Hi E,
This is a good read, as it contrasts the ABX/ARP offer with the ABX/PGD and Homestake/ARP buyouts and perhaps suggests why Pangea is accepting this offer from Barrick. In the current gold market, it is being viewed by analysts as a reasonable offer. Nice action on Tiomin today.
Winspear analysts find De Beers offer low
Winspear Diamonds Inc WSP
Shares issued 51,634,088 Jun 30 close $4.21
Tue 4 Jul 2000 Street Wire
by Will Purcell
In a move that hardly came as a surprise, Winspear Diamonds Inc. responded
unfavourably and testily to the announcement made last week by De Beers
that it would be offering $4.25 per share for all of the outstanding stock
of Winspear. Winspear's response, authored by company president, Randy
Turner, described the De Beers offer as opportunistic, hostile and highly
conditional, and he added that it did not reflect the underlying value of
Winspear. Certainly on that latter point, at least, most of the industry
analysts appear to agree with him.
Most of those analysts have De Beers at a distinct disadvantage in
assessing the merits of Snap Lake, as most have actually visited the site
at least once, and they have had ample opportunity to discuss the project
with company insiders. De Beers, on the other hand, has apparently had no
such opportunity, and whatever limited due diligence that the company has
been able to muster has been solely based on information in the public
domain. Mr. Turner said, "De Beers has never signed a letter of
confidentiality, nor have they ever been to Snap Lake." He added that it
appeared to be public perception that Winspear had been negotiating with De
Beers, but that was not the case, he stated. Mr. Turner added that De Beers
first approached him at a recent diamond conference, held in Toronto, and
asked for a meeting. That meeting apparently took place on the Friday
afternoon before the announcement. Mr. Turner said that De Beers's
officials informed him at that meeting that they would be making their
offer, and late Sunday night, De Beers made their decision public.
Just hours after the De Beers pronouncement, Yorkton Securities analyst,
Art Ettlinger, correctly predicted Mr. Turner's response. "I would suspect
that Winspear will try to fight this," Mr. Ettlinger told the Dow Jones
Newswires, adding that Yorkton had a $7 price target on Winspear. "We think
the offer undervalues the Snap Lake asset," he concluded. Mr. Ettlinger is
not alone, as that $7 target seems well in line with the projections made
by most other analysts in recent months. Most of those estimates were based
on Winspear s prefeasibility study, which proposed a production rate of
3,000 tonnes per day. A larger mine would generate larger cash flows, and
hence a significantly greater net asset value.
One of the first analysts off the mark with a recommendation following the
news was George Albino, of Deutsche Banc Alex. Brown. Mr. Albino wrote: "We
believe that Winspear stock has further upside on a fully-diluted,
long-term basis and hence we recommend that current Winspear shareholders
do not tender to the De Beers offer." Mr. Albino added that because so much
of Winspear's value was left on the table, he believed that competing bids
for the company were possible.
Having suggested that a competing bid was possible, Mr. Albino went on to
suggest one possible source of such bids. "We believe that Canada's
incumbent diamond producers offer more operating synergies than De Beers
does," he wrote; adding that some of those companies are massive, global
mining houses, with greater experience at mining narrow underground bodies
similar to the Snap Lake dike system. He went on to say that these
companies also had better expertise with operations in Canada's north, and
he added they also had a greater familiarity with the permitting process in
the Northwest Territories.
Mr. Albino continues to value Winspear highly, on a net asset value basis.
He suggests a conservative valuation of $6.52 per Winspear share, based on
a resource of 15 million tonnes, and using a 6-per-cent discount rate.
Using a 25-million-tonne resource, the net asset value rises to $9.10 per
share, and to a whopping $21.79 per share at a zero discount rate. Based on
Mr. Albino's calculations, the current De Beers offer would correspond to a
15-million-tonne resource, at a 10-per-cent discount rate, or to a resource
of about nine million tonnes at a 6-per-cent discount. As a result, Mr.
Albino termed the De Beers offer, "opportunistic and low."
Mr. Albino has been covering Winspear for well over a year. Last fall,
Deutsche Bank was one of the co-leads in a $14-million private placement of
Winspear shares and warrants, along with Mr. Ettlinger's Yorkton and
Canaccord Capital. The recently announced public offering, which is now
apparently on hold, was to be conducted with BMO Nesbitt Burns and
Canaccord Capital acting as co-leads.
Another analyst with a relatively recent valuation of Winspear is John
Barker, of RBC Dominion Securities, one of the firms retained by De Beers
to act as an adviser during the takeover process. Writing just after the
prefeasibility study had been released, Mr. Barker estimated Winspear's net
present value at $7.44, using a 10-per-cent discount, and discounting this
amount by a further 20 per cent to account for recent market trading levels
for the sector, Mr. Barker arrived at a $5.95 value for Winspear shares,
which he described as "offering an idea of a realistic market valuation per
share." It appears that RBC Dominion officials might have discounted Mr.
Barker's net present value calculation by a very much larger percentage
when they were providing advice to De Beers.
