Argonaut Gold to buy Prodigy Gold in share, cash deal

Mr. Pete Dougherty of Argonaut reports

ARGONAUT GOLD AND PRODIGY AGREE TO FRIENDLY BUSINESS COMBINATION

Argonaut Gold Inc. and Prodigy Gold Inc. have entered into an agreement pursuant to which Argonaut Gold has agreed to acquire all of the issued and outstanding common shares of Prodigy by way of a plan of arrangement. The combined entity will benefit from the strong operating experience and cash flow of Argonaut Gold and its ability to successfully advance Prodigy’s Magino gold project, which has an indicated resource of more than six million ounces (223 million tonnes at 0.87 gram per tonne gold using a cut-off grade of 0.35 gram per tonne).

Pursuant to the terms of the arrangement announced today, Prodigy shareholders will receive 0.1042 of an Argonaut Gold share and 0.001 cent in cash per Prodigy share, representing $1.08 per share based on Argonaut Gold’s 20-day volume-weighted average price and a premium of 54 per cent based on both companies’ 20-day VWAPs as at Oct. 12, 2012, the last trading day prior to this announcement. The transaction values Prodigy’s equity at approximately $341-million on a fully diluted in-the-money basis and implies an enterprise value of approximately $277-million.

Pro forma the transaction, Argonaut Gold will be owned approximately 78 per cent by current Argonaut Gold shareholders and 22 per cent by current Prodigy shareholders (based on fully diluted in-the-money shares outstanding). The terms of the transaction have been unanimously approved by both companies’ boards of directors, with the commitment of votes from all directors and officers of Prodigy, representing approximately 3.9 per cent of Prodigy’s shares, having been secured.

Highlights of the combined entity:

  • Current production from two mines in Mexico and a strong pipeline of two developments projects in Canada and Mexico, representing a diversified asset portfolio in two premier jurisdictions for mine development and operation;
  • If both development projects are advanced to production, Argonaut Gold is expected to enter the ranks of the intermediate producers and fulfill its stated goal of 300,000 to 500,000 ounces of gold production per year;
  • In excess of 12 million ounces of measured and indicated gold resource, including 1.2 million ounces of proven and probable gold reserve (fully broken out by category and property as described below);
  • Strong balance sheet with no debt;
  • Current and projected future cash flow generation expected to self-finance future development, mitigating future financing risk;
  • Strong management team and experienced board of directors with proven development and operating record.

Pete Dougherty, president and chief executive officer of Argonaut Gold, said: “We are very pleased to announce this transaction with Prodigy today. Magino is a highly attractive asset which has shown continued resource growth, and which we believe will provide a longer-term production opportunity for Argonaut Gold shareholders. The Magino resource provides substantial flexibility for maximizing value creation using a higher-grade cut-off. We believe the project can be ‘right-sized’ for a company like Argonaut Gold to deliver the best returns to our shareholders, while providing further upside should the gold price maintain its strong performance. This transaction is both highly attractive to Prodigy shareholders as well as significantly accretive to Argonaut Gold shareholders on all key financial and operational metrics.”

Brian J. Maher, president and chief executive officer of Prodigy, said: “The transaction announcement today is the culmination of the success we have had growing and advancing the Magino project. We believe the price offered by Argonaut Gold is highly attractive for our shareholders, and that in addition to the premium our shareholders receive today, our shareholders now have the opportunity to participate in a company that has current production exposure and can both finance and develop Magino.”

Transaction benefits for Argonaut Gold shareholders:

  • Magino represents a significant-scale asset in the Argonaut Gold portfolio, and has the potential to allow Argonaut Gold to achieve or exceed its stated goal of 300,000 to 500,000 ounces of gold production.
  • Magino is a multi-million ounce deposit which provides tremendous grade flexibility when considering development alternatives while pursuing the highest returns for Argonaut Gold shareholders.
  • The timeline for Magino development provides for continued growth beyond Argonaut Gold’s existing organic growth projects with anticipated start-up well timed after San Antonio is targeted to start production.
  • The transaction provides geopolitical and asset diversification, and entry into another of the world’s most supportive mining jurisdictions.
  • A fairness opinion has been received from the financial adviser to Argonaut Gold indicating that the transaction is fair from a financial point of view to Argonaut Gold.
  • The transaction is significantly accretive to all of Argonaut Gold’s per share metrics, including net asset value per share, resources per share, longer-term cash flow per share and longer-term production per share.
  • In addition to Magino, Argonaut Gold will gain exposure to Prodigy’s portfolio of other exploration-stage assets

