TORONTO (miningweekly.com) – Miner Timmins Gold has agreed to buy fellow Mexico-focused explorer Newstrike Capital for about C$140-million, giving rise to an emerging intermediate gold mining company in the North American country.

The cash-and-scrip transaction would give the combined entity a portfolio of high-quality production and development assets, with the San Francisco mine providing a solid base of operations that would provide the company with cash flow to develop Newstrike's Ana Paula gold project and Timmins' Caballo Blanco gold project.

Under the terms of the court-approved plan of arrangement, Newstrike shareholders would receive 0.9 of a Timmins common share and C$0.0001 in cash for each Newstrike common share, representing the equivalent of C$1.15 a Newstrike share and a premium of 20% based on the closing prices of the Timmins shares on the TSX and the Newstrike shares on the TSX-V on Friday.

The boards of directors of both companies had each unanimously approved the terms of the agreement and agreed to recommend that their respective shareholders vote in favour of the proposed arrangement.

Timmins announced that it would undertake a nonbrokered private placement to raise up to C$10-million at a price of C$1.25 a Timmins share in connection with the transaction.

Two companies controlled by a trust settled by the late Adolf H Lundin and Sentry Investments had indicated that they would participate in the private placement, together with other accredited investors. The proceeds of the placement would be used to support the continued development of Ana Paula.

Upon completion of the business combination, Timmins shareholders would own about 63% of the combined company and Newstrike shareholders would own about 37%.

“The combination of [the two companies] will immediately position Timmins as an emerging intermediate gold company supported by current production and a very attractive pipeline of development projects. The assets and projects in both companies are highly complementary and we are excited about the many opportunities ahead for us to continue delivering value to Timmins shareholders,” Timmins CEO Bruce Bragagnolo said.

Newstrike president and CEO Richard Whittal added that the transaction provided an attractive premium to the company's current share price, offered immediate leverage to gold production at the San Francisco mine and derisked the future development of Ana Paula.

“We believe the consideration offered by Timmins is highly attractive for our shareholders who will also have the opportunity to participate in the growth and rerating potential of the combined company,” he commented.

The Ana Paula project, Timmins believed, would add a high-quality development project to its portfolio as it had robust economics and manageable upfront capital requirements.

Ana Paula was expected to deliver an attractive after-tax internal rate of return of 32.8% in the current commodity environment, when using a gold price of $1 300/oz, based on its preliminary economic assessment (PEA) and significant potential to improve project economics through optimisation.

Assuming Ana Paula was put into production at the levels projected in the PEA, the project would add about 116 000 oz/y to Timmins' portfolio, lifting output from the 2015 range of between 115 000 oz and 125 000 oz of gold to about 326 000 oz/y, if the Caballo Blanco project was also put into production at expected levels.

Ana Paula would increase Timmins' total measured and indicated gold resources by 75% and improve the average resource grade by 34%.

BMO Capital Markets was acting as exclusive financial adviser to Timmins, while Paul, Weiss, Rifkind, Wharton & Garrison and DuMoulin Black were acting as the company's legal counsel.

National Bank Financial and Minvisory Corp were acting as financial advisers to Newstrike and Blake, Cassels & Graydon was acting as legal counsel. Cormark Securities had been engaged by the special committee to provide a fairness opinion.

Newstrike’s TSX-V-listed stock rose by about 8% on Tuesday to C$1.04 apiece, while the TSX-listed stock of Timmins Gold declined almost 12% to C$1.13 a share.