Endeavour Mining

Endeavour Mining (TSX EDV) has catapulted itself solidly into the ranks of mid-tier gold producers with the announcement of its "merger of equals" with Adamus Resources Limited (ADU.V).

The combined company will boast 2011 gold production of 172,000 ounces at a time when the yellow metal is trading at stratospheric levels. This annual production total will come from Endeavour's Youga Gold Mine in Burkina Faso and Adamus' Nzema Gold Mine in Ghana.

The new company projects annual production to increase to 250,000 ounces per year by 2013 at a cash cost per ounce between $575 and $625. Translation: Over the next couple of years, the new Endeavour will be a money making machine.

The proposed deal will create a fast-growing and nimble West African gold producer with a management "dream team" that includes some of the sharpest minds in the industry. Cash flow will be extremely positive from the outset and growth will be around the corner, as the new company advances towards an early 2012 production decision on its Agbaou project in Cote d'Ivoire. 

The merger will also give Endeavour access to Adamus' proven track record of mine building and will create a vast exploration portfolio scattered throughout the gold-rich region of West Africa.

Endeavour will bring its significant financial strength to the table, allowing the new company to eliminate Nzema's $60 million of project debt and to reduce its goldhedging volumes by a minimum of $100 million.

Said Endeavour CEO (and CEO of the new company) Neil Woodyer: "This combination will create a stronger and better positioned company with the financial strength to grow through strategic acquisitions. Merging with Adamus is a significant step forward as we seek to become a mid-tier gold producer."

Under the terms of the deal, Endeavour will acquire all the issued ordinary shares of Adamus. Shareholders in Adamus will receive 0.285 Endeavour common shares for each share of Adamus they currently hold. Endeavour will establish a listing on the Australian Stock Exchange as part of the deal, so that new Endeavour/old Adamus shareholders can trade the new Endeavour on the ASX.

The merger is expected to close some time in December 2011, with a meeting of Adamus shareholders to ratify the deal to be held some time in November 2011. The deal will also require the approval of Endeavour shareholders. This meeting will take place in November.

This is a great deal for Endeavour shareholders, as it will allow the company to unlock the potential of its significant production assets in West Africa. It's the type of move I've been expecting the company to make: a production deal with some warts on it (in the form of Nzema's project debt and hedged production) that Endeavour can clean up to maximize value.

And I don't expect the combined company to be complacent either. Look for more acquisitions in the next 12 months to enhance the new company's production capacity.

With all the volatility in the markets these days, news of the merger was drowned out by the larger financial picture. But with gold looking primed to reach new heights over the next couple of years, this is a company you need to have in your portfolio.

Once the market settles down and digests the fact that the new Endeavour Mining will be generating 172,000 ounces of gold by the close of 2011, the cash flow implications of that fact should cause the new company's share price to head significantly higher from here.

It's a strong buy, even pre-merger.

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