Michael Curran, analyst for Merrill Lynch & Co., was also busily evaluating
Winspear just after the prefeasibility study had been completed. Late in
April, he suggested that the company was valued at $6.50 per share, based
on the prefeasibility study parameters, and he offered an intermediate and
long-term accumulate recommendation for Winspear as a result, suggesting
that there would be increased interest in Winspear shares this summer. How
prophetic.
In early April, a BMO Nesbitt Burns analyst, Steven Butler, arrived at a
net asset value of $7.55 for Winspear, using a 6-per-cent discount, and a
$5.06-per-share value using a 10-per-cent discount rate. BMO Nesbitt Burns
has subsequently been retained by Winspear to act as an adviser as the
company attempts to rebuff the hostile takeover.
Canaccord analyst, Graeme Currie, has also been following Winspear closely.
In early May, just after a one-day trip to Snap Lake, he estimated
Winspear's net present value to be $6.13 per share, using a 5-per-cent
discount rate. He suggested that the current exploration program would
address most of the remaining program risks. The most significant risk, Mr.
Currie said, was the ability of the partners to replicate last year's carat
grade and diamond valuation figures, although he also noted that the
project had the potential to materially improve upon last year's numbers.
Diamond mining remains a misunderstood, if not entirely unknown industry to
most North American investors, and the parameters of Snap Lake are perhaps
better understood from a gold mining context. Based on the current price of
gold and Winspear's prefeasibility study, the Snap Lake diamond project is
the equivalent of a gold deposit hosting 12.6 million tonnes of ore,
grading 22 grams of gold per tonne, or 0.65 ounce per ton. The minable
resource included in the prefeasibility report is the equivalent of nine
million ounces of gold, and the entire 21.3-million-tonne global resource
contains the equivalent of about 13 million ounces of gold. Indeed, recent
drilling suggests that even that latter figure is outdated. Under the most
optimistic scenarios, should subsequent infill drilling prove the dike to
be suitably thick and continuous to the extremities of the latest drilling,
the Snap Lake dike could theoretically host the equivalent of about 25
million ounces of gold.
At the proposed production rate of 3,000 tonnes per day, Snap Lake would
produce the equivalent of more than 700,000 ounces of gold annually, with
the operating cost of production the equivalent of just $98 (U.S.) per
ounce of gold. De Beers' $259-million offer for Winspear and its
68-per-cent interest in Snap Lake is similar to offering $19.90 (U.S.) for
an equivalent ounce of gold contained in the global tonnage estimate, or
just under $29 (U.S.) for each equivalent ounce contained in the MRDI
prefeasibility mine plan.
The comparison of Snap Lake to a hypothetical gold mine is perhaps timely;
as Pangea Goldfields Inc. announced Friday that Barrick Gold Corp. had made
a $7-per-share offer for all outstanding Pangea shares. The friendly
takeover bid, for up to 29.2 million shares on a fully diluted basis, could
cost Barrick $204-million. Barrick, certainly no stranger to launching
takeover bids, is offering about $64 (U.S.) per ounce for the Pangea gold
resource. In a news release issued just two days before the friendly
takeover bid was announced, Pangea claimed ownership of a gold resource of
about 3.2 million ounces, or just over one-third of the gold equivalent
contained in Winspear's 68-per-cent share of the Snap Lake global tonnage.
Barrick was also involved in a recent hostile takeover attempt that turned
out poorly for them. Late in 1998, the company offered $4 per share for at
least 50.1 per cent of all outstanding Argentina Gold Corp. shares; an
offer that was apparently made after negotiations surrounding an offer of
$5.50 per share had fallen through. Argentina's management rejected the
offer, terming it "inadequate, opportunistic and coercive," and the company
stated it had a gold resource of about 4.5 million ounces. If so, the offer
amounted to about $22 (U.S.) per ounce. Argentina shareholders certainly
did not tender their shares in droves, and Barrick subsequently was forced
to up its offer to $5 per share. The revised offer brought more harsh words
from Argentina's board, which also unsuccessfully attempted to introduce a
poison pill to thwart the bid. In the end it was not required, as Barrick's
amended offer expired without a sufficient number of shares tendered, and
the matter died.
Argentina had been trading near $2 prior to Barrick's move, and traded up
to $5 as the gold major progressively upped the ante. Argentina shares
dropped back to as low as $3.61 in the days after the bid died, stabilizing
near $4, before beginning a modest new rally which seemed to suggest
something new might be afoot. Sure enough, just a month after Barrick's
takeover bid failed, Homestake Mining Company announced a friendly takeover
bid for Argentina, valued at $7.81 per share, and Argentina's intransigence
was rewarded.
Trading in Winspear reached new heights in the days immediately following
the announcement of the takeover. In all, 18.5 million shares were traded
last week, over 13 million of them in the first two days alone. The stock,
which had closed at $2.40 prior to the news, opened at $4.15 and has traded
in a narrow range near the $4.25 offer price, hitting a high of $4.35, and
touching a $4.10 low. Through the week, Bunting Warburg Inc. and BMO
Nesbitt Burns were the most active accumulators, each adding over 1.8
million shares to their accounts. Nesbitt was particularly active, on the
buy side for 5.4 million shares. At the other end of the spectrum,
Canaccord Capital was the largest net seller, dumping 2.2 million shares.
Winspear closed down one cent on Friday, ending the week at $4.21.
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