VANCOUVER — As it works to fend off a hostile takeover bid from Waterton Global Resource Management, Chaparral Gold (TSX: CHL; US-OTC: CRRGF) has boosted the gold resource at its Converse project in north-central Nevada to 6.6 million oz. gold and 41.6 million oz. silver.
The irony is that Waterton’s 50¢-per-share bid ascribes zero value to Chaparral’s projects, so the added ounces likely do not mean much to the private equity fund.
Waterton announced its bid for Chaparral on Feb. 18, less than two months after the company listed on the Toronto Stock Exchange. Chaparral was borne of a takeover: when Hochschild Mining (LSE: HOC; US-OTC: HCHDF) acquired International Minerals last year to consolidate ownership of their two joint-ventured mines in Peru, Chaparral was spun out to hold International Minerals’ non-Peru assets.
Waterton’s 50¢-per-share offer values Chaparral at $58.8 million and represents a 22.5% premium to Chaparral’s volume-weighted average share price in the 20 trading days leading up to the offer.
That sounds good, until Chaparral’s treasury is taken into account. As of the end of 2013 the company had working capital of $59.7 million, including $49 million in cash and equivalents. As such, Waterton’s bid ascribes zero — or even negative — value to Chaparral’s two projects, which are the development-stage Gemfields gold project, which is part of the larger Goldfield property, and the advanced exploration-stage Converse gold project, both in Nevada.
That Waterton’s bid incorporates a premium means the market has also been giving Chaparral zero credit for its assets. Before Waterton’s offer, Chaparral had a $51.2-million market capitalization.
Chaparral’s directors have nevertheless decried the bid, calling it undervalued and opportunistic. Two weeks after Waterton made its offer, Chaparral’s board outlined why it thinks investors should not tender their holdings.
The negative valuation for Gemfields and Converse top the list. The board also pointed to its “aggressive” search for value-enhancing alternatives, gold’s 28% price decline during 2013, the bid’s low multiple relative to similar deals, the scarcity of large, low-risk gold assets like Chaparral’s Nevada projects, the company’s strong balance sheet and the bid’s 12 conditions.
“The unsolicited hostile bid by Waterton is ridiculously low, based on every economic metric that we apply,” said Chaparral CEO Nick Appleyard. “The bid fails to recognize the fundamental value in either our flagship Goldfield property or our large Converse property. Our board absolutely rejects this bid and recommends that Chaparral shareholders do not tender their common shares.”
For its part, Waterton says the premium is notable, the deal would give investors immediate liquidity, the likelihood of a competing offer is low and the bid is fully financed. Moreover, Waterton points out it will cost hundreds of millions of dollars to develop Gemfields and Converse, funds that Chaparral will have trouble raising, and the projects also have to navigate long, complicated permitting processes. Instead of hanging on through these challenges, Waterton says shareholders should get cash for their shares now.
Chaparral says shareholders — including all directors and officers of the company — that collectively control more than 50% of the company’s outstanding count have indicated they will not tender, though binding agreements have not been signed.
The bid is open until March 27.
While it planned its fight against Waterton’s hostile approach, Chaparral was also busy plugging data from 30 new holes into the resource estimate for Converse. Located in Nevada’s Battle Mountain–Cortex gold trend, Converse hosts skarn-related gold–silver mineralization in two deposits, known simply as North and South, that wrap around a central intrusive.
The new drilling boosted the project’s measured and indicated gold count by 18%, to 6.12 million oz. gold and 38.1 million oz. silver contained in 363 million tonnes grading 0.5 gram gold per tonne and 3.3 grams silver per tonne. Inferred resources add 600,000 oz. gold and 3.5 million oz. silver from 37.5 million tonnes averaging 0.5 gram gold and 2.9 grams silver.
“Converse is a large, low-grade gold deposit in close proximity to other operating mines and regional infrastructure,” Appleyard said. “This updated mineral resource shows that Converse is now one of the largest undeveloped gold resources in North America.”
A late-2011 preliminary economic assessment outlined an open-pit, heap-leach operation at Converse churning through 45,000 tonnes per day to produce 2.2 million oz. gold and 8.5 million oz. silver over a 13-year mine life. After a US$455-million capital investment, the mine would be able to produce an ounce of gold for just US$745, net of silver credits.
Based on a US$1,300 per oz. gold price, a US$25 per oz. silver price and a 5% discount rate, the project carries an after-tax net present value (NPV) of US$120 million and would generate an 8.6% after-tax internal rate of return (IRR).
The new, larger resource at Converse could lift those numbers. In the meantime, Chaparral has another, more advanced project to work. The Gemfield project is expected to produce gold in mid-2016, provided permitting wraps up in mid-2015 as expected and Chaparral is able to obtain financing.
For $151 million, Gemfield could become an open-pit, heap-leach mine producing 76,000 oz. gold annually, according to a mid-2013 feasibility study. Current reserves support just over a six-year mine life. Using a US$1,350 per oz. gold price, the project carries an after-tax NPV of $73 million and could generate a 20% IRR.
On news of Waterton’s bid in mid-February, Chaparral’s share price jumped 10.5¢ to 54¢. The next month shares climbed as high as 63¢ before settling to 59¢, which means Waterton’s bid no longer represents a premium. Chaparral has 118 million shares outstanding.
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