Winspear fights De Beers takeover

In the face of an unsolicited takeover offer from De Beers Consolidated Mines (DBRSY-Q) that it deems “hostile, opportunistic and undervalued,” Winspear Diamonds (WSP-T) has initiated a program designed to ensure that shareholders understand the full scope and potential of its 67.76%-owned Snap Lake diamond project, while, at the same time, enticing a third-party bid.

The so-called “value recognition program” combines an updated scoping study and new additional drilling.

De Beers’ cash offer of $4.25 per share represents a 90% premium over Winspear’s 20-day average closing share price prior to the June 26 takeover announcement. The offer was mailed to Winspear shareholders on July 6 and is open for consideration for 21 days until July 28 of the current year.

In a letter to Winspear shareholders, Richard Molyneux, president of De Beers Canada, states: “We believe that Winspear shareholders should find the offer price attractive, particularly given the prefeasibility stage of the Snap Lake project, the technical and permitting hurdles involved and the significant expenditure that will be required to bring this project into production as an underground mine.”

Winspear says De Beers’ offer does not constitute a permitted bid under its shareholder rights protection plan, which requires that the offer be open for a minimum of 60 days. Under the plan, if any person or group acquires 20% or more of the company’s common shares without complying with the conditions of a permitted bid, then the holders of each outstanding share acquire the right to buy an additional share at half the market price of the prior 20-day average. In mid-July, Winspear’s board of directors issued a response by way of a director’s circular.

De Beers’ offer is conditional on several factors, including the tendering of at least 50.1% of Winspear’s 61 million fully diluted shares. Winspear would also be required to withdraw its shareholder rights plan and cancel its recently proposed $20-million equity financing, announced June 20.

De Beers currently owns 103,300 shares of Winspear, representing a 0.2% stake. The shares were purchased in the open market during the first two weeks of June at prices ranging from $2.07 to $2.50.

“The De Beers group seeks to enhance its presence in the growing Canadian diamond industry by acquiring a diamond project that has the potential to become an operating mine,” states De Beers in its offering circular. “Based on its analysis of the Camsell Lake property, the De Beers group considers that an underground diamond mine on the Camsell Lake property may prove economically viable.”

Winspear is the operator and undisputed owner of a 67.76% interest in the Camsell Lake joint venture, which includes the Snap Lake project. Aber Resources (ABZ-T) holds the remaining 32.24%. However, what was once a cordial relationship between the two partners has soured. Aber had taken Winspear to court to protect its stake in Camsell Lake after Winspear claimed that Aber’s interest should be reduced to about 15% because it failed to provide timely written notice of its intention to participate in the 1999 exploration program, as required under the joint-venture agreement. The British Columbia court ruled in Aber’s favour, confirming its 32.24% ownership of Camsell Lake.

With the threat of Aber’s potential multi-million-dollar damages lawsuit looming, Winspear has appealed the April 10 ruling.

The Snap Lake project is 220 km northeast of Yellowknife in the Northwest Territories and centres on the diamond-bearing NW dyke, a gently dipping, narrow body of mainly hypabyssal kimberlite that lies beneath Snap Lake. With an average thickness of 2.5 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.

Winspear is conducting an aggressive drill program of stepout holes northeast, east and southeast of the dyke’s known boundaries. Four drill rigs are turning, and a fifth is being mobilized. Results of this drilling will be used to update the July 2000 scoping study.

Based on 189 contiguous kimberlite drill intersections completed to the summer of 1999, the global resource is estimated at 21.3 million tonnes grading 1.97 carats per tonne, equivalent to 42 million carats. Within that resource, according to MRDI Canada, a division of AGRA-Simons, is an indicated and inferred minable resource of about 12.6 million tonnes averaging a diluted grade of 1.75 carats per tonne, equal to 22 million recoverable carats.

