To say that the future of Minera Andes Inc. (OTCBB: MNEAF) is uncertain is an understatement of significant proportion as the gold, silver and copper exploration company faces numerous questions surrounding its independence, questions concerning their legal battles, and questions concerning their ability to procure skilled workers for production at mining properties. With these obstacles dominating investor concerns shares in MNEAF slid to a low of 1.99 on August 8, 2011 and while they have rebounded back to the 2.09 – 2.11 range on Tuesday they remain below their 50-day moving average of 2.42 as well as their 200-day moving average of 2.59.
While MNEAF CEO Rob McEwen has outlined his desire to merge the company with US Gold Corp. (NYSE: UXG), a gold exploration company that he also heads, the likelihood of that happening in the near future appears dim. This despite McEwen’s optimistic opinion that “The merger of US Gold and Minera Andes would be transformative, creating a dynamic, new precious metal company. A mid-tier silver producer diversified throughout the Americas. The combined company would be low-cost and possess a significant pipeline of production growth in addition to owning an exciting portfolio of exploration properties. Importantly, this combination would move us one step closer to our goal of qualifying for inclusion in the S&P 500 Index by 2015.”
As part of the proposed merger shareholders of MNEAF would receive 0.4 shares of UXG for 1 share of MNEAF. In mid-July McEwen provided an update to this proposed merger, stating “The independent committees of the boards were formed. They went out and hired their independent counsel and financial advisers. And the financial advisers are doing their due diligence right now. That is probably going to take the better part of three or four weeks.”
That would mean an answer from the two sides should be coming shortly but even a green light from each party wouldn’t necessarily move the merger any closer to reality as it would then have to clear the Securities and Exchange Commission, a process that could take at least a month, and even if that was overcome it would then have to be approved by shareholders in a vote, something McEwen anticipates sometime in October.
The way McEwen describes the merger it appears as if the power move would elevate shareholder value to new levels yet the timeline for such a merger is sure to be interrupted due to an ugly legal battle MNEAF currently faces concerning their claims relating to three issues over mineral properties in the northern part of their 100% owned Los Azules Copper Project, in San Juan Province, Argentina. According to TNR Gold Corp. the ownership of that highly valued property is in question and they contend that they should have been allowed to exercise a 25% back-in right on concessions that cover the northern portion of the Los Azules deposit, which it total houses an estimated 2.2 billion pounds of copper.
In the eyes of many TNR Gold is simply grasping at straws but there is legitimate concern among MNEAF shareholders that if they manage to actually get their hands on one of those straws it could cause significant damage to MNEAF’s financial outlook. TNR Gold is no longer looking for that 25% back-in right; they are now claiming a breach of contract and intentional interference with economic relations and now want the return of the Properties in question or damages. The legal battle has gone before the British Columbia Supreme Court which has allowed TNR Gold time to amend their original claim to add a new claim to the litigation concerning the Los Azules project in Argentina.
For their part MNEAF has essentially dismissed the claims made by TNR Gold and McEwen has gone as far as saying he believes the move to be “a form of blackmail.” Whatever it is has certainly been a setback for MNEAF as they had plans to actually spin out the deposit into a separate company yet those plans had to be shelved due to the battle concerning ownership rights. Given what is known it would appear that MNEAF holds the legal rights to the property as TNR Gold revealed in a press release back in September 2007 that “All cash payments due by May 15, 2008 have now been received. All exploration expenditures have also been incurred,” in essence signing off on the option agreement that was in place.
Despite acknowledging these cash payments and exploration expenditures TNR Gold has argued that the expenditure requirements were never met and as such the entire northern portion of Los Azules remains their property. The British Columbia Supreme Court has allowed TNR Gold to add this claim to their litigation and if it is found that MNEAF did not meet the expenditure requirements as stated by TNR Gold it would be a monumental loss.
Not only would it be a loss for MNEAF, it would be a serious setback for McEwen who has envisioned the merger of Minera Andes with US Gold as the first step toward achieving the goal of inclusion in the S&P 500 by 2015, something that would open numerous financial doors for investment. The legal wrangling involving MNEAF would seemingly be a major concern for UXG shareholders when deciding about the merger and TNR Gold has already expressed any change in ownership of MNEAF would not change to legal proceedings.
Shareholders of UXG are holding on to the hope that they will see production from a pair of gold projects around 2014 and any kind of trouble involving MNEAF could push that date further. With gold prices climbing any delay in that production is lost revenue and given the fact that these shareholders have already shown a tremendous amount of patients through a number of their own difficulties it doesn’t seem likely that they would be willing to take on the difficulties of another.
Of course McEwen will be pushing hard for the merger, he is the largest shareholder of MNEAF and he will have a serious interest in getting the deal done. He will certainly be trying to point out that these legal issues have overshadowed the promising results ties to MNEAF’s 49% interest in Minera Santa Cruz (MSC), which owns and operates the San Jose Mine, an operating silver and gold mine in Santa Cruz Province, Argentina, covering 50,491 hectares. That San Jose Mine produced 5.3 million ounces of silver an 84,000 ounces of gold last year. Those production figures are expected to climb in 2011 with first quarter numbers already showing a jump from silver ounces sold at MSC of 739,000 ounces in 2010 to 1,342,000 ounces in 2011 while gold jumped from 14,000 ounces to 18,000 ounces.
Even with all the uncertainty surrounding the legal issues with MNEAF a merger could put shareholders in an incredible position. If MNEAF does get through the claims against their property in Argentina then it could advance McEwen’s vision for S&P 500 inclusion and ultimately send share value significantly higher.