SolGold go-it-alone strategy debated ahead of October showdown – shareholders, bankers

11 August 2020 - 08:54 am UTC

by Patrick Harris in London and Claudia De Meulemeester in Perugia

 

  • Livermore Partners supports SolGold management
  • Cornerstone lobbies for joint sale process
  • BHP, but not Newcrest, seen as likely to make offer - bankers

 

Besieged miner SolGold risks alienating shareholders and potential acquirers as it approaches a requisitioned general meeting and the lifting of a standstill agreement with BHP in late October, shareholders and bankers following the situation said.

 

The Australian-headquartered company controls the highly prospective Cascabel concession and Alpala copper-gold porphyry project in Ecuador, through its 85% ownership of local subsidiary Exploraciones Novomining S.A. (ENSA) in which Cornerstone Resources holds the balance. Cornerstone is the subject of a hostile takeover offer by SolGold that was formerly rejected last month.

 

Cornerstone is itself a 7.6% shareholder in its would-be acquirer and last month announced a requisitioned general meeting, to be held from the 27 October, to remove SolGold’s board and support a strategic review of the business.

 

Meanwhile, SolGold’s largest shareholders BHP, with just over 13.6% but subject to a standstill agreement that expires in mid-October, and Newcrest Mining holding just under 13.6%, are widely reported as potential acquirers of the business.

 

“I expect all sophisticated shareholders plus Newcrest and BHP will support a capable board put forward by Cornerstone at the end of October,” Brooke Macdonald, Cornerstone’s CEO, told this news service.

 

However, there is still a long way to go to release shareholder value and, while the company would perhaps develop better in other people’s hands, it is not a smart idea to change management at this time, David Neuhauser, managing director at Livermore Partners, a minority shareholder in SolGold, told this news service.

 

“I side with (SolGold CEO) Nick (Mathers) - I don’t think Cornerstone will get anywhere with that EGM. It would need the support of BHP or Newcrest, but then it would be clear they want to make an offer,” he said.

 

SolGold’s management could look to pre-empt any attempt to overthrow the board by itself launching a strategic review of the business, one of the bankers following the situation said.

 

Cinderella story or royalty rumble

 

The company’s royalty agreement and loan with Franco-Nevada and subsequent equity capital raise could be seen as attempts to frustrate any offer from BHP or a third party, two of the sectors bankers following the situation said.

 

In May, SolGold announced the USD 100m royalty funding injection from Franco-Nevada, with an option to upscale this to USD 150m. The Franco-Nevada investment, and potential upscale, provides funding for the full feasibility study of Alpala, this news service previously reported, citing SolGold’s Executive General Manager Ingo Hofmaier.

 

The project has a construction capex of around USD 2.7bn, and a valuation of USD 4.4bn. In June, the company conducted a c. USD 40m placing that did not see the participation of BHP or Newcrest, with the latter publicly criticising SolGold’s approach.

 

BHP and Newcrest are unlikely to be pleased with these moves, which would be dilutive to their share of SolGold and to the future cash flows of Alpala, one of the sector bankers said.

 

If BHP were not restricted until October it would likely have already made an offer for the business, this banker speculated. Newcrest is less likely to seek an all-out acquisition of SolGold, this banker and two further bankers said. It is not short of its own projects to develop and is not looking to build a portfolio of minority interests, one of these bankers said, but the difficulty is how to maximise value for the stake through either M&A or an ECM solution.

 

The capital raise was a bit strange, Neuhauser admitted, but seems to have had the effect of putting management in a stronger position, he added.

 

SolGold is right for consolidation, he said, so it must either be sold or build the Cascabel project itself, but it is difficult to see how current management can do that on its own. There is a lot of value in Solgold’s assets and a sale of the company would be desirable, he added.

 

As with Newcrest’s stake review, Livermore wants to get some perspective on the situation, Neuhauser said.

 

It may be the tactic is to attract an offer, and that COVID-19 might have slowed down a potential sale, but given that management own a large stake in the business it may also be focusing on developing the company itself, he said.

 

“You don’t want to get stuck in this asset, you want movement on an offer or on the Cascabel project, which has massive potential,” Neuhauser said

 

BHP is most likely interested in owning Cascabel given that so very few assets of this size are available in the world, Macdonald said. “It is a monster.”

 

“With copper prices on the up, and gold going gangbusters, I think someone will make a move towards end of the year,” Macdonald said. “We want to launch a strategic review and sale process in order to open up the data room to a wider universe of companies and get competitive tension to maximise value for shareholders.”

 

The sale process could be structured in such a way as to allow third parties to competitively bid, given the concentrated ownership, and that would support a friendly deal and encourage success, he said.

 

Timing is important because, at the end of October, the first 12-year concession period will have only two years remaining and so a feasibility study needs to be completed, Macdonald noted. A major miner will want to conduct this study itself, in-house, rather than rely on SolGold to do so, he added.

 

However, while Cornerstone’s funding obligation up to feasibility study stage are debt-carried by SolGold, after that it must contribute its full share of capital costs or risk share dilution, as per the SolGold announcement. Should Cornerstone’s equity holding in ENSA fall below 10%, SolGold has the option to buy out the stake for USD 3.5m.

 

SolGold may believe that by convincing the world that it is going to build the mine itself then it will encourage BHP, Newcrest or another party to swoop down with an attractive premium offer, Macdonald suggested.

 

However, it may be that SolGold truly believes it can independently develop Cascabel and so become the next regional BHP Fortescue, he said. But this will be very difficult to project finance traditionally without a portfolio of other assets, he added.

 

SolGold and BHP declined to comment. Newcrest did not respond to requests for comment.

 

SolGold’s Cornerstone offer

 

Meanwhile, SolGold’s ambition to buyout Cornerstone and thus consolidate ownership of Alpala continues.

 

SolGold’s first offer, of 0.55 of a SolGold share for each Cornerstone common share tendered, was rejected in March 2019.

 

On 30 June this year, SolGold returned with an all-stock offer of 11 ordinary shares of SolGold for each Cornerstone, which represented a premium of approximately 22% over Cornerstone's closing price on the TSX Venture Exchange on 29 June 2020 and a premium of 56% based on the volume weighted average trading price over the last 12 months. On July 14, Cornerstone formally rejected the renewed offer.

 

“SolGold’s hostile and underwhelming offer is essentially the same as first proposed in January 2019, given a share consolidation performed since then, and as such has been a sword of Damocles over Cornerstone’s head for the last 17 months,” Macdonald told this news service.

 

SolGold argues that consolidation of the Alpala Project into a single listed entity would simplify the structure of the project, whilst also removing the risk of dilution and future development funding finance for Cornerstone shareholders.

 

Better value can be achieved for both companies to be auctioned together, given it would be very unusual for juniors such as Cornerstone and SolGold to independently develop a project of this scale, Macdonald said.

 

Cornerstone would sell for a cash price that reflects the overriding value of the project and reflects precedent transactions, he said.

 

Cornerstone does not want to take SolGold paper, which is as illiquid as Cornerstone’s given the poor trading levels in Canada, he said. The company has written responses from over 65% of Cornerstone shareholders stating opposition to the offer so it has zero chance of success, he said.

 

“We have been at this poker table a long time and are not going to fold just before BHP’s release – the offer lapses a week before its standstill period expires,” he added.