New Gold agrees to buy Silver Quest

New Gold Ltd., less than six months after gaining majority ownership of the Blackwater Gold Project in central British Columbia, has moved to consolidate its control of the project. The mid-tier gold producer reported Oct. 17 it had entered into agreements to acquire two juniors that currently claim significant stakes in gold-rich properties believed to host the mineral resource.

New Gold entered a binding agreement to acquire Silver Quest Resources Ltd. in an all-stock transaction that valued Silver Quest's assets at about C$166 million.

The mid-tier gold producer also inked a similarly structured agreement to purchase Geo Minerals Ltd., a junior that owns the West Blackwater project, which comprises about 1,471.4-hectare (3,636 acres) located to the northwest of Blackwater.

Both projects are situated some 160 kilometers, or 100 miles, southwest of Prince George, B.C.

Analysts immediately praised the transactions, while investors sent Silver Quest's shares soaring nearly 43 percent to about C$1.24 a share and Geo Minerals' shares climbing 33 percent to C16 cents a share by Oct. 24.

In June, New Gold gained control of 100 percent interest in the southern portion of the Blackwater project and 75 percent interest in the northern portion, known as the Davidson Property, when it completed its acquisition of Richfield Ventures Corp. The company, which operates gold mines in Australia, Mexico and the United States, is also advancing the New Afton gold project in southern British Columbia toward production start-up in mid-2012.

Silver Quest win-win

New Gold and Silver Quest jointly announced a binding letter agreement whereby New Gold will acquire, through a plan of arrangement, all of the outstanding common shares of Silver Quest. Under the terms of the arrangement, Silver Quest shareholders will receive a fraction (0.09) of a New Gold share for each Silver Quest share they hold, along with one common share for every three Silver Quest shares held in a new Yukon Territory-focused precious metals exploration company called McIntyre Minerals Inc. The offer values Silver Quest at C$1.32 per share, which represents a 52 percent premium based on the combination of:

The share consideration of C$1.06 per share, representing a 22 percent premium based on New Gold and Silver Quest's Oct. 14 closing prices on the TSX and TSX.V, respectively. This implies an equity offer value of about C$131 million on a fully diluted basis and a transaction value of C$121 million, net of the cash to be received from the exercise of Silver Quest's dilutive instruments; and

Consideration of C26 cents per share for spinning out certain Silver Quest assets into McIntyre Minerals. This represents an additional 30 percent premium based on Silver Quest's Oct. 14 closing price on the TSX.V, implying a value of about C$35 million.

Upon closing of the arrangement, which is expected in December, New Gold will gain Silver Quest's 25 percent interest in the Davidson Property which forms the northern half of the Blackwater gold project, and thereby consolidate ownership of Blackwater, in which it currently holds the remaining 75 percent interest. Silver Quest's share of the Blackwater mineral resource includes 555,000 ounces of indicated and 206,000 ounces of inferred gold mineral resources.

Following a report in August that New Gold and Silver Quest had intersected 278 meters grading 2.8 grams per metric ton gold at Davidson, the companies approved a new budget covering work to be completed over the next six to nine months. The planned activities included an aggressive 75-hole, 26,250-meter diamond drilling program on the Davidson Joint Venture Claims, preparation of a preliminary economic assessment report and work on certain infrastructure items that would benefit both the Davidson claims and the overall Blackwater Project. Silver Quest's share of the budget was about C$5.1 million.

New Gold also will gain a 100 percent interest in the nearby Capoose Property in the deal.

Capoose comprises 120 claims covering 46,788 hectares (115,613 acres) located about 25 kilometers (16 miles) west of the Blackwater Project.

Situated in the Nechako Plateau Region of central British Columbia, the three-property land package which Silver Quest has assembled in recent years, has an established NI 43-101 gold-silver-zinc resource estimate that includes indicated resources of 383,823 ounces of gold at a grade of 0.38 g/t gold, 26.6 million ounces of silver at a grade of 26.5 g/t silver, and 137.5 million pounds of zinc at a grade of 1,998 g/t zinc.

Additionally, there are inferred resources of 443,206 ounces of gold at a grade of 0.37 g/t gold, 29.5 million ounces of silver at a grade of 24.6 g/t silver, and 219.2 million pounds of zinc at a grade of 2,669 g/t zinc.

