RE:RE:Arrogance..Well surprise surprise CHL recommends rejection of Waterton's "
ridiculously low" hostile offer. Interesting reference to National Bank FInancial 2011 analyst report: "Waterton's own financial advisers recognize the scarcity value of assets similar to Goldfield.
In a research report dated Sept. 11, 2013, National Bank Financial, financial adviser to Waterton, highlighted the "absolute scarcity of near-term development projects at a time when many mid-tier and senior producers are seeing their production profiles decline." It continued, "Analysis suggests a limited field of development projects likely to be in production within the next two years, more so in favourable locations like North and South America, where we account for seven projects meeting our selection criteria (more than 75,000 ounces per year, 2014 or 2015 start dates, not owned by a mid-tier or senior producer)." NBF also highlighted the benefits of heap-leach projects as having relatively low upfront capital costs and the ability to scale production upward over time.
While Goldfield is not estimated to be in production until mid-2016, it does meet all the other criteria described by NBF as being scarce, namely: it is located in North America, it has been advanced to a feasibility study and it is capable of significant production.
In the same report, NBF depicted recent acquisitions and historical takeout multiples where the takeout averages as compiled by NBF equate to a price to net asset value of 0.83 times and an enterprise value per resource of $98 (U.S.) per ounce. Applying those multiples to Chaparral would imply a dramatically higher price range than the hostile bid."
Chaparral board urges holders to reject Waterton offer
2014-02-26 21:01 NT - News Release
Mr. Nick Appleyard reports
CHAPARRAL GOLD BOARD RECOMMENDS REJECTION OF HOSTILE BID AND ADOPTS SHAREHOLDER RIGHTS PLAN
The board of directors of Chaparral Gold Corp. has recommended that shareholders reject the hostile takeover bid to acquire 100 per cent of the common shares of the company at 50 cents per share in cash made by Waterton Precious Metals Fund II Cayman LP on Feb. 19, 2014.
The board's recommendation was made after receiving the recommendation of the independent special committee and advice from its legal and financial advisers.
Nick Appleyard, chief executive officer of Chaparral, stated: "The unsolicited hostile bid by Waterton is ridiculously low, based on every economic metric that we apply to it. The bid fails to recognize the fundamental value in either our flagship Goldfield gold property or our large Converse gold property. Our board absolutely rejects this bid and recommends that the Chaparral shareholders do not tender their common shares."
The board has also adopted a shareholder rights plan to allow the board sufficient time to seek competing bids and alternative proposals to maximize shareholder value. The plan seeks to ensure that all of the company's shareholders are treated fairly in any transaction involving a possible change of control of Chaparral.
The special committee has engaged DuMoulin Black LLP as its independent legal adviser. As previously disclosed, the company has engaged Maxit Capital LP as its financial adviser and Axium Law Corp. as its legal adviser.
Reasons to reject the hostile bid
The basis for the board's recommendation will be further outlined in a directors circular to be filed with Canadian regulators and mailed to Chaparral shareholders. The following is a summary of the principal reasons for the board's recommendation that Chaparral shareholders reject the hostile bid and not tender their Chaparral shares.
Summary of reasons:
- The hostile bid implies negative value for Chaparral's mineral properties.
- The board is aggressively pursuing value-maximizing alternatives. The hostile bid fails to recognize the value of Chaparral's asset base.
- The timing of the hostile bid is opportunistic.
- The hostile bid is significantly below precedent multiples for similar-scale gold developers.
- The hostile bid represents an immaterial premium to Chaparral's share price.
- Waterton's own financial advisers recognize the scarcity value of assets similar to Goldfield.
- Chaparral has a strong balance sheet and no near-term dilution risk for shareholders.
- The hostile bid is financially inadequate.
- Chaparral's directors and officers have rejected the hostile bid.
- The hostile bid is highly conditional.
Details of reasons
The hostile bid implies negative value for Chaparral's mineral properties.
The hostile bid is not credible as it implies that the company's two open-pit, heap-leach gold projects in Nevada are worthless. The hostile bid, net of the company's estimated working capital, implies a negative value for Chaparral's mineral properties. Effectively, Waterton is using Chaparral's cash and receivables to finance Waterton's proposed acquisition of Chaparral.
The board is aggressively pursuing value-maximizing alternatives. In response to the inadequacy of the hostile bid, the board and special committee have been working, together with Chaparral's management and financial and legal advisers, to develop, review and evaluate a range of alternatives consistent with the board's focus on maximizing value to Chaparral shareholders. These alternatives include building upon existing value-enhancing initiatives, as well as engaging in discussions with third parties regarding alternatives.
