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MINING NEWS: Stornoway woos Ashton minority Three-way consolidation in Canada’s diamond industry will proceed despite vocal opposition from one target’s management team Rose Ragsdale For Mining News
Stornoway Diamond Corp. of Vancouver, B.C., worked up until a Sept. 18 deadline to win over minority shareholders of Ashton Mining of Canada Ltd., succeeding in wooing enough shareholders to move forward with the complex three-way merger.
Stornoway said late Sept. 18 that conditions of its offer for outstanding shares of Ashton and Contact Diamond Corp. were met, and Stornoway has given notice to the depositary to take-up all shares tendered under the offers and extend the offers until Oct. 2.
Stornoway proposed the ambitious merger with Ashton and Contact in July, seeking to create an entity that could lead diamond exploration and development in Canada. The transaction is valued at C$140 million,
Contact’s management and Ashton Mining’s majority shareholder endorsed the proposed combination shortly after it was announced, but Ashton’s management staunchly opposed the deal. Ashton’s majority stake, which represents 52 percent of the company’s outstanding shares, is held by subsidiaries of British mining giant RioTinto Ltd.
Ashton’s board opposed Ashton’s board of directors sent a letter to shareholders Sept. 11, saying the merger would dilute the value of the remaining 48 percent of Ashton’s outstanding shares.
“Ashton has laid out a clear path to value, while Stornoway is offering a clear path to greater dilution and risk that is not in the shareholders’ best interests,” John Cole, chairman of Ashton’s board, and Pierre Lebel, chairman of a special committee that evaluated Stornoway’s offer, said in a joint statement.
Ashton officials called the offer “financially inadequate” and said it failed to recognize the potential for a near-term increase in the company’s value from expected recovery of large diamonds in the Renard bulk sample now under way and from subsequent valuation of a 6,000-carat parcel of diamonds in 2007.
“The very best properties in the ‘new Stornoway’ would all be Ashton’s,” the managers said in a letter to the shareholders.
“However, your ownership stake in these key properties, the ones that Stornoway proposed the ambitious merger with Ashton and Contact in July, seeking to create an entity that could lead diamond exploration and development in Canada. The transaction is valued at C$140 million.”
Ashton: prize assets from Ashton Moreover, after the merger, Stornoway’s prize assets will all come from Ashton, they said.
“Ashton is Canada’s blue chip diamond exploration company and is on track to deliver one of Canada’s next diamond mines,” the managers said. “Ashton controls the Renard deposit, one of only two pre-feasibility stage (diamond) projects in Canada. Ashton also has three other projects at the active bulk sample stage.”
Stornoway, by contrast, has no pre-feasibility stage projects and no active bulk sample stage projects. Stornoway has no deposits with defined tonnage, they said.
In a business where the ability to recover large diamonds is a key value-driver, it is significant that Ashton has recovered 37 diamonds larger than one carat, while Stornoway has recovered none, they further noted.
Ashton’s managers also cited their own business plan as an advantage, saying it will create significant value for the company’s shareholders through 2007.
Ashton’s board said its recommendation was supported by an opinion from National Bank Financial Inc., which acted as the company’s financial advisor in the transaction.
Stornoway: merger would form premier company Responding to the criticism from Ashton’s management Sept. 13, Stornoway said it strongly disagreed with Ashton’s view of the merger and reiterated its perspective.
“The proposed combination of Ashton, Stornoway and Contact provides Ashton shareholders with an exceptional early stage opportunity to participate in the creation of Canada’s premier, diamond exploration and development company,” said Eira Thomas, Stornoway’s president and CEO.
“The facts are that Ashton’s minority shareholders will have the opportunity to participate in the full range of the combined company’s future prospects, including the Renard Project and several advanced exploration projects owned by Stornoway and Contact, if the Contact offer is completed,” Thomas said.
“The combination will create Canada’s leading, mid-cap, pure diamond exploration and development company with an expected pro forma market capitalization in excess of $200 million, a large and diverse shareholder base, no controlling shareholder and an enhanced capital market profile,” she said. “The combination is expected to result in significant value creation for all shareholders. The new company will have a world-class management team and the technical advice of Agnico-Eagle Mines Ltd., Stornoway’s strategic investor and an invaluable asset should the Renard Project advance to the mining stage.
Stornoway: Share breakdown about 31% to Ashton Thomas said Ashton shareholders (Rio Tinto and the minority shareholders together) will receive about 35 percent of the outstanding shares of the combined company after the combination of Stornoway and Ashton and about 31 percent after the three-way combination of Stornoway, Ashton and Contact.
She said the exact percentage breakdown between Rio Tinto and the minority Ashton shareholders is dependent upon how many shareholders elect the cash alternative or the share alternative under the offer. If all of Ashton’s minority shareholders take the offer and opt for share, they will receive almost the full 35 percent or 31 percent, respectively, of the outstanding shares of the combined entity and Rio Tinto will receive almost all cash.
However, Stornoway admitted that refinancing a bridge loan may result in additional dilution, reducing Ashton’s share of two-way combination to 30 percent and a three-way merger to 27 percent, respectively.
The number and size of large stones recovered in any deposit “is a meaningless statistic when viewed in isolation without consideration of, amongst other things, the total tonnage processed to recover those large stones,” Thomas said.
“Many factors contribute to the viability of a diamond project, and each of the advanced-stage projects of both Stornoway and Contact, including Aviat, Qilalugaq, Churchill and Timiskaming, along with Ashton’s development track Renard project, offer the potential to contribute future resources to the combined company,” she added.
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