VANCOUVER — Struggling copper producer Mercator Minerals (TSX: ML) has reportedly been on the market since late September, and the company found a suitor in Intergeo MMC — a Russian-based resource company controlled by billionaire Mikhail Prokhorov's Onexim Group. On Dec. 12 the companies announced a business combination agreement under which Prokhorov's mining arm will hold an 85% stake.
Mercator had been struggling with operations at its Mineral Park copper-molybdenum mine located in northwestern Arizona, roughly 193 km southeast of Las Vegas. The company registered a net loss of US$168 million during the third quarter, and had a working capital deficit of US$94 million due to an outstanding US$87 million term loan. Mercator failed to make a principal payment of US$4.8 million under the loan agreement on Sept. 30, and announced it was reviewing strategic alternatives for a takeover or sale.
Intergeo had been attempting to score a public listing in Canada for around two years. The company cancelled an initial public offering (IPO) in 2012 due to what it labelled "unfavourable market conditions." Under terms of the agreement Intergeo's direct ownership interest, Daselina Investments, will forward up to US$14 million to Mercator's Mineral Park subsidiary in order to fund operations until the transaction is complete.
The cash advance by Daselina is part of a larger US$100 million investment, which will take the form of a private placement in the combined company at a price of roughly 13¢ per share. Around US$50 million of the placement will go towards funding principal payments under Mercator's outstanding loan facility.
Intergeo's shareholders, namely Daselina and Kirkland Intertrade, will receive roughly 8.35 shares in the combined company — which will be called Intergeo Mining — as well as a conditional share that allows for certain special rights, including the naming of the chairman and CEO. Mercator shareholders will receive one share in Intergeo plus one transferable put right for each Mercator share held that will entitle investors to sell an Intergeo share at 10¢. Shares of the company will be consolidated at a 1 for 50 ratio.
Intergeo will control three advanced-stage base metal projects in addition to Mineral Park, including: the El Pilar copper porphyry property in Sonora, Mexico; the El Creston moly property, also in Sonora; and Intergeo's Ak-Sug development-stage copper project in southern Siberia.
The company will be headed by current Intergeo CEO John Lill. The board includes eight Intergeo directors, with John Bowles the only member carried over from Mercator's board. Lill said in a release that "[the combined company] intends to focus [its] efforts initially on optimizing Mineral Park, bringing El Pilar to production and then developing Ak-Sug in a financially disciplined manner.”
Mercator had been unable to normalize production rates at Mineral Park due to what it called "capital contraints". The company had been struggling with cost reductions, and slashed its work force by 10% earlier this year. Mercator produced around 19.8 million lbs. of copper equivalent during the third quarter — including 9.9 million lbs. of copper in concentrates and cathode and 2.1 million lbs. of moly — which put it well behind a 2013 production guidance of 93 million lbs. of copper equivalent.
Mercator has traded within a 52-week window of 4¢ and 64¢. The company had dropped around 79% year-on-year to a historic low of 4¢ per share at the time of the deal. Following news of the announcement Mercator's shares jumped 100% on 32 million share trade volumes before closing at 9¢ per share at the time of writing. The company maintains 316 million shares outstanding for a $27 million press-time market capitalization.
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