Timmins Gold Responds to Capital Gold's
Rejection of Merger of Equals Proposal
VANCOUVER,
B.C. --Timmins Gold Corp. (TSX-V:TMM) ("Timmins Gold")
announces that yesterday it sent a letter to the Board of Directors of
Capital Gold Corporation (AMEX/TSX: CGC) ("Capital Gold")
responding to their rejection of Timmins Gold's previously announced
proposal for a merger of equals. Under Timmins Gold's proposal, each share
of Capital Gold common stock would be exchanged for 2.27 common shares of
Timmins Gold. Based on the average of the respective closing share prices
for the last 30 trading days, Timmins Gold's proposal has a value of
US$5.55 per Capital Gold share and exceeds the value of the Gammon offer by
US$0.64 per Capital Gold share.
Bruce Bragagnolo, CEO of Timmins Gold, stated:
"The proposed transaction is strategically compelling and a superb
opportunity to create value for our respective shareholders. Combining
Capital Gold and Timmins Gold will create a solid mid-tier gold producer,
with production of approximately 160,000 ounces of gold per year and
estimated reserves of approximately 2.2 million ounces* of gold, which we
believe will generate a unique re-rating opportunity that will benefit
Capital Gold and Timmins Gold shareholders alike."
Mr. Bragagnolo added, "We believe that our
proposal clearly delivers both greater short-term and long-term value to
Capital Gold shareholders compared to the Gammon offer, as well as
providing greater certainty of closing to Capital Gold. Shareholders
holding approximately 35% of the shares of Capital Gold have expressed
their support for our merger proposal."
Below is the text of the letter that Timmins Gold sent to Capital Gold's
Board of Directors:
"February 9, 2011
BY EMAIL AND COURIER
Board of Directors
Capital Gold Corporation
76 Beaver Street, 14th Floor
New York, NY 10005
Attention:
John Cutler
Chairman of the M&A Committee
Gentlemen:
Re: Due Diligence
This letter is in response to your letter of February 1, 2011. We take
issue with both its contents and timing.
You invited us to meet in Philadelphia on January 6, 2011 based on your
conclusion that our proposal may reasonably lead to a superior proposal as
defined in your agreement with Gammon. Given that the value of our proposal
has long exceeded Gammon's offer, such a decision was long overdue.
We attended the January 6 meeting seeking your acknowledgment that our
proposal provides greater value to Capital Gold shareholders so that you
could commence the matching period under the Gammon agreement, which would
have given Gammon the option to increase its offer to match our proposal.
Thus, our proposal provided you the exceptional opportunity to realize
greater value for your shareholders, either with Timmins Gold or through an
improved offer from Gammon.
At the January 6 meeting, you asked us questions about (i)
our financial position -- particularly whether we could fund a $10.3
million payment to Gammon, $3.5 million of change of control payments and
other expenses -- and (ii) our operations -- particularly about our gold
recoveries and cash costs. We responded to your queries and offered to
provide supporting materials.
At the conclusion of the meeting, you advised that you could not conclude
that our proposal constituted a superior proposal without performing
thorough due diligence on Timmins Gold. That you needed to do confirmatory
due diligence was perfectly reasonable. However, given (i)
that you had considered a merger with us in July, August and September 2010
and, therefore, had performed some prior due diligence, including two site
visits to our San Francisco mine in July and August 2010, and (ii) the
contested nature of the proposed transaction, we expected that your
diligence would be targeted and expeditious. Instead you sent us generic
due diligence requests. This caused us to become skeptical about the nature
of your due diligence requests. As a result, we suggested that you focus
your attention on our San Francisco mine to ensure you could be satisfied
as to our operations. We expected this to be the essential focus of any due
diligence.
To that end, on January 12 (two days after receipt of your diligence
request list), we arranged for a conference call to discuss the San
Francisco mine and our operations, and made our independent mining
consultant, Micon International, available to
you. On January 14 (four days after receipt of your due diligence request),
we arranged for Scott Hazlitt and representatives of your independent
mining consultant, SRK, to conduct (another) site visit to the San
Francisco mine. SRK subsequently delivered a voluminous due diligence
request list.
On January 18, we received the following email message from Scott Hazlitt:
"Thank you very much for an excellent visit of your mine last Friday.
The four SRK engineers that accompanied me were also impressed with your
operation and personnel. Please thank Arturo and Daniel for their help with
the visit. We look forward to completion of due diligence by the SRK
Consulting group."
That was your last communication about the mine and our operations. You
never raised any issues about our operations -- gold recoveries, cash cost
or otherwise. Nevertheless, you continued to push to receive responses to
all of your due diligence requests.
On Thursday, January 27, and Friday, January 28, after substantial effort,
and within the deadline set out in your January 27 letter, we provided you
and SRK with approximately 120 megabytes of requested operational and
financial information.
