Acquisition & Spin-Off Should Power-Up StockWolfden Acquisition & Spin-Off Should Power-Up Stock
By Ben Abelson
15 Feb 2006 at 04:10 PM EST
NEW YORK (ResourceInvestor.com) -- While project potential is what ultimately makes or breaks any mining company, astute investors are aware that in the near term a company's "story" can significantly affect the reaction it gets from the marketplace.
Thanks to its recently announced acquisition of several base metal projects from Inmet Mining [TSX:IMN], Wolfden Resources [TSXv:WLF] is planning a major reworking of its assets. The company will retain its new acquisitions and current Arctic mining projects, while spinning off its Ontario-based gold projects (which are primarily centred in the prolific Red Lake district) into a new publicly traded entity.
Wolfden's move should prove a wise one for both management and shareholders, creating two distinctly separate stories: a Northern Canadian base metal company with some of the industry's highest untapped grades, and a Southern Canadian gold explorer with lots of potential.
Trading on a Discounted Gold Valuation
Since 2003, Wolfden has been one of the better-known Canadian explorers. But with a cluttered array of projects located in different camps and consisting of different metals, the company has not always done the best job of 'selling' investors.
While a significant portion of Wolfden's assets are in the base metal sector, for example, the company has recently traded more or less solely on the merits of its gold projects - but with a lower multiple than other gold explorers! As a result, the company's stock has also largely missed out on the surging stock prices recently seen by base metal juniors like Breakwater Resources [TSX:BWR], Constellation Copper [TSX:CCU] and New Gold [AMEX:NGD].
Overall, the situation had led to a wholly disappointing stock performance over the past two years.
Extracting Value
That may all be changing. Yesterday the company announced the acquisition of several prospective base metal projects from Canadian producer Inmet. For the issuance of 13.5 million shares (valued at approximately C$52.7 million), Wolfden acquired the much touted Izok Lake (16.5 million tonnes grading 2.2% Cu,11.4% Zn, 60 g/t Ag), Gondor (7.3 million tonnes grading 0.2% Cu, 4.8% Zn, 46 g/t Ag), and Hood projects (3.2 million tonnes grading 2.6% Cu, 3.6% Zn, 18 g/t Ag).
As part of the deal, Wolfden will lump together these new projects with its current High Lake and Ulu Gold projects to create a Nunavut-centred mining company. The new company should benefit from synergies between its projects and will be "one of the world's most significant holders of undeveloped copper and zinc resources,'' according to CEO Ewan Downie.
While the new company will retain some decent gold exposure (about 1 million ounces in the resource category from High Lake and Ulu), the focus will definitely be base-metal oriented - with about 1.8 billion pounds of copper, 6.3 billion pounds of zinc and 74.4 million ounces of silver in the ground.
In terms of boosting investor sentiment, the company will also benefit from having Inmet as a major shareholder (after the transaction it will own some 18% of Wolfden's outstanding shares.)
With Izok in hand, and a pre-feasibility study for High Lake due out shortly, Wolfden's base metal division could finally unlock the oft-touted resource potential of Nunavut. On a conference call Feb. 15, Wolfden CEO Ewan Downie told investors that the company plans to "advance Izok very quickly," noting that a lack of infrastructure had been impeding the project's development. A study was completed on Izok in 1994, demonstrating the feasibility of an open pit mine with a mine life of about 15 years.
''As we're envisioning it right now, probably High Lake would be first for development, Izok right behind it and Hood would come on line following that,'' Downie added.
''So it could provide up to 20 years plus of mine life in the region. There's not many projects in the world that can boast that type of resources."
As news begins to unfold about the new company's structure, and summer drill results are released, look for Wolfden's base metal company to start trading toward the lofty levels enjoyed by other up-and-coming copper and zinc juniors.
The rest of Wolfden's assets, including the Bonanza/Follansbee and East Bay properties in Red Lake, will be spun-off into a separate gold entity.
Gold Projects on the Block?
Based on Downie's stance in the recent analyst call, the current management seems most focused on developing Wolfden's base metal projects. When an analyst asked about Wolfden's C$25 million in working capital, Downie noted that the bulk of the cash would be remaining with the base metal company, and that most of this year's drill programme is geared toward Ulu and High Lake. While the gold unit will provided enough funding for the remainder of this year's projects, after that it will be on its own. The hands-off stance suggests that "Wolfden Gold" may be up for grabs soon after the spin-off.
In recent months, mid-tier and senior producers have shown an increasing willingness to snap up explorers and mines throughout Canada. Goldcorp [TSX:G; NYSE:GG] is probably the most likely acquirer, given that the miner has shown a willingness to buy, is obviously interested in consolidating Red Lake (as shown by its purchase of Placer Dome's interest in the nearby Campbell mine) and already holds some 10% of Wolfden's stock.
Even if the gold unit isn't acquired, look for the new company's stock to gradually appreciate as investors ascribe a greater value and multiple to the gold-only story.
Conclusion
Wolfden's acquisition and planned spin off creates the best of both worlds. Its base metal unit will have five mine-quality projects with the potential to unlock Canada's frozen north, while its gold division will have several prospective exploration projects in Ontario - more than enough to attract a major's interest. When one considers that the company is already undervalued compared to its peers, the new structure is likely to unlock a more favourable multiple for both units.