BUSINESS

AuRico Gold shares up after deal to sell assets in Mexico for US$750 million

10/10/2012 04:56 EDT | Updated 12/10/2012 05:12 EST
The head of AuRico Gold (TSX:AUQ) says that selling off its troubled Ocampo mine and other assets for US$750 million will help it reduce debt, fund development and return cash to shareholders.

President and chief executive Scott Perry said Wednesday that the agreement to sell the select operations to a company owned by Mexican billionaire Carlos Slim will eliminate AuRico's risk associated with the underground development at Ocampo, which has faced difficulties.

"We believe this transaction is a significant value creation opportunity for AuRico shareholders relative to how the asset was being valued in the current share price," he told a conference call with financial analysts.

The deal helped send AuRico shares soaring.

AuRico shares closed up $1.34 or about 21 per cent at C$7.60 on the Toronto Stock Exchange as more than 7.8 million shares traded hands, making it the most active issue on the exchange.

Perry said the deal will provide AuRico with the cash for further development at its Young-Davidson mine in Ontario, look at expansion opportunities and return a portion of the cash to shareholders.

Companies can return capital to shareholders through share buybacks and dividends.

Perry said the specific timing and amount of the return of capital to shareholders still needed to be determined, but the company was aiming for the first quarter of 2013.

"The company will continue assessing its internal cash flow needs, but we have committed to undertake a significant return of capital," he said.

"The most efficient structure for this one-time capital return is being considered by management and the board."

Under the deal, Slim's Minera Frisco will acquire the Ocampo property as well as a pair of neighbouring exploration projects in the Mexican state of Chihuahua and a 50 per cent stake in the Orion development project in the Mexican state of Nayarit.

The Ocampo mine had been AuRico's main asset before it acquired Northgate Minerals Corp. in a stock swap last year.

AuRico also owns the El Chanate mine in Mexico and the Young-Davidson gold mine in northern Ontario that had been held by Northgate and began commercial production last month.

In July, the company cut its production guidance at Ocampo and raised its cost estimates due to problems at the mine.

John Ing, CEO of Maison Placements Canada, said the mine has had its troubles.

"Ocampo has always been a long suffering mine," Ing said, citing water shortages and difficulty with the ore body.

"Now AuRico is sort of changing focus to the assets of Northgate and selling Ocampo."

Ing noted that AuRico may find it difficult to find high-grade assets to spend its newly acquired cash on once the Ocampo deal closes.

"They have been well advertised as acquisitors, but the reality is that there are just so few quality assets around and the low hanging fruit has been acquired many years ago," he said.

"What there are is a lot of medium-grade assets."

The Ocampo deal follows the sale of AuRico's El Cubo mine and the Guadalupe y Clavo project to Endeavour Silver Corp. for $100 million in cash and $100 million in shares.

AuRico also sold the Stawell and Fosterville mines in Australia to Crocodile Gold Corp. for $55 million in cash in May.

Perry is the executive who replaced former president and CEO Rene Marion, who stepped down earlier this year for health reasons.

AuRico said Marion, appointed CEO in 2007, has a non-life threatening degenerative medical condition that will require his full attention as he undergoes treatment.

He remains a strategic adviser to the board of directors.