Less than three days later, on January 31, you met and on the
recommendation of the M&A Committee made the determination to terminate
discussions with Timmins Gold. The following day, on February 1, you sent
us a letter informing us that you were terminating discussions with Timmins
Gold.
Your February 1 letter raises a number of issues regarding our finances,
management team and operations that you claim to have identified in and
unable to satisfy through your due diligence. We note that you reached your
decision to terminate discussions with us less than three full days after
we sent you a very large volume of material and without raising any of your
concerns with us. That you could come to a conclusion so quickly without any
dialogue with us or our independent mining consultants -- either to fulfill
your own stated fiduciary duties or even as a courtesy -- leaves us
wondering how thorough your due diligence process was. In fact, the
information we delivered to you on January 27 and 28 provides all of the
answers to your queries about our operations.
The statement in your February 1 press release that your decision to
terminate discussion with Timmins was "based upon Capital Gold's
review of Timmins' due diligence materials" is vague and perhaps even
misleading. It is also potentially damaging to Timmins Gold and, therefore,
we need to address each of the "concerns" you raise.
Finances
1) You state that our cash and cash equivalents
increased by only $0.4 million during the quarter ended December 31, 2010
and, therefore, you question whether we can continue as a going concern.
Response: Included in expenditures during
the quarter were exploration ($1.1 million), on-going expansion project
($1.3 million) and the vendor loan payment ($1.7 million). We also paid
$6.8 million on the gold loan and only have 6 more payments left. We are
cash flow positive and are able to fund our ongoing expenditures with cash
flow from operations. We would be able to fund the ongoing expenditures of
the merged companies from operations had the termination fee with Gammon
not been in issue.
2) You question our ability to fund the termination fee that could be
payable to Gammon.
Response: Putting aside whether this is
an appropriate line of inquiry or is evidence that your agreement with
Gammon is preclusive, we have sufficient funds to pay Gammon if required.
As we stated at the meeting in Philadelphia and consistent with the
materials we provided, such a payment would deplete our funds and, therefore,
if required to fund the payment to Gammon as matter of prudency we would
likely seek additional capital. We further advised you on January 6 that
Timmins Gold was quite capable of raising
additional funds necessary to complete the transaction with Capital Gold.
Our recollection is that your financial adviser agreed that we could raise
such capital. We advised you that we were prepared to engage in further
discussions with you to discuss the amount and timing of such financing;
however, we did not hear back from you.
3) You state that neither Timmins Gold nor its auditors opine as to the
effectiveness of Timmins' internal control over financial reporting on an
annual basis.
Response: Neither Timmins Gold nor its
auditors is currently required to opine as to the effectiveness of our
internal controls. Thus, this "concern" is an absolute red
herring. However, as you well know, in connection with a merger with
Capital Gold we will become subject to such requirements and have
sufficient time to comply.
Management
You state that you are concerned about our current
management structure and experience level and our ability to successfully
consummate and integrate a transaction with the Capital Gold.
Response: This "concern" has no
basis in fact and is inconsistent with our historic performance, our track
record of executing our business plan, our demonstrated ability to raise
capital and investors' confidence in management. We need only point you to
the fact that a significant portion of your shareholders favor a
transaction with Timmins Gold to refute this unfounded concern.
Operations
1) You question our ability to fund expansion of
the San Francisco mine.
Response: The expansion of the San
Francisco mine to increase crushing capacity to 18,000 tonnes
per day, including additional leach solutions handling and ADR plant
expansion, has commenced. The expansion activities were observed by, and
discussed with, SRK personnel on their site visit.
We expect to spend approximately US$5.2 million for the expansion, which we
plan to complete in June 2011. We have already incurred about 30% of such
cost, which we have funded with cash from operations, and foresee no issue
financing the balance with cash from operations. The projected capital
expenditures for this expansion were published in our latest NI 43-101
report on new mine reserves, dated as of November 30, 2010, which was
prepared by Micon (the "Technical
Report").
2) You question whether the life-of-mine grade disclosed in the Technical
Report of 0.695 g/t can be achieved in light of the actual grade that has
been mined at the project to date, what impact this may have on the mine
life and whether 70% recovery is achievable in the near term.
