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Takeover Threat Won’t Stop Drilling 
By William Mbaho and Marc Davis of

The $3.6 billion buyout of Andean Resources by Goldcorp Inc. last year left many in the investment community wondering where the next success story in Argentina would emerge from. One much talked about candidate is Extorre Gold Mines (TSX: XG) (NYSE: AMEX: XG). But there is one major obstacle -- the company isn’t interested in being bought-out.

“At this time we would vociferously say that with six drilling rigs in operation to define new gold-silver reserves any offer would be considered untimely and opportunistic,” says Extorre co-chairman Yale Simpson.

At stake is Extorre’s flagship asset, the 100 per cent-controlled, bonanza-grade Cerro Moro gold and silver project in the southern province of Santa Cruz. The company is now taking precautions to protect itself from any potential buy out.

“We have appointed an independent M&A (mergers and acquisitions) advisor to assist the Board in these matters as we do feel somewhat vulnerable at present,” says Simpson.

The company also holds a portfolio of other exploration assets in Argentina, including the advanced Don Sixto gold project in Mendoza province, which hosts 1.2 million ounces of gold. And Extorre is very expansion-minded.

“Within two years we will have the Cerro Moro mine producing,” explains Simpson. “In terms of resources we are optimistic that we will have increased our gold resources significantly.”

“In fact, when you look two years out, I would be optimistic that we are progressing on our second mine.”

Extorre’s current resource base on a gold equivalent basis, which includes the value of the silver, is 2.2 million ounces (in two deposits). The company hopes to move that through three million ounces within the next year.

Extorre last documented its gold resources in early 2010 with a modest gold resource base at Cerro Moro of 547,000 ounces of gold. However, it has discovered plenty of silver -- 27.3 million ounces so far. And the prospect of finding more silver is very high, Simpson says. This significant value driver, along with a strong rally in silver prices in recent months, is why Extorre is concerned.

A recent research report by the international investment firm Macquarie Capital Markets identified Extorre as a company that could offer investors exposure to an emerging, un-hedged, high-margin gold-silver producer. The report published this year recommends Extorre for its production potential and for leverage to potential M&A.

In fact, Extorre's bonanza silver grades could attract silver producers interested in gold exposure, says Adam Graf, Director of Equity Research for Precious Metals and Emerging Miners at the investment bank, Dahlman Rose and Co., in New York.

“Extorre could be an interesting candidate for either a mid-tier gold or silver producer, with current gold production between 100,000 ounces and one million ounces, or a significant silver producer producing several million ounces of silver currently,” says Graf.

“Goldcorp recently bought Andean, whose flagship asset was in the same region, and of similar size. Because of the current gold and silver price ratio, and the grades at Cerro Moro, the projected annual revenues from gold and silver are about equal.”

Extorre’s hopes to monetize their mineral assets in the region are happening at a time when other companies are also busy with their own mine plans. Patagonia Gold PLC expects to start production in a few months at its Lomada site. Also, Canadian-based Yamana Gold Inc. anticipates a construction decision will be made this year at its in-development Agua Rica copper-gold mine.

Investment analysts agree that potential suitors for Extorre would likely consist of small to mid-tier precious metals producers. The attraction will be the very high operating margins predicted for Cerro Moro and the potential to double or treble the company’s mineral resources.

“I’m not suggesting that any of the mid-tier companies are circling, but I can think of several who would make a logical acquirer,” says Graf.

Marshall Berol, a very successful San-Francisco based mutual fund manager, concurs that Extorre’s ongoing drilling success has to be catching the eye of potential suitors.

“Extorre would be a very attractive takeover candidate for a larger company. But they don’t need it to be successful as they have a very fine project and they’re well financed, which means they could bring their project into production themselves,” he says.

“There’s probably also lot more silver and gold in the ground there (at Cerro Morro),” says Berol. “And they’re still getting very promising drill results. But if a takeover happens, then it will be the frosting on the cake.”

Marshall Berol co-manages the San Francisco-based Encompass Fund, which has a heavy weighting in mining equities, and which has been a stellar performer over the past four years as a result of a resurgent market in gold stocks. This small mutual fund was ranked as the second best performer last year among over 15,700 global equity funds that are tracked by Morningstar, a financial sector ratings agency.

Extorre’s ultimate goal is to be producing gold and silver by 2013. Alternatively, Extorre could be gobbled up by a bigger fish in the mining industry before then. But either scenario promises a good return for investors, Graf notes.

“In the current metal price environment, and led by a strong operation oriented management team, the company will either likely be taken out as Cerro Moro moves into construction, or gain significant multiple expansion as the market recognizes lower risk and greater certainty in the future cash flows,” he adds.

The principals of do not directly or indirectly own shares in the stocks and investment funds mentioned in this article.


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