Private gold explorer Andes Resources has several good reasons to prefer a backdoor listing to an IPO right now.

Andes has struck a deal to merge with ASX-listed Metminco (ASX:MNC). Metminco will acquire all of the issued capital of Andes by way of an off-market takeover offer of 25 new Metminco shares for every one Andes share.

One key point made by the junior explorer’s managing director, Jason Stirbinskis, is the declining share prices of the companies that have gone down the IPO route recently.

Over 60 per cent of the companies that have listed via an IPO in the past year have lost between 3 and 80 per cent of their value.

Just five of some 21 resources floats over the past 12 months are in positive territory.

“I think it’s particularly hard via the IPO route at the moment as the share performance of recent junior explorer floats has been negative,” Stirbinskis told Stockhead.

“And this of course translates to trepidation in participating in new floats regardless of how compelling the investment proposition might be, and that sentiment has persisted now for perhaps 18 months or so.

“Many IPOs are now trading far below the IPO price, and we believe the merger with Metminco on very compelling valuation metrics sets up the company for a strong chance of re-rating once the deal is completed.”

In terms of why merge rather than IPO, Stirbinskis says an IPO “brings with it additional regulatory obligations and hurdles that carry with them costs and risks, e.g. the risk of not achieving spread or not reaching minimum shareholder numbers etc”.

“There is very few examples of IPO that have actually held their value in the secondary market over the past 12 months also, and we are very conscious of this.”

They already have the backing of Andes’ largest shareholder Sandfire Resources (ASX:SFR), which has agreed to commit $1.2m to become a 15 per cent shareholder in the larger company.

“We are now mid-process in merging with our Colombian neighbour, which is strongly supported by all of Andes’ major shareholders and board members,” Stirbinskis said.

“The merger with Metminco has considerable additional benefits as the Metminco shareholder base are very familiar with Colombia and the highly prospective area in which both companies operate.

“The similarities of Metminco and Andes and the nature of the merger has also resulted in the regulators determining that Metminco does not need to re-comply with Chapters 1 and 2 of the listing rules and this delivers additional cost and time savings.”


Faster route to production

The tie-up provides Andes with a quicker path to development via Metminco’s Quinchia gold project, which already has a defined reserve of 457,000oz and a resource of 877,000oz.

Typically reserves refer to discoveries that are commercially recoverable using existing technology, while resources are either not yet commercially viable or are mere speculation.

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The Quinchia project hosts several deposits and exploration targets including Miraflores, Dosquebradas and Tesorito.

“Being geographically close to our 80,000ha, we’ve always been aware of each other’s activity,” Stirbinskis explained.

“The catalyst however was Metminco’s success in negotiating a JV with AngloGold Ashanti for the Chuscal licences just 2km from their established gold reserve at Miraflores.

“We know the Chuscal ground and its substantial gold potential in its own right and the fact that it could enhance the economics of Miraflores amplifies any drill success at Chuscal.”

Metminco is earning a 51 per cent stake in the Chuscal JV by spending US$2.5m ($3.6m) over three years.

The company plans to start drilling the ground once its merger with Andes is complete.

Metminco is continuing to trade on the ASX, but the expectation is the merger will be complete and the larger company will be trading mid- to late-July.