Response: Our mine production program is
clearly outlined in the Technical Report, as well as in our response to
SRK's due diligence questionnaire (please see page 8 of our response to
point 1.10). Our previous mine reserve estimates (based on a preliminary
feasibility study in March 2008) assumed a gold price of US$500 per ounce
and a cash operating cost of US$7.38 per tonne of
ore processed. In contrast, the Technical Report utilized a price of gold
of US$900 per ounce (an increase of 80% from the preliminary feasibility
study) and a cash operating Life of Mine ("LOM") cost of US$7.88
per tonne of ore processed (an increase of 6.8%
LOM from the preliminary feasibility study). As a result of the updated
estimates utilized in the Technical Report, the cut-off grade was reduced
from 0.22 g/t Au to 0.16 g/t Au. That is, we are now able to process lower
grade gold. Previously, the average grade of our reserve was 0.84 g/t Au,
whereas in our new plan the average gold grade in our reserve is 0.695 g/t
Au, a reduction of 17 % in the gold grade processed. This is reflected in a
corresponding 17% increase in the LOM cost per ounce processed from US$417
per ounce of gold to US$489 per ounce of gold. However, our costs per tonne only increased by 6.8%, which is primarily
attributable to inflation. Higher prices of gold coupled with a small
increase in operating costs increased the value of our mine. At US$1,000
per ounce of gold, our projected NPV (at an 8% discount rate) in 2008 was
US $131.8 million, compared to a current NPV of $216.8 million. Given that,
at the end of December 2010, we were projecting an after-tax profit, the
San Francisco mine's NPV had an increase greater than US$100 million.
While the above response deals with the technical aspects of your concern,
all of which is included in the due diligence materials we delivered to
you, let us get to the heart of the matter. It seems that you are
suggesting that we are "high grading" the San Francisco mine.
This is not the case. We have mined out all ore reserves above cut off
grade, initially 0.22 g/t Au and now 0.16 g/t Au. We have stockpiled lower
grade material for processing in the future when our expansion is complete.
High grading is not mining the ore grade, whereas we are mining all of our
ore above cut-off grade. As prudent operators, we will make a strategic
decision based on gold price and cash flow as to when to process lower
grade ore.
In addition, we continue to extract and recover at a rate of 70% as
predicted in our mine plan. As you should know, heap leach operations
across the globe typically have a leach cycle of at least three months
before they actually begin recovering and selling gold. Again, all of this
information was delivered to you in response to SRK's due diligence
requests. Please refer to pages 1, 2, 3 and 9 of our response report and points
1.1 and 1.2 of SRK's due diligence request list.
3) You question whether the $489 cash cost per ounce disclosed in the
Technical Report can be achieved in the "near term" in light of
historic cash costs.
Response: First, the $489 cash cost per
ounce is a LOM estimate, not a near term estimate. You know this (or should
know this). Second, our operating costs have been (as expected) higher in
the beginning of production and are expected to gradually reduce to
projected levels over time. There are two components to a ramp up year. The
first is the higher initial strip ratio required to access the ore, and the
second is the leach cycle of gold extraction. On our new mine plan, during
the first year of production we have a strip ratio of 3.4, compared to a
projected LOM strip ratio of 1.9, and projected strip ratios of 2.0, 2.0,
1.6 and 1.1 in years 2 through 5, respectively.
The other cost component is the leach cycle. All heap leach operators go
through the same process. Our operating costs are in line with projected
LOM costs. Remember that we just began commercial production in April 2010
and at September we were still in a ramp-up production cycle.
If you have any concerns based on information or a report provided to you
by SRK we suggest that you provide us with a copy of that report so that we
and our consultants can address such concerns.
As our responses demonstrate, all of the concerns expressed in your
February 1 letter could have been alleviated had you taken the time to
discuss such concerns with us or allowed SRK the time to complete its
report. The fact that you have again rejected our clearly superior proposal
without any dialogue and less than three full days after we have sent you
extensive due diligence materials is disappointing. Unfortunately, it is
consistent with your past behaviour toward us and
seems to confirm that our skepticism regarding your due diligence process
was well founded.
Sincerely,
TIMMINS
GOLD CORP.
Per:
Bruce Bragagnolo
Chief Executive Officer "
As a result of Capital Gold's repeated rejection of Timmins Gold's merger
of equals proposal, Timmins Gold announces that it intends to make its
offer directly to Capital Gold stockholders and will soon file a
registration statement containing a prospectus/offer to exchange with the
Securities and Exchange Commission and Canadian securities regulators so
that Capital Gold stockholders have the opportunity to select Timmins
Gold's proposal over the Gammon deal.
About
Timmins Gold
Focused in Mexico, Timmins Gold Corp. became a gold producer in April 2010
with the commencement of commercial production at its wholly owned San
Francisco Mine in Sonora, Mexico. In addition, the Company has an extensive
portfolio of gold projects in Mexico.
Contacts:
Timmins Gold Corp.