Chaparral has approached or been approached by a number of third parties which have expressed an interest in considering transactions with Chaparral. Chaparral has entered into confidentiality and standstill agreements with a number of such interested parties, several of which are examining confidential financial, technical and other relevant information. Discussions are continuing with these parties and others to generate value-enhancing alternatives. Tendering Chaparral shares to the hostile bid before the board and its advisers have had an opportunity to fully explore all available alternatives to the hostile bid may preclude the possibility of a superior alternative transaction emerging. While there can be no assurances, Chaparral's pursuit of alternatives may lead to a proposal superior to the hostile bid.
The hostile bid fails to recognize the value of Chaparral's asset base.
Chaparral's shareholders currently have indirect 100-per-cent ownership of two heap-leach gold projects in mining-friendly Nevada. Chaparral's flagship Goldfield property is a relatively high-grade, low-cost, near-term production scenario. Chaparral's other project, Converse, contains a large gold resource and provides considerable leverage to the gold price. The hostile bid, being all cash, would deprive Chaparral shareholders of their exposure to the cash-generating potential and gold price optionality of these two high-quality development projects:
Goldfield
Goldfield's National Instrument 43-101 independent feasibility study was prepared by Micon International Ltd. in 2012 and was updated at the completion of basic engineering in 2013. The project is currently in a fast-track permitting process administered by the Bureau of Land Management, and permitting is expected to be completed in the second quarter of 2015. Initial production is anticipated in mid-2016, subject to financing.
Goldfield is forecast to produce approximately 76,000 ounces of gold annually at highly attractive total cash costs of $612 (U.S.) per ounce over its initial six-year mine life. It is relatively high-grade in terms of heap-leach deposits, with the project's average gold grade being four times the estimated cut-off grade of 0.25 gram per tonne. Chaparral management believes there is also significant potential to extend Goldfield's mine life.
Converse
Gold deposits the size of Converse are very rare, even more so within stable political jurisdictions. There are approximately 37 undeveloped gold deposits worldwide that are owned by junior companies that have larger gold resources than Converse. Of those 37 deposits, only 18 are in North America.
Converse remains subject to further evaluation but provides tremendous leverage to rising gold prices. Based on the company's 2012 independent scoping study, the project could generate cumulative pretax cash flows over its projected mine life of $900-million (U.S.) to $1.3-billion (U.S.) and internal rates of returns ranging from 18 per cent to 25 per cent at gold prices between $1,500 (U.S.) and $1,700 (U.S.) per ounce.
Waterton has clearly recognized the value of this asset, having made inquiries to Chaparral as early as October, 2013, regarding a potential earn-in or acquisition opportunity related specifically to Converse.
The timing of the hostile bid is opportunistic. In 2013, the gold price decreased 28 per cent, representing the greatest annual percentage decrease in gold since 1981 and the end of 12 consecutive annual gold price increases. Waterton is attempting to acquire Chaparral at a time when the company's share price has been significantly impacted by the current challenging commodity price environment.
At the time of the announcement of the hostile bid, Chaparral had been trading on the Toronto Stock Exchange as an independent company for only 34 trading days (since Dec. 30, 2013) and, as a result, has yet to rerate to the trading price levels of its peer group with similar development gold projects in favourable jurisdictions. The hostile bid attempts to prevent Chaparral shareholders from benefiting from this potential rerating of the Chaparral share price.
The hostile bid is significantly below precedent multiples for similar-scale gold developers.
The hostile bid represents a significant discount to the price to net asset value multiples and enterprise value per ounce of gold economic limits that have been paid in prior acquisitions of similar-scale gold developers. In fact, as previously stated, net of the company's estimated working capital (at Dec. 31, 2013), the hostile bid implies a negative value for Chaparral's mineral properties.
The hostile bid represents an immaterial premium to Chaparral's share price.
The hostile bid of 50 cents per share represents a meager 14.9-per-cent premium to the closing price of Chaparral shares on the Toronto Stock Exchange on Feb. 14, 2014 (the last trading day prior to the announcement of the bid). Furthermore, as at Feb. 26, 2014, the hostile bid represented a 12.3-per-cent discount to the closing price of 57 cents for Chaparral's shares on the Toronto Stock Exchange. Chaparral shares have not traded at or below the hostile bid price since the Waterton announcement.
Waterton's own financial advisers recognize the scarcity value of assets similar to Goldfield.
In a research report dated Sept. 11, 2013, National Bank Financial, financial adviser to Waterton, highlighted the "absolute scarcity of near-term development projects at a time when many mid-tier and senior producers are seeing their production profiles decline." It continued, "Analysis suggests a limited field of development projects likely to be in production within the next two years, more so in favourable locations like North and South America, where we account for seven projects meeting our selection criteria (more than 75,000 ounces per year, 2014 or 2015 start dates, not owned by a mid-tier or senior producer)." NBF also highlighted the benefits of heap-leach projects as having relatively low upfront capital costs and the ability to scale production upward over time.
While Goldfield is not estimated to be in production until mid-2016, it does meet all the other criteria described by NBF as being scarce, namely: it is located in North America, it has been advanced to a feasibility study and it is capable of significant production.
