TORONTO (miningweekly.com) – Canadian gold producer San Gold this week signed a nonbinding letter of intent to buy TSX-listed Kerr Mines in an all-scrip deal that would see San Gold take control of the Copperstone gold mine, in Arizona.

San Gold president and VP of finance Gestur Kristjansson on Monday said the merger reflected the company’s new strategy of operating multiple, efficient high-grade gold mines that were located in mining-friendly jurisdictions.

“Our operating principles of strict grade control, better cost control, lower overheads and operating the mines at the optimum mining rate to properly match the geometry of the orebodies are paying off at Rice Lake and will be applied to other projects, most notably at the Copperstone gold mine in Arizona,” he noted.

Kristjansson pointed out that the high-grade Copperstone mine, which Kerr acquired through buying American Bonanza last month, would be similar in size to the Rice Lake mine, near Bissett, Manitoba, with the ability to restart quickly with low capital requirements under the combined management team.

Under the terms of the agreement, Kerr shareholders would “receive a number of” San Gold common shares for every common share of Kerr based on an exchange ratio to be determined by the parties at a later date.

Kerr had engaged Jennings Capital and San Gold had retained Primary Capital to provide an opinion to the companies’ boards to consider whether the deal was fair from a financial point of view.

Besides acquiring the fully permitted Copperstone mine, with significant mining and processing infrastructure in place, San Gold would also gain control over Kerr’s sizeable footprint of contiguous gold properties near Virginiatown, Ontario, on the prolific 200-km-long Cadillac-Larder Lake Break that straddles the Ontario/Quebec border.

Mining properties along the Break have historically produced more than 95-million ounces of gold.

Kerr controls a 26-km-long section of the Break with properties extending into Quebec. Kerr's Ontario assets include the McGarry and Cheminis gold mines, in the Kirkland Lake area, as well as a five-year option to buy the Kerr-Addison property, next to McGarry. The Kerr-Addison mine was one of Canada's largest gold producers, producing more than 11-million ounces of gold during a 58-year operating life from 1938 to 1996.

Kerr's recently acquired gold project from Bear Lake Gold, Larder Lake, located west of the McGarry mine, is under an option and joint venture agreement with South African miner Gold Fields subsidiary Gold Fields Abitibi Exploration, entitling Gold Fields to acquire up to 60% of the Larder Lake project by spending up to C$40-million over five years.

“It's important to emphasise the extent to which San Gold has reshaped itself over the past four months. This merger provides an important step toward ensuring the full potential of that effort is realised,” Kristjansson said.

He explained that with more than one producing mine, San Gold was better positioned to achieve optimum use of the operating team's knowledge and skills and greater diversified use of its equipment and infrastructure, resulting in greater efficiencies and lower overall costs.

Closing the deal was subject to signing a definitive agreement by August 31, completing due diligence and obtaining shareholder and regulatory approvals and permitting. Under the agreement, a break fee of C$1-million is payable by either party in the event that either company proceeds with an alternative transaction during a specified period.

San Gold currently has 373-million shares outstanding, while Kerr has about 1.3-billion outstanding shares.