The deposit remains open at depth and along all margins.

Silver Quest has said a geological interpretation of the known mineralization at Capoose indicates that the explorer might have been drilling into the top of a large, disseminated gold-silver system.
Silver Quest's focus at Capoose was on expanding the resource volume.

There are multiple drill targets outside of the immediate deposit area that are defined by geochemical and geophysical anomalies, such as the area of anomalous metal concentrations in soils that trends northeast from the deposit area for more than 5 kilometers (3 miles).

As part of the arrangement, New Gold will purchase, on a private placement basis, C$3.5 million of McIntyre shares at a price of C78 cents per share ($0.26 per share, value- adjusted for the three Silver Quest shares for one McIntyre share exchange).

As a result, New Gold will gain a 9.9 percent stake in McIntyre Minerals and Silver Quest shareholders will control the remaining 90.1 percent interest.

The companies said they expect McIntyre to have about C$15 million in cash to fund an aggressive two-year exploration program focused on Silver Quest's 3Ts Gold Project in the Nechako Plateau region of central British Columbia and a number of Yukon exploration properties.

"The acquisition of Silver Quest's Davidson interest and the Capoose Property consolidates our ownership of the Blackwater Project and expands our presence significantly in the area," said New Gold Executive Chairman Randall Oliphant. "We also look forward to continuing our relationship with Silver Quest as a shareholder in McIntyre, given their team's track record of delivering value for shareholders."

In addition to an immediate premium recognizing both the current value and potential value of the Davidson Property, Silver Quest shareholders will retain exposure to the Blackwater Project and to its 3Ts and Yukon properties through McIntyre with sufficient cash for two years of aggressive exploration in 2012 and 2013, while gaining exposure to New Gold's diversified gold production base and strong growth profile.

"This transaction delivers an immediate and attractive premium to our shareholders, while allowing them to continue to share in the potential at the Blackwater Project through their New Gold shares," said Silver Quest President and CEO Randy Turner. "We are pleased that our shareholders are able to retain their exposure to an exciting portfolio of exploration properties in the Yukon and British Columbia through their McIntyre shares with New Gold as a supportive shareholder."

McIntyre will be led by the existing management team and board of directors of Silver Quest, who have significant experience in building companies focused on mineral exploration.

McIntyre's exploration in British Columbia will be focused on the 3Ts Gold Project which covers an epithermal gold-silver vein system within which 12 individual mineralized veins, up to 650 meters in strike length and up to 15 meters in true width, have been identified. The 3Ts property encompasses about 3,100 hectares (8,401 acres) with an established inferred mineral resource of 942,600 metric tons at 4.89 grams per metric ton gold and 77 g/t silver. Exploration in the Yukon will be focused on 18 properties covering more than 93,000 hectares (229,803 acres), including extensive land holdings in the White Gold District.

Another spinoff deal

Geo Minerals acquired the West Blackwater project in 2010. The original claim block is within 2.5 kilometers (1.5 miles) west-northwest of Blackwater. Geo has since expanded the property with the acquisition of additional claims and conducted at least two exploration programs, including detailed geological mapping, selected prospecting, an IP geophysical survey and infill soil sampling, delineating the anomalous zones identified during the 2010 exploration program. Earlier this year, Geo initiated a 5,000-meter drill program.

Under the plan of arrangement with New Gold, Geo shareholders will receive C16 cents per share and 1/15th of a common share in a new exploration company for each Geo common share held. Excluding consideration for the new company, the offer represents a premium of about 33 percent based on the closing price of Geo's shares Oct. 14.

New Gold also will subscribe for 9.9 percent of the spinoff company's outstanding common shares for consideration of C$250,000. On completion of the transaction, current Geo shareholders will hold about 90.1 percent of the outstanding shares of the spinoff, and new company will own all of Geo's assets and liabilities, except for cash retained by Geo and Geo's West Blackwater mineral interests.

The board of directors of Geo unanimously approved the transaction and all directors and senior officers of Geo, as well as certain other Geo shareholders, collectively holding about 29 percent of the number of Geo securities anticipated to be entitled to vote at a meeting of the Geo security holders (including holders of Geo shares, stock options, and share purchase warrants), have agreed to vote their securities in favor of the transaction.