Canada’s diamond industry has received a wake-up call from South Africa’s
Winspear is the operator and 67.76% owner of the promising Snap Lake underground diamond project in the Northwest Territories.
The cash offer of $4.25 per share represents a 77% premium over Winspear’s closing price of $2.40 on June 23 and a 90% premium over its average closing price for the previous 20 trading days.
Winspear’s board of directors has rejected the offer, calling it opportunistic, hostile and undervalued. “De Beers’ offer appears timed as an attempt to acquire Winspear just as the viability of the Snap Lake project is being further evidenced,” the board states, adding that “the offer does not constitute a permitted bid under Winspear’s shareholder rights protection plan.”
Winspear is reviewing all its alternatives and has retained BMO Nesbitt Burns and Blake, Cassels & Graydon as advisors to its board of directors.
In a prepared statement, Richard Molyneux, president and chief executive officer of De Beers Canada, said: “We believe that our offer provides full and fair value to Winspear shareholders, particularly given the prefeasibility stage of the project, the technical and permitting risks involved and the significant expenditure that will be required to bring this project into production.”
De Beers has engaged NM Rothschild & Sons, RBC Dominion Securities and Fasken Martineau DuMoulin LLP as advisors.
Once a formal takeover circular has been mailed to shareholders, the bid will be open for a period of 21 days. Winspear states that the takeover bid does not constitute a permitted bid under its shareholder rights protection plan, which requires the offer be open for 60 days to allow management the time to seek competing bids.
De Beers’ offer is conditional on several factors, including the tendering of at least 50.1% of Winspear’s 61.1 million shares fully diluted. Management and insiders hold about 24% of the stock on a fully diluted basis.
Winspear would be required to withdraw its shareholder rights plan and cancel its recently proposed $20-million equity financing, announced on June 20. Also, Winspear would not be permitted to enter into any material contracts or agreements.
The financing, a short-form prospectus underwriting by BMO Nesbitt Burns and Canaccord Capital, relates to the issue of units for a total of $20 million. The price of the units, consisting of one share and half a warrant, was not disclosed.
Winspear and joint-venture partner
Situated 220 km northeast of Yellowknife, the Snap Lake project centres on the NW dyke, a gently dipping, narrow, single-phase kimberlite body that lies beneath the lake. With an average thickness of 2.4 metres, the NW dyke extends along strike in a north-southerly direction for 2.5 km and downdip to the east for 2.6 km. Winspear has yet to define the body’s limits, either downdip or along strike.
Based on drilling completed to the summer of 1999, a global resource is estimated at 21.3 million tonnes grading 1.97 carats per tonne, equivalent to 42 million carats. Within that resource, MRDI Canada estimates an indicated and inferred minable kimberlite resource of 12.6 million tonnes grading 1.75 carats per tonne and exceeding 2 metres in thickness, after allowing for mining dilution. This is equivalent to 22 million recoverable carats at a value of US$118 per carat, or US$206.50 per tonne.
Winspear is driving a decline below Snap Lake to collect up to 20,000 tonnes of kimberlite, of which 6,000 tonnes will be processed on-site in a 10-tonne-per-hour dense media separation plant, beginning in the fall. Not only will the underground program provide a definitive grade and value of the diamonds downdip of the previous sub-surface bulk sample; geological, geotechnical and hydrogeological will be obtained and used to establish underground mining conditions.
“It is potentially Canada’s first underground diamond mine,” says Tom Beardmore-Gray, senior vice-president of De Beers Canada. “We do have a significant amount of expertise in underground diamond mining, and that has certainly been a contributing factor in making this offer. We believe that it’s a project that we can add value to and move forward on. Obviously we’re continually reviewing projects all around the world with a view to making a return for our shareholders. We would certainly like to be an operator in Canada.”
Aber’s potential damages lawsuit against Winspear and Winspear’s appeal of a British Columbia court ruling that confirmed Aber’s 32.34% ownership of Snap Lake has not deterred De Beers from taking a run at Winspear.
Glenn Brown of Haywood Securities says De Beers’ offer gives little recognition to either the minable resource or the rich dyke system at Snap Lake. The offer equates to US$11.75 per carat for stones that are valued at US$118 per carat.
“Winspear has been put into play,” says Brown, “but it remains uncertain if a white knight will appear on the horizon in order to raise the stakes.”
Yorkton Securities’ retail analysts Doug Leishman and Art Ettlinger, who had last set a target price of $7 per share for Winspear, say the offer by De Beers appears inadequate. “It is not surprising then that De Beers has asked Winspear to waive its shareholder rights plan,” the analysts write. “This is exactly what these plans are for: to protect the company from inadequate takeover offers.”
In April, MRDI completed a prefeasibility study of the project. Based on the indicated and measured resource, a 12-year mine life was predicted for a 3,000-tonne-per-day underground mining operation. A small open-pit in the mine’s early days would represent about 2% of the minable resource. Capital costs are estimated at $269 million. Given the margin between the projected operating cost of $93.62 per tonne and the kimberlite value of $299 per tonne, the project has a 37.6% after-tax discounted internal rate-of-return and a payback of 2.1 years.
Graeme Currie of Canaccord Capital estimates an after-tax net present value (NPV) per Winspear share of $6.13 at a 5% discount rate. His base case model uses minable reserves of 12.5 million tonnes, no optimization of grade control and 65 million issued shares. Currie says the global resource is long overdue for recalculation as subsequent drilling has expanded the strike and downdip perimeters of the NW dyke. For every 10% increase in resource tonnage added to reserves, the NPV in Currie’s model rises about 50 per share.
“We do not see any recognition of the enormous expansion potential that exists at Snap Lake in the De Beers bid,” states Currie.
On the other hand, John Kaiser of the Kaiser Bottom-Fishing Report, says there is no doubt the bid is opportunistic. “[The bid] takes advantage of Winspear’s predicament as a junior trying to develop a diamond mine in a hostile permitting environment and in the context of a foolish lawsuit that carries a high risk of a debilitating damage judgment,” Kaiser states. “The uncertainty of permitting timelines, possible technical difficulties in mining a shallow-dipping dyke under a lake, and being at the mercy of financial bullies are all reasons for Winspear shareholders to embrace a cash takeover bid at $4.25 today rather than wait for years as Winspear undergoes the same dilution fate
The Winspear offer represents De Beers’ first major step to become a Canadian diamond producer. The South African diamond giant has watched from the sidelines as Australia’s
Through Monopros, its exploration arm in Canada, De Beers has had moderate exploration success at the Kennady Lake joint venture with
De Beers is believed to control 65-70% of the world trade in rough diamonds through its London-based marketing subsidiary, the Central Selling Organization (CSO). Last year, De Beers secured an agreement with BHP to buy 35% of the run-of-mine production from Ekati for three years.
De Beers posted record diamond sales of US$3.5 billion for the first half of 2000 — 44% higher than in the corresponding period of 1999. Demand has been driven by the continuing strength of the U.S. market. Earnings in 1999 totalled US$686 million, up 83% over 1998, while operating cash flow for the year was almost US$2 billion.
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