TORONTO (miningweekly.com) – Vancouver-based Timmins Gold said this week it has increased support from shareholders of rival Capital Gold Corp (CGC) for a deal to merge the two companies, despite CGC having agreed to an offer from another buyer.

Timmins announced on September 27 that it had proposed a merger that would value CGC shares at C$4,50, which at the time of the proposal would imply a share ratio of 2,27 Timmins shares for each CGC share.

The company said in its initial announcement that shareholders representing 17% of CGC had agreed to support its proposal.

But on October 1, CGC revealed it had signed a definitive agreement to be acquired by another Canadian firm with operations in Mexico – Gammon Gold.

Gammon has agreed to pay 0,5209 one of its own shares and $0,79 in cash for each CGC share, which valued the shares at $4,57 based on September 24 closing prices.

The deal includes a break-up fee, and requires approval by holders of 50% plus one share of CGC.

All three companies only have one operating asset each, although Gammon started the year with two but closed its El Cubo mine in June because of ongoing labour disruptions.

CGC owns the El Chanate mine, Timmins Gold recently started up its San Francisco mine and Gammon still operates the Ocampo mine. All three are in Mexico, and each company also has development and exploration projects.

CGC has said that it received a number of proposals, including one from Timmins, but that the Gammon offer was deemed to be most valuable.

The trick is that Timmins' offer (and part of Gammon's too) is linked to the offerer's share price, so while the Timmins offer may have been cheaper when Capital made its decision, that appeared to have changed by this week.

Octagon Capital analyst Rik Visagie agreed on Wednesday that Timmins' all-share bid was more valuable, but noted that both offers include shares which are constantly changing value.

“So if I was an investor I would have to look at the value, and decide which company do I like better – Timmins or Gammon?

“Remember, Timmins is ramping up production so their share price is reflecting some view of the future which maybe the guys at Capital see or don't see, I just don't know.”

Dahlman Rose & Co analyst Adam Graf commented that Gammon Gold has been operating mines in Mexico for several years, while Timmins first operation is still relatively new.

Gammon also says it has spare mining equipment that can be moved to CGC's El Chanate mine, and boasts a pretty strong balance sheet, he said in an interview.

“It appears that on the face of these offers, and we don't know the details, that the Gammon offer seems superior.”

Timmins CEO Bruce Bragagnolo did not respond to interview requests but told Canada's Business News Network on Wednesday that the company has now received indications of support from shareholders owning as much as 35% of CGC, including a number of lock-up agreements.

The firm still wants to negotiate with the CGC board but has not had any response, he said, adding that Timmins is “not going away”.

“This won't be over any time soon, we are looking at all the options right now.”

Capital Gold chairperson Stephen Cooper was also not available to comment.

Dahlman's Graf did raise the question, though: why does CGC need to enter into a transaction at all?

On a valuation basis, the argument could be made that Gammon shareholders are getting the better end of the stick, he added.

“But I don't want to be negative here, I think that consolidation in Mexico is probably a good thing.

“Maybe together, Capital shareholders can get a better multiple in terms of valuation than they would alone; certainly, the market has never given them a full valuation for their assets.

“In that way, perhaps it's a win-win.”

Since the Gammon deal was made public, a number of US securities litigation firms have announced planned investigations into whether CGC breached its fiduciary duties by signing with Gammon Gold, and whether the price is fair.