An Analyst Comment Forwarded to Me on TGZ/OLE offer

Event

• Teranga (TGZ) announced an intention to make an offer to acquire all the issued and outstanding Oromin (OLE) shares it does not already own. Oromin would receive 0.582 of a TGZ share for each OLE share.

Background

• The full offer will be mailed to OLE shareholders by mid-June 2013.
• TGZ currently holds 18.7M shares of OLE or 13.6% of the company.
• IMG currently holds 16M shares of OLE or 11.7% of the company, and has entered into a lock-up agreement with TGZ, subject to a superior bid which is not met by TGZ within 5 business days.
• TGZ has a P&P reserve of 1.59M oz grading 1.40 g/t.
• OLE owns 43.5% of a joint venture which has a P&P reserve of 2.34M oz grading 2.59 g/t. Of this, 1.4M oz grading 2.05 g/t is open pittable, but we estimate that another 0.3M oz could likely be added to the open pittable reserves with some minimal geotechnical drilling, and maybe another 0.2M oz of OLE heap leachable reserves can be added as well for a total of approximately 1.9M oz of open pittable material.
• In TGZ’s press release today, they stated that on May 17, 2013 they made an offer to OLE similar to one made in December 2011, and it was rejected by one of the OLE jv partners due to a lack of cash consideration
• In TGZ’s press release today, they also stated that on May 24, 2013, TGZ made an all share offer similar to the one tabled currently, but OLE declined to grant TGZ due diligence on acceptable terms and to engage with TGZ wrt the offer which expired on May 31, 2013.

Impact

• This is a combination that makes a lot of sense:
  • Oromin’s land position surrounds Teranga’s on the south and east, and all of its deposits are within 10km of Teranga’s Sabodala mill, with some as close as 1km away (purple line below defines Oromin’s land position, yellow, red, and green define Oromin’s deposits, black circle to the left of the yellow is Teranga’s Sabodala operation.

• • Teranga needs an acquisition like this to maintain their 200,000 oz p.a. production rate, or their production declines to 150,000 oz p.a. steady state at their reserve grade.

• Price offered represents a 50% premium to OLE’s 20 day VWAP and a 68.7% premium to OLE’s closing price as at May 31, 2013.
• Price offered represents $55/oz of total P&P (open pittable & U/G), or $93/oz of O/P P&P oz, or $68/oz of our estimate of potential O/P oz.
• TGZ in their press release said that, should this combination go through, their LOM free CF would go up by 50%, their NAV could increase by 50% and earnings would increase by 300%.
• Although another bidder may emerge (as OLE’s project makes sense economically on a standalone basis), we believe that due to the synergies of the TGZ/OLE combination, TGZ would/should outbid anyone else and emerge as the ultimate acquirer.
• We believe that the current effective price offered is on the light side, given the value to TGZ of this asset.

Dan Hrushewsky, B.Eng., MBA, CFA

Jennings Capital Inc.

Senior Gold Analyst

Suite 320 | 33 Yonge Street | Toronto | ON M5E 1G4

Posted in Canadian Stocks Exploration Shares Gold