Transaction benefits for Prodigy shareholders:

  • Significant premium of 54 per cent to Prodigy shareholders based on both companies’ 20-day VWAPs as at Oct. 12, 2012;
  • All-share transaction provides Prodigy shareholders with exposure to current production and cash flow in a strong gold price environment and continuing exposure to the advancement of Magino as well as Argonaut Gold’s existing organic growth profile;
  • Substantially decreases the financing risk for the project;
  • Leverages Argonaut Gold’s highly experienced and successful management team;
  • Argonaut Gold’s shares provide improved trading liquidity for Prodigy shareholders;
  • Fairness opinion received from Prodigy’s financial adviser indicating that the transaction is fair, from a financial point of view, to Prodigy shareholders.

Arrangement agreement summary

The arrangement includes, among other things, certain standard conditions including receipt of approval of the shareholders of Prodigy and Argonaut Gold by the affirmative vote of no less than 66-2/3 per cent and 50.1 per cent of the shares voted, respectively, and receipt of court and stock exchange approvals. Special shareholder meetings for each company to vote on the transaction are expected to be held in December, 2012, with closing expected shortly thereafter.

The arrangement agreement is subject to customary non-solicitation provisions, subject to Prodigy’s right to consider and accept superior proposals. In the event of a superior proposal, Argonaut Gold will have a five-business-day right to match the superior proposal. If the arrangement is not completed as a result of a superior proposal or in other certain specified circumstances, a termination fee equal to $10.25-million will be paid to Argonaut Gold. The arrangement agreement also provides for reciprocal expense reimbursement under certain specific circumstances. After closing of the transaction, Prodigy will have the right to appoint one director to the Argonaut Gold board of directors.

The terms and conditions of the arrangement will be disclosed in more detail in the management information circulars which will be filed and mailed to Argonaut Gold and Prodigy shareholders in November, 2012.

Advisers and legal counsel

BMO Capital Markets is acting as financial adviser and Fraser Milner Casgrain LLP is acting as legal counsel to Argonaut Gold and its board of directors. BMO Capital Markets has provided an opinion that, based upon and subject to the assumptions, limitations, and qualifications in such opinion, the consideration to be received by Prodigy’s shareholders is fair, from a financial point of view, to Argonaut Gold.

National Bank Financial Inc. is acting as financial adviser and DuMoulin Black LLP is acting as legal counsel to Prodigy. National Bank Financial Inc. has provided an opinion that, based upon and subject to the assumptions, limitations, and qualifications in such opinion, the consideration to be received by Prodigy’s shareholders is fair, from a financial point of view, to Prodigy shareholders.

Conference call details

Argonaut Gold and Prodigy will host a conference call to investors and analysts to discuss the transaction on Oct. 15, 2012, at 9 a.m. ET (6 a.m. PT).

You will be able to participate in this call using the following details:

  • Conference call information: toll-free (North America) — 1-877-440-9795; Toronto local and international — 1-416-340-8527;
  • Conference call replay: toll-free replay call (North America) — 1-800-408-3053; replay call — 1-905-694-9451 (passcode 3150074).

The conference call replay will be available from 12 p.m. ET on Oct. 15, 2012, until Oct. 29, 2012. The webcast archive will be available from 11 a.m. ET on Oct. 15, 2012, for one year.

The technical information contained in this document regarding Argonaut Gold has been prepared under supervision of, and reviewed and approved by, Thomas H. Burkhart, Argonaut Gold’s vice-president of exploration, and a qualified person as defined by National Instrument 43-101.

The technical information contained in this document regarding Prodigy has been prepared under supervision of, and reviewed and approved by, Tom Pollock, PGeo, Prodigy Gold’s vice-president — exploration, who is a qualified person under the definitions established by National Instrument 43-101.