Andean Resources Limited 08 Sep 10

Goodbye Andean; thank you Goldcorp

Andean has a market capitalisation of around US$900 per gold equivalent resource ounce. On the same basis Goldcorp is valued by investors at US$175 per ounce which is around 50% premium to a benchmark average of US$116 per ounce.

Acquiring the Cerro Negro Project for US$900 per ounce is not of course the only cost. To this has to be added the expected capital cost per ounce (initial and ongoing cost) plus the cash operating cost.

The company expects the cash cost to be US$200 per ounce, and the capital cost for the projects life around US$60 per ounce, based on resources. Not all the gold will be recovered so the unit cost per recovered ounce will be well in excess of US$1,160 per ounce; more like US$1,400 to US$1,500 per ounce.

The all in cost is higher than the current gold price and brings into question how much value Goldcorp is adding to their shareholders. Goldcorp clearly believes that there is much more gold to be found with a higher gold price. This is not a problem for Andean shareholders that have been given the opportunity to exit at a great price.

A lot more gold will be found at Cerro Negro and the likelihood of increasing the resource base 2-3 times seems possible. The company has gold equivalent resources of 3.44 million ounces and if the resource was 10 million ounces the company would still be valued at around US$316 per ounce.

Andean rejected an earlier approach from Eldorado Gold Corporation and says it has been approached by a number of parties but the price was too low. The offer from Goldcorp was probably almost too good to be true and Andean’s Board agreed in principal to merge with Goldcorp.

Eldorado Gold has a market capitalisation of around three times Andean but a deal there would not have been good for Andean shareholders. The average grade of Eldorado’s deposits is only 1.1 g/t gold, and at the current price of gold, each tonne of resource is worth around US$50. By comparison, Andean has an average gold grade of 6.3 g/t; an average ore value of US$287 per tonne.

The high value of Andean’s ore is highly coveted by other gold producers and it is not surprising that Andean is the subject of takeover or merger offer. Goldcorp doesn’t only have gold resources, but also copper, lead and zinc. Goldcorp’s ore resources have an average value of around US$56 per tonne. This is better than Eldorado, but the average gold grade is low, only 0.82 g/t gold, but then, like Newcrest, some mines have a valuable by-product copper credit.

In terms of the in ground value of ore resources, Andean is a fine catch. But as is always the case there is a price for everything, and at this point in time, Andean’s share price is more than fully valued on what we know today. Andean has been a real winner for Aussie investors, but now it is time to say goodbye.

Fat Prophets initiated coverage of Andean in FAT-MIN-002, November, 2005, and as such, Andean was one of the first companies added to the Portfolio at a BUY price of A$0.25. In five years the stock price has risen around 30 times.


Since breaking out from the consolidation between support at $4.12 and resistance at $4.52, there really hasn’t been any turning back. Andean Resources touched a recent high of $7.19 on September 6, which represents a gain of $2.67 or 59% in just over one week. The remarkable run has resulted in the RSI surging into deeply overbought levels, which is suggestive of an exhausted upward move. A pullback looks eminent in the near term.

The weekly chart illustrates the strength of Andean Resources throughout mid 2008 to date. The weekly MACD looks overextended, which is indicative of a potential countertrend move lurking just around the corner.


Now down to the nitty gritty; Goldcorp and Andean Resources have announced an agreement to merge. This will be done through a scheme of arrangement under Australian law whereby Goldcorp will acquire all the outstanding shares in Andean. The total consideration for the purchase of 100% of the fully diluted shares of Andean is approximately CAD3.6 billion or AUD3.7 billion.

Naturally Goldcorp sees the acquisition of Andean as a great step forward because it improves the quality of Goldcorp’s portfolio of undeveloped projects.

The cost to Goldcorp shareholders is 0.14 common shares in Goldcorp or a cash payment of C$6.50; but there is a catch in as much that the cash alternative is capped at C$1.0 billion. In the event that the aggregate demand for the cash alternative exceeds the ceiling, Andean shareholders will be scaled back.

On September 3rd, 2010, Goldcorp closed on the TSX at C$6.98 or at the current exchange rate equal to A$7.26. Perhaps the market thinks that there will be another offer put on the table. This is possible, but in our view, Goldcorp has made a full offer. A third party making a significantly bigger offer would probably be punished by its shareholders.

The deal is virtually done; both boards are recommending the transaction to their respective shareholders, and Andean’s largest shareholder Sentient with a 21% stake has said that it will vote in favour if there isn’t a better offer made in the meantime.

Sentient has also entered into a call option agreement with Goldcorp in relation to 19.95% of Andean’s issued capital. This has been done to support the transaction and to make sure if a third party does merge that they cannot get to 100%.

A scheme booklet will be mailed to Andean shareholders in November 2010. We feel certain that the shareholders will vote in favour of the scheme, and we expect the cash ceiling to be breached.

For the scheme to be approved, the holders of 75% of Andean’s issued share capital have to vote in favour. The transaction is expected to close late in 2010 or early in 2011. The price is a full one and we don’t think there is any chance of Andean shareholders not voting for the scheme.

Andean’s share price is A$6.53 and now is the time to take the cash; sell on market and invest the proceeds elsewhere.

It is sad to see this once all Aussie junior finish up in the portfolio of a North American major. From a humble start in Fremantle as a junior explorer to becoming a multi billion dollar company Andean has been a memorable voyage.

It is with a degree of sadness that we are exiting Andean Resources and as such the company will no longer be held in the Portfolio.


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