Take physic, pomp

(UPDATED) Esperanza (EPZ.v) and Alamos (AGI.to): Errrr…toldya?

Excuse me for laughing a very lot indeed. Here’s the NR out of Alamos seconds ago:

August 22, 2013
Alamos Comments on Esperanza News Release
TORONTO, ONTARIO–(Marketwired – Aug. 22, 2013) – All amounts are in United States dollars, unless otherwise stated.

Alamos Gold Inc. (TSX:AGI)(NYSE:AGI) (“Alamos” or the “Company”) commented on the news release issued earlier today by Esperanza Resources Corp. (“Esperanza”) regarding the recent amendment to Article 71 of the Law of Rural Sustainable Development in the State of Morelos, Mexico (the “New Law”). The principal asset of Esperanza, the Esperanza gold project, is located in Morelos.

Alamos and Esperanza entered into an Arrangement Agreement dated July 12, 2013 pursuant to which Alamos offered to purchase all of the issued and outstanding shares of Esperanza (the “Transaction”). Completion of the Transaction is subject to the fulfilment of certain conditions set forth in the Arrangement Agreement.

The New Law came into force on August 15, 2013, after being published in the August 14, 2013 edition of “Tierra Y Libertad”, the official newspaper of the state government of Morelos, which is available on the official state government website. In its publication of the announcement of the New Law, the State Government noted that the use of cyanide shall be “restricted” in the State of Morelos, and makes specific reference to the Esperanza gold project, which is planned for Morelos. It is not clear what the nature or extent of the restrictions on the use of cyanide will be under the New Law.

Given that the Esperanza gold project is located in Morelos, and contemplates the use of cyanide in its design plans, Alamos has significant concerns regarding the New Law and is currently working with its legal advisers in Mexico to further clarify the potential effect of the New Law. Alamos was aware of the New Law prior to today’s press release by Esperanza, but has not completed its assessment of its potential impact on the viability of the Esperanza gold project.

UPDATE: I’ve been asked “waddyamean toldyaso?”, to which I could point you to blog evidence such as this post at the time of AGI’s offer for EPZ which sums it up with “bargain hunters overpaying for idiots”. But away from the blog and over at the subscription weekly, we take a more measured view of things and try to be a little less uncouth (not easy, but ah tries ma hardest). Here’s the section that contemplates the Esperanza gold project and AGI’s then newly-minted offer from that weekend’s edition, IKN219 dated July 14th:

That leaves the main “Esperanza” project in the State of Morelos, Mexico (ex-Cerro Jumil, and when a project gets a quiet name change from a junior owner it’s a red flag all by itself), which is the project that recently had its environmental permit turned down by Mexico’s Semarnat environmental body (which is headed by a close ally of President Enrique Peña Nieto and member of his inner circle, Juan José Guerra Abud). Much noise was made by the whining English language commentary brigade in mining circles about this permit denial as they tried hard to cherrypick their data and blame it all on a bunch of lefty enviro-terrorists who’s stopped the project because of a long-neglected historical site nearby. That aspect had a secondary role according to Semarnat in its ruling, but the main reason for permit denial was that the mine would take away too much water supply from agricultural zones nearby and that, ladies and gentlemen, is a real project-killer in Mexico mining these days and will be a tough one to overcome. I’m guessing that McCluskey over at AGI might fancy his chances of bringing the Morelos people round to his way of thinking by being able to show them the producing mines AGI already has in Mexico, but all the same the social opposition to Esperanza is now entrenched and it will be a very tough one to crack, even over a long-term period.  
But as suggested in the first lines of the above, I don’t think this deal is necessarily bad for AGI. Firstly it’s small compared to the company’s current size. Secondly, it adds assets into the corporate structure in exchange for un-needed cash at a time when assets are at distressed sale prices. Those can sit there, pad out the overall in-situ resource count at AGI for a few quarters and then in the event of a sector rebound and new interest from dumb money, get flipped out at a profit in the next round of junior speculation. However, all talk of some sort of intense bidding war for EPZ should be discounted here; AGI has made a smart, lowball and friendly bid that the guys at EPZ need to take (after having made their own mess of things and been hit at the wrong time by a sector downturn). If you hold EPZ today, you’ve been offered a reasonable out and should take it. 
By the way, ‘esperanza’ is Spanish for ‘hope’. You’ve been told enough times already that hope is not a valid investment thesis, I’m sure.
IKN back: Here we are six weeks later from those words and I sure hope all subbers who read that note took the advice and the 90c general offer, rather than hanging round for the deal to close. Because this one is well and truly sexually intercoursed.

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