Juniors KWG Resources (KWG-V) and Spider Resources (SPQ-V) are planning to merge in an attempt fight off a pair of hostile takeover bids by Cliffs Natural Resources (CLF-N), their partner for the Big Daddy high grade chromite deposit in the McFaulds Lake area of northwestern Ontario.
Cliffs, which holds a 47% interest in Big Daddy, is looking to take control of the project by buying KWG or Spider or both. KWG and Spider share a rotating operatorship and each hold 26.5% of the project with an option to earn up to 30% each.
The two juniors say the merger is “the next logical step” but the decision to join forces was made after Cliffs sent separate but similar friendly takeover proposals to them over the Victoria Day long weekend, putting both companies in the hot seat to accept within 48-hour and 24-hour timeframes. Both companies rejected the last-minute proposals and now Cliffs is drawing up its formal bids aiming to acquire one or both companies.
Cliffs bought its interest in Big Daddy and two adjacent projects, Black Thor and Black Label, in January when it acquired Freewest Resources for $240 million. The company says it wants to go about developing all of these projects as a single entity.
Cliffs offered 13¢ for each KWG share and 13¢ for each Spider share, however, Cliffs already owns 19.9% of KWG shares and 4% of Spider shares. The deal values KWG at $100 million and Spider at $86 million.
The price is a 62.5% premium over both companies’ closing share price on Friday, May 21, the day Cliffs first approached KWG and two days before it approached Spider.
Under the KWG-Spider deal, shareholders will hold 50% of the merged company.
KWG will transfer its interest in the railway right of way, its 1% net smelter returns royalty covering Big Daddy, Black Thor and Black Label and cash in an amount to be decided by KWG subsidiary Debuts Diamonds in exchange for Debuts’ interest in diamond exploration projects, an undecided number of Debut shares, and will distribute all of the outstanding common shares of Debuts to existing KWG shareholders.
Both KWG and Spider have agreed to pay the other a break fee of $2.3 million if the merger is not completed under certain circumstances.
The companies say they will still consider the Cliffs offers.
Cliffs says the merger offers little if any value to KWG and Spider shareholders and says the companies lack the technical expertise and financial strength to develop Big Daddy.
Spider discovered the Big Daddy project in 2006 and has been working together with KWG in the Ring of Fire since 1992.
In early May, an initial resource estimate for Big Daddy put indicated resources at 23.2 million tonnes grading 40.66% chromite and inferred resources at 16.3 million tonnes averaging 39.09% chromite.
Black Thor has inferred resources of 69.55 million tonnes grading 31.9% chromite at a cut-off grade of 25% chromite.
Chromite is processed into ferrochrome which is used to make stainless steel and Big Daddy has been said to be especially desirable because of its ratio of chrome to iron to waste, as the ore could be bought by steel makers without processing.
KWG shares shot up 6.5¢, or 81%, today on the merger news to 14.5¢ on a trading volume of nearly 26 million shares.
Spider shares rose 6¢, or 75%, to 14¢ on a trading volume of 28 million shares.
Both companies saw their shares rise to similar levels when the Big Daddy resource estimate was released early May.