In the same report, NBF depicted recent acquisitions and historical takeout multiples where the takeout averages as compiled by NBF equate to a price to net asset value of 0.83 times and an enterprise value per resource of $98 (U.S.) per ounce. Applying those multiples to Chaparral would imply a dramatically higher price range than the hostile bid.
Chaparral has a strong balance sheet and no near-term dilution risk for shareholders.
Contrary to Waterton's assertions, with approximately $43-million (U.S.) in cash and a further $18-million (U.S.) in receivables, Chaparral is in an enviable position, with one of the strongest balance sheets in its peer group. Further, given that the company's flagship Goldfield project is currently in the permitting phase and that Converse is currently under evaluation, the company and its shareholders are not subject to any onerous property-holding costs, capital requirements or near-term financing requirements.
The company's financial future is strong, and it is under no financial duress. In fact, Waterton is essentially attempting to use the company's (and by extension its shareholders') own working capital to acquire Chaparral's mining properties.
The hostile bid is financially inadequate.
Maxit Capital LP, financial adviser to the company, has opined to the special committee and board of the company that as of Feb. 26, 2014, and based upon and subject to the assumptions, limitations and qualifications set forth therein, the consideration offered under the hostile bid for the Chaparral shares is inadequate from a financial point of view to the Chaparral shareholders, other than Waterton.
Chaparral's directors and officers have rejected the hostile bid.
The directors and officers of Chaparral do not intend to tender any of their shares to the hostile bid. The directors and officers of Chaparral, after giving effect to the exercise of all of their stock options, would hold an aggregate of 5,394,527 shares, representing approximately 4.5 per cent of the outstanding shares on a fully diluted basis.
The hostile bid is highly conditional.
The board is concerned that the hostile bid is highly conditional, to the benefit of Waterton, and contains 12 conditions which must be satisfied or waived before Waterton is obligated to take up and pay for common shares deposited under the hostile bid. Many of the conditions are not subject to a materiality threshold but rather provide Waterton with very broad discretion to decline to proceed with the offer. Based on the foregoing, tendering to the hostile bid would, in effect, grant Waterton a free option to acquire the tendered shares.
Shareholder rights plan
To ensure that the board has sufficient time and opportunity to explore alternative options that could maximize shareholder value and to encourage equal treatment of shareholders in connection with any takeover bid, the board, based in part on the recommendation of the special committee, has adopted a shareholder rights plan.
The plan does not prevent a takeover of Chaparral. The plan discourages discriminatory, coercive or unfair takeovers of Chaparral and gives the board time if, in the circumstances, the board determines it is appropriate to take such time, to pursue alternatives to maximize shareholder value in the event an unsolicited takeover bid is made for all or a portion of the outstanding Chaparral shares.
Pursuant to the plan, the board has authorized the distribution of one share purchase right for each outstanding common share of the company, effective at the close of business today. Each right is initially attached to and will trade with the Chaparral shares in respect of which it was issued. The issuance of the rights will not change the manner in which shareholders currently trade their Chaparral shares.
The rights will separate from the Chaparral shares to which they are attached and become exercisable at the separation time, which occurs following the date a person or a group acting in concert makes or announces an intention to make a takeover bid that is not a permitted bid (as such term is defined in the plan). The plan provides that the separation time may be deferred by the board.
As the hostile bid is not a permitted bid, under the provisions of the plan, the separation time would occur on the close of business on March 3, 2014; however, the board, in accordance with the plan, has deferred the separation time in respect of the hostile bid until the day prior to the expiry date of the hostile bid.
In the event of an acquisition of 20 per cent or more of the common shares of the company by an acquiror, other than by way of a permitted bid, each right will entitle the holder thereof, other than the acquiror, to acquire common shares of the company at a 50-per-cent discount to the then-current market price.
For a takeover bid to qualify as a permitted bid under the plan, the bid must provide that no shares will be taken up under the bid for a period of at least 60 days after the bid is commenced. A permitted bid must also satisfy certain other conditions, including that more than 50 per cent of the outstanding common shares held by persons unrelated to the bidder must be deposited pursuant to the bid and not withdrawn before any common shares may be taken up under the bid and paid for and that, in the event that such number of shares are deposited, the bidder will make a public announcement of that fact and the bid will remain open for deposits of common shares for not fewer than 10 business days following the date of such public announcement. The hostile bid by Waterton, which expires on March 27, 2014, does not qualify as a permitted bid under the plan.
The company intends to submit the plan for approval by the company's shareholders at its planned annual general meeting in May, 2014. The plan also remains subject to regulatory approval, including the approval of the Toronto Stock Exchange. The foregoing summary of certain terms of the plan is qualified in its entirety by reference to the text of the plan, which will be available on SEDAR.
The technical information reported in this news release was reviewed by Chaparral's chief executive officer and qualified person, Mr. Appleyard.
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