Azco and Princeton announce merger plans

In attempt to form a multi-mine, low-cost copper producer, Princeton Mining (TSE) and Azco Mining (TSE) announced plans to merge into a single company.

The proposed merger would see Princeton consolidate its shares on a 5-for-1 basis, after which Princeton shareholders would receive one share of the merged company and half a warrant for each consolidated share. One full warrant enables the holder to buy an additional share at $3.95 in the first year and $4.25 in the second. Each Azco shareholder will receive 0.57 share of the merged entity for each share held.

On completion of the merger, the new company would have about 32 million shares outstanding, with existing Azco shareholders holding 14.5 million shares and Princeton shareholders holding 17.4 million.

Shareholders of both companies will vote on the proposed merger in January, 1996.

Initial reaction to the deal by the market was less than positive, leading to a selloff in Azco. Princeton remained relatively unchanged at the 60 cents level.

New York-based broker Muzinich & Co. argues that the deal does not benefit Azco shareholders. “It doesn’t make sense to sell low-cost assets to take on higher-cost assets,” says Muzinich analyst Lawrence Glaser.

Glaser is referring to Azco’s previously announced plan to sell to Phelps Dodge (NYSE) a 100% interest in its Sanchez oxide copper project in Arizona and a 70% interest in its Piedras Verdes property in Mexico. The total cost of the sale would be US$40 million.

Cash cost estimates for Azco’s Sanchez project are US55 cents per lb., compared with Princeton’s Similco operation in British Columbia which, at US95 cents per lb., is one of the highest-cost operations in North America. Princeton’s other major asset is the Huckleberry copper deposit near Smithers, B.C., which is at the permitting stage. Cash production costs at the property are projected at US65 cents per lb.

Azco’s market capitalization stands at $42 million, which represents a discount to Phelps’ cash offer for a portion of the company’s assets. “That [comparison] just shows the extent of shareholder dissatisfaction with Azco’s current management,” states Glaser.

Anthony Harvey, chairman of Azco, maintains that the market does not necessarily recognize a good deal when it sees it.

“Princeton brings strong management, a production history and cash flow to the table. Even after completion of the Phelps Dodge deal, on a combined basis, the two companies will have close to 3 billion lb. of copper resources.”

Muzinich, in concert with John Dreier (a former director of Azco), entered a proxy battle with Azco earlier this year over the latter’s proposed asset sale to Phelps Dodge.

Muzinich asserts that Azco would be better off developing the assets itself, and attempted to block the deal by soliciting shareholders to remove the company’s current board of directors and replace it with their own nominees.

Muzinich has since dropped the solicitation in favor of waiting for the results of a shareholder vote on the Phelps deal.

Shareholders are expected to vote on the Phelps Dodge sale on Nov. 14. Glaser is confident the deal will be rejected by shareholders.

The agreement with Princeton is not contingent on the Phelps Dodge deal proceeding.

If the Phelps Dodge deal is completed, Azco will be left with about US$30 million in cash after tax and other considerations, a 30% interest in Piedras Verdes, and a 100% interest in the Suaque Verde project in Mexico.

Princeton, which produced 18.6 million lb. copper from its Similco operations in the first six months of 1995, reported cash flow for the period (after changes in working capital) of $2.6 million.

James O’Rourke, president of Princeton, expects Similco to produce about 40 million lb. copper this year and next, at a cash cost of US95 cents per lb.

On completion of the financing for the Huckleberry project, Princeton will have a 60% interest in the mine, which is expected to produce about 65 million lb. copper per year for the first five years of its 15-year life. Cash costs during the first five years are estimated at US65 cents per lb.