Bruce Bragagnolo
CEO and Director
604-638-8980
bruce@timminsgold.com
www.timminsgold.com
*
Mineral Reserve Estimates
See Timmins Gold's news release of November 16, 2010 in which it announced
that independent consulting firm Micon
International Inc. had estimated proven and probable mineral reserves of
780,000 ounces of gold (34,932 ktonnes grading
0.695 g/t gold comprised of proven reserves of 17,194 ktonnes
grading 0.756 g/t gold (418,000 ounces) and probable reserves of 17,738 ktonnes grading 0.635 g/t gold (362,000 ounces) ) and
Capital Gold's news release of October 13, 2009 in which it announced that
independent consulting firm SRK Consulting Inc. had estimated proven and
probable mineral reserves of 1,504,000 ounces of gold (70,557 ktonnes grading 0.66 g/t gold comprised of proven
reserves of 22,402 ktonnes grading 0.70 g/t gold
(503,000 ounces) and probable reserves of 48,155 ktonnes
grading 0.65 g/t gold (1,001,000 ounces).
Timmins Gold is subject to reporting requirements under applicable Canadian
securities laws, and as a result it reports mineral reserves in accordance
with Canadian reporting requirements for disclosure of mineral properties
as set out in National Instrument 43-101 Standards of Disclosure for
Mineral Projects ("NI 43-101"). The definitions of NI 43-101 are
adopted from those given by the Canadian Institute of Mining, Metallurgy
and Petroleum. In the United States, companies generally report mineral
reserves in accordance with Industry Guide 7, as promulgated by the
Securities and Exchange Commission. As such, proven and probable mineral
reserve estimates contained in this press release may not be comparable to
similar information disclosed by U.S. companies.
Important
Information
This press release does not constitute an offer to sell or the solicitation
of an offer to buy any securities or a solicitation of any vote or
approval. This press release relates to a business combination transaction
with Capital Gold proposed by Timmins Gold, which will become the subject
of a registration statement that Timmins Gold intends to file with the
Securities and Exchange Commission (the "SEC"). This material is
not a substitute for the prospectus/proxy statement Timmins Gold intends to
file with the SEC and Canadian securities regulators regarding the proposed
business combination or for any other document that Timmins Gold may file
with the SEC and Canadian securities regulators and send to Timmins Gold or
Capital Gold shareholders in connection with the proposed transaction.
INVESTORS AND SECURITY HOLDERS OF TIMMINS GOLD AND CAPITAL GOLD ARE URGED
TO READ ANY SUCH DOCUMENTS FILED WITH THE SEC AND CANADIAN SECURITIES
REGULATORS CAREFULLY IN THEIR ENTIRETY WHEN THEY BECOME AVAILABLE BECAUSE
THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION.
Such documents will be available free of charge through the web site
maintained by the SEC at www.sec.gov, by calling the SEC at
telephone number 800-SEC-0330, or at the web site maintained by the
Canadian securities regulators at www.sedar.com, or by directing a request to
Timmins Gold at Suite 520 - 609 Granville Street, Vancouver, BC, Canada V7Y-1G5.
Timmins Gold and its directors and executive officers and other persons may
be deemed to be participants in any solicitation of proxies from Capital
Gold's shareholders in respect of the proposed transaction with Capital
Gold. Information regarding Timmins Gold's directors and executive officers
will be available in a prospectus/proxy statement Timmins Gold intends to
file with the SEC and Canadian securities regulators regarding the proposed
transaction or in other documents that Timmins Gold may file with the SEC
and Canadian securities regulators and send to Timmins Gold or Capital Gold
shareholders in connection with the proposed transaction. Other information
regarding potential participants in such proxy solicitation and a
description of their direct and indirect interests, by security holdings or
otherwise, will be contained in any proxy statement or other documents
filed with the SEC and Canadian securities regulators in connection with
the proposed transaction.
Caution
Regarding Forward-Looking Statements
This press release contains forward-looking
statements. Forward-looking statements are statements which relate to
future events. In some cases, you can identify forward-looking statements
by terminology such as "may," "should," "expect,"
"plan, "anticipate," believe," "estimate,"
"predict," "potential," "opportunity" or
"continue" or the negative of these terms or other comparable
terminology. These statements are predictions and involve known and unknown
risks, uncertainties and other factors that may cause our actual results,
production, reserves, level of activity, performance or achievements to be
materially different from any future results, production, reserves, levels
of activity, performance or achievements expressed or implied by such
forward-looking statements. Actual results could also differ materially
because of factors such as Timmins Gold's ability to promptly and
effectively integrate the businesses of Capital Gold and Timmins Gold, the
timing to consummate the proposed transaction and any necessary actions to
obtain required regulatory approvals, and the diversion of management time
on transaction-related issues. While these forward-looking statements, and
any assumptions upon which they are based, reflect our current judgment regarding
the direction of our business, actual results will almost always vary,
sometimes materially, from any estimates, predictions, projections,
assumptions or other future performance suggestions herein. Except as
required by applicable law, Timmins Gold does not intend to update any
forward-looking statements to conform these statements to actual results.
Neither TSX Venture Exchange nor its Regulation Services Provider (as that
term is defined in the policies of the TSX Venture Exchange) accepts responsibility
for the adequacy or accuracy of this release.
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