just one day apart and Orezone was one of them. Gold Fields has its own capital commitments and perhaps they are divesting of assets that are a bit further away from their home base. When you look at how little contribution this made up of their total reserve base, I think is a bit easier to see why this transaction happened.

In a dollars per ounce basis, it was a cheap deal and I think Orezone got a good deal.

Paul O'Brien, CFA, mining analyst for Raymond James (part of the underwriting syndicate for Orezone's financing)

This deal makes Orezone a more relevant company. Everyone always talks about consolidation in West Africa and this makes Orezone a much more attractive take-out candidate now that they own 100 per cent of a large asset as opposed to owning only 40 per cent. That's the major difference, obviously. It also adds a lot of risk because now they have to finance 100 per cent of the project. But I don't think in the current environment that's a huge issue. Orezone's stock was lagging until (the price of gold took off last Thursday), and its stock is up almost nine per cent (last Thursday).

If you work for a gold mining company, you are going to be positive on the price of gold, but they would have had to be very positive to do this deal. They took a large chance.

The fact that Orezone was able to raise the money to buy Gold Fields' percentage shows that the gold market is still pretty positive and sentiment is still pretty good. There were a number of transactions in West Africa at the same time as the Orezone deal; several companies raised money at the same time. Demand is obviously still good. I am positive on gold and I am positive on West Africa. I think this particular project has a lot of potential in the region, not just the Essakane zone. I think there is potential to add to their reserves and resources.

Brad Humphrey, analyst, CIBC World Markets (CIBC represented Orezone in facilitating its financing)