By Jane Louis
St LOUIS (ResourceInvestor): With Gold trading at 28-year highs and commodities prices booming, it is no wonder there is a frenzy in mergers and acquisitions in the mining sector lately. Barrick [NYSE:ABX; TSX:ABX] became the latest miner to announce an offer today, bidding C$773 million ($805 million) for Canadian junior Arizona Star Resource Corp.

Arizona Star [AMEX:AZS; TSX-V:AZS] holds 51% stake in the one of the world’s largest undeveloped gold and Copper projects in Latin America. The Cerro Casale gold-copper deposit in Chile holds proven and probable reserves of 1.035 billion tonnes of ore containing 22.9 million ounces of gold and 5.8 billion pounds of copper. Kinross Gold [NYSE:KGC; TSX:K] holds the remaining 49%.

As gold prices continue to rally to $800 this year, the deposit will bolster Barrick’s world-class gold reserve base. Barrick, headquartered in Toronto, already holds the world’s largest gold reserves with 123 million ounces in 2006. The miner also holds 6 billion pounds of copper reserves.

The acquisition comes at a time when several other majors have made bids on companies in an attempt to boost output and take advantage of rising prices. Meridian Gold [NYSE:MDG; TSX:MNG] last month accepted Yamana Gold’s [NYSE:AUY; TSX:YRI; AIM:YAU] hostile takeover offer, while Newmont [NYSE:NEM] recently made an offer for Miramar Mining Corp. [AMEX:MNG; TSX:MAE] and Gold Fields [NYSE:GFI] sold its Venezuelan assets to Rusoro Mining Corp. [TSX-V:RML]. Today, Northgate Minerals Corp. [AMEX:NXG; TSX:NGX], made a friendly bid for Perseverance Corp. [ASX:PSV].

But Vincent Borg, senior vice president of corporate communications for Barrick, told Resource Investor that the commodity boom was not the main reason it made an offer for Arizona Star. In fact, rising metals prices can have negative effects, he said.

“The commodity boom means that construction prices are higher too,” he said.

According to Borg, the timing of the deal was mostly affected by Arizona Star’s desire to maximise shareholder value, and Barrick came through with the right offer after Arizona Star entertained more than 30 potential buyers.

Barrick’s bid of C$18 per share for Arizona Star is a 27% premium on the junior’s 20-day volume weighted average trading price and 22% higher than its closing price of $14.70 on the Toronto Ventures Exchange Friday. With a market capitalization of $753.4 million and 42.33 million shares outstanding, Arizona Star has traded in a 52-week range of $9.03 to $18 per share.

“Our board is very pleased with this attractive premium and is unanimously recommending Barrick’s offer to our shareholders,” Arizona Star Chairman James S. Anthony said in a press release.

Arizona Star’s largest shareholder, FCMI Resources Ltd., has already agreed to the offer, tendering its 34.5% stake and representing more than half of the 66.66% Barrick needs to complete the deal.

Cerro Casale

“Cerro Casale is an attractive, long-life asset that we look forward to adding to our unrivalled project pipeline,” said Greg Wilkins, Barrick president and CEO.

Cerro Casale’s nearly 23 million ounces of gold have an average grade of 0.69 g/t. Its 5.8 billion pounds of copper have an average grade of 0.25% copper. It is located in Region III’s Maricunga district in northern Chile, about 20 kilometres west of the Chile-Argentina border.

The deposit will cost $1.96 billion to develop and have cash operating costs of less than $107 per ounce of gold, Arizona Star’s website said - though some analysts say development will probably cost more due to rocks obstructing the ore body.

“The project life is projected at 17 years with a payback of 4.9 years,” according to the website. “Average Gold production is estimated at 990,000 ounces per year and Copper production at 294 million pounds per year. Total metal production for the project is estimated to be 16.9 million ounces of gold, 5 billion pounds of copper and 28.5 million ounces of silver.”

Working with Kinross

Kinross holds 49% of Cerro Casale. Kinross’ shares jumped more than 4% to $19.19 on the New York Stock Exchange on the news of Barrick’s offer.

According to UBS, Barrick’s participation in the property increases the likelihood that Cerro Casale will be developed. UBS raised its price target on Kinross from $20.50 to $22 today.

Barrick already operates several major operations in South America: the Lagunas Norte and Pierina gold mines in Peru; the Veladero gold mine in Argentina; the Zaldivar copper mine in Chile; and the Pascua-Lama gold-silver project in Chile and Argentina.

Borg said that Chile is an attractive country to operate in because of its good political climate and geological resources.

“I think our expertise and being known in the country is helpful,” he said, adding that the company’s positive synergies with the development of the Lama project increase its value.

He said it is premature to predict when development will begin and how the project will impact Barrick’s earnings, saying that there is “still more than a couple years” until production and that the firm is first focusing on making the offer successful.

“We’ll then sit down with Kinross to discuss more detailed plans,” he said.

According to Kerry Smith, a senior mining analyst with Haywood Securities, the offer is a great deal for both Barrick and Kinross. They are two well-financed companies that are “more than capable to advance the project,” he said.

“Arizona Star would not have had the financial capabilities to develop (Cerro Casale),” he said, due to the “serious amount of capital involved.”

Smith said it is also helpful that Barrick and Kinross are used to working with each other.

“Barrick knows that Kinross knows how to operate machinery” and vice versa, he said, adding that it is still unclear who would be the chief operator of the project. “For Kinross, it’s a great deal. They get a partner that is much more able to develop.”

Smith said he does not think Barrick is buying too cheaply, and although he expects production to be at least 5 years away, high metals prices will justify the deal.

“It’s a good project at these kinds of metals prices,” he said.

Shares in Arizona Star soared more than 20% on the offer, trading up C$3.14 at C$17.84 this afternoon on the Toronto Ventures Exchange. Barrick added $1.01 to trade at $44.06 per share on the New York Stock Exchange.

Gold futures closed up $5.10 a $792.60 per ounce, while copper finished the day at $3.5475 per pound.

By Arrangement with www.resourceinvestor.com

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