resourcestocks article

Bolnisi Gold wrapped in silver
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Wednesday, 10 October 2007

THE merger of Australia's Bolnisi Gold with US silver play Coeur d'Alene will create the world's largest listed primary silver company. By Wally Graham - RESOURCESTOCKS*

Australian-based Bolnisi Gold is engaged in mining and exploration for gold and silver in Mexico. Its primary focus is the Palmarejo silver and gold project in the state of Chihuahua, which it holds through its 74.7% subsidiary, the Toronto Stock Exchange (TSX) Venture Exchange-listed Palmarejo Silver and Gold Corporation.

The Palmarejo project is located in the Temoris District of Chihuahua within the Sierra Madre Occidental mountain range.

Bolnisi, together with Palmarejo, has announced a merger with Coeur d'Alene Mines, one of the world's leading primary silver producers, which will transform the company.

Bolnisi and Palmarejo wholly own the Palmarejo project, which is one of the highest-quality primary silver projects in the world. Coeur d'Alene believes its experience in exploration and development of underground and open pit mines will help it significantly increase the project's value.

"The Coeur d'Alene deal is Bolnisi's primary focus at the moment," Bolnisi chairman Norman Seckold told .

"Because the Palmarejo project is destined to be an extremely low-cost producer, we are aware we have been on the radar screen of every major company you can think of.

"We have had a lot of them flirt with us but Coeur d'Alene approached us last year. They took it further and from there things got very serious.

"Most of the other companies that approached us were very much bigger than Bolnisi so the risk to us was that if we entered into a combination with any of them then it was likely that our low-cost Palmarejo asset would be lost within the major company's portfolio of projects and therefore have little impact on its long-term share price.

"This would not be the case with Coeur: this is a merger of two equal-sized groups and therefore we would expect the Palmarejo project to have a major impact on the merged entity's growth and earnings."

When the project comes online the merged Bolnisi Palmarejo and Coeur d'Alene will be the world's leading primary silver producer in terms of quantity and cash costs.

Based on mineral resource estimates and metallurgical and mining studies completed to date, Palmarejo is expected to nearly double Coeur d'Alene's production levels.

Work began in September 2006 on a plant that will process 2 million tonnes of ore and produce 12 million ounces of silver and 110,000 ounces of gold annually.

Together Bolnisi Palmarejo and Coeur d'Alene are expected to produce about 32 million silver ounces and about 290,000 gold ounces in 2009 silver production.

The companies possess a total of over 364 million ounces of measured and indicated silver mineral resources (inclusive of reserves), 96.6 million ounces of inferred silver mineral resources, 3.4 million ounces of measured and indicated gold mineral resources and 0.95 million ounces of gold inferred mineral resources.

"Together we create the world's largest primary silver company and the world's lowest-cost producer, which is what I really like about the transaction," Seckold said.

"By putting Bolnisi Palmarejo and Coeur d'Alene together we create a company that in 2009 should produce around 32 million ounces of silver and a quarter million ounces of gold, making it far and away the biggest listed predominantly silver company in the world.

"With forecast cash operating costs of $2 per ounce after byproduct credits, it also makes it by far and away the cheapest producer company."

Seckold said he had been questioned many times as to why Bolnisi would merge with Coeur d'Alene. He points to the benefit of a major share price re-rating.

"It is inconceivable that the largest producer and lowest-cost producer would not re-rate to a point where its NAV multiple is, at the least, at the industry average, as against the current situation where Coeur's NAV multiple is only 65% of the industry average," he said.

Coeur d'Alene brings a much diversified portfolio to the table. It owns and operates three silver mines in North America and South America, and owns all the silver production and mineral reserves of two operating mines in Australia. It has a new silver mine under construction (San Bartolome) in Bolivia and a new gold mine at the Kensington Gold Project in Alaska.

Based on the Bolnisi, Palmarejo and Coeur d'Alene balance sheets, as at December 31, 2006 the pro forma cash position of the combined company would be $382 million, which is expected to be sufficient to fund all three growth projects without further equity dilution.

The combination of Coeur d'Alene's portfolio and the Palmarejo properties is expected to create considerable exploration upside potential for shareholders. The low operating costs of the Palmarejo project are expected to materially reduce Coeur d'Alene's overall cash costs.

"When could Bolnisi be a half million ounce producer?" Seckold asked rhetorically.

"It comes back to time. At best, if everything went to plan with nothing going wrong, it would be about three-and-a-half years, at the very soonest, when we could be at a level of production that would justify a similar value that we will hopefully get in the short term by merging with Coeur d'Alene, assuming the Coeur share price re-rates as previously discussed.

"We see our primary job, as a board, to create wealth for our shareholders. Our job is simply to make as much money as we can in the shortest possible time for them. It is not for us to have long-term jobs and to build an empire of our own.
"It is our belief, with great conviction that this is a terrific transaction, which should result in Bolnisi's shareholders having a significant uplift on the current share price that would take us years to match by operating on a standalone basis.

"That is the way the market works; if you are the biggest at something, then you get to sell at a premium. Not only will we be the world's biggest silver producer, we will also be the lowest-cost producer. That is a compellingly good combination."