Last year, Winspear extracted a 6,000-tonne surface bulk-sample of the NW dyke from two separate pits on the northwestern peninsula of Snap Lake, where the dyke subcrops. The diamonds recovered from the bulk sample are valued at US$118 per carat, giving an equivalent value of US$206 per tonne.

A prefeasibility study by MRDI in April 2000 envisioned a 12-year mine life for a 3,000-tonne-per-day underground operation, based on the 12.6-million-tonne minable resource. A small open pit in the mine’s early days represents about 2% of the resource. MRDI limited the minable resource to a kimberlite thickness of greater than 2 metres and to a depth of about 370 metres below surface. Subsequent drilling has intersected the kimberlite dyke at more than 700 metres of depth.

Capital costs are estimated at $269 million and operating costs, at $94 per tonne. This 1.8-million-carat-per-year proposed operation would provide a robust 37.6% rate of return and a payback of 2.1 years.

“The De Beers announced offer substantiates what we already believe, that Snap Lake is potentially one of the most important undeveloped diamond projects in the world,” says Winspear President Randy Turner. “Clearly, De Beers recognizes this potential. Our view, however, is that they are grossly undervaluing it.”

He adds that the company has been approached by several third parties interested in reviewing the Snap Lake project and that a data room has been made available for qualified companies.

As part of the “value recognition program,” MRDI has prepared an updated July 2000 scoping study that incorporates 35 kimberlite intersections drilled since June 1999, plus other drilling results outside of the minable tonnage identified in the prefeasibility study. Most of these holes were completed since the beginning of this year.

The minable resource has been recalculated to a depth of 750 metres below surface and now sits at 39.5 million tonnes averaging a diluted grade of 1.7 carats per tonne and containing a total of 67 million recoverable carats — triple the amount determined in the prefeasibility study. The minable tonnage includes 27.6 million tonnes for that part of the dyke exceeding 2 metres in thickness. The remaining 11.9 million tonnes represents kimberlite ranging from one to two metres in thickness, for which increased dilution has been allowed.

John McConnell, vice-president of project development, says the scoping study builds on the prefeasibility work. “We have a great deal of confidence in these numbers. We’ve drilled 224 kimberlite intersections on this resource and are now striking kimberlite at predicted depths and locations almost 100% of the time.”

Based on the expanded resource, MRDI proposes to double the mine’s planned output to 6,000 tonnes per day by the end of 2006 through a phased expansion funded from cash flow. The expansion would occur between 2004 and 2006, and extend the mine life to 21 years.

To achieve the 6,000 tonnes per day, a second underground mining area would be developed and made accessible by a 700-metre shaft on the north shore of Snap Lake. Ore from the two underground areas would be processed in the same recovery plant.

The financial implications of the July 2000 scoping study appear positive. The estimated total revenue for the project increases to $11.5 billion, up from $3.8 billion in the prefeasibility study; after-tax cash flow jumps to $3.99 billion from $1.22 billion; net present value of the after-tax cash flow discounted at 8% is $1.38 billion, and at 5% is $2.01 billion, versus a respective $560 million and $750 million in the prefeasibility.

The updated scoping study predicts an after-tax rate of return of 39.4% and a payback period of 3.4 years. MRDI recommends developing Snap Lake in two stages. The capital cost to build the first stage, which includes essentially the same facilities as in the prefeasibility study, is $289 million. The second stage would require additional capital expenditures of $230 million, which Winspear says could be funded entirely out of cash flow from operations. Owing to improved economies of scale, operating costs would fall to a projected $88 per tonne.

“Management has long believed that the Snap Lake diamond project is one of the most important undeveloped diamond projects in the world,” says Chairman Hugh Morris. “It’s gratifying to receive this type of affirmation from MRDI Canada, and I can ensure you that Winspear will continue to work to understand fully the extent of the Snap Lake deposit, its value and its potential.”

Meanwhile, it’s business as usual at Snap Lake. As part of a $45-million exploration and development program designed to take the project through to the final feasibility stage, Winspear is driving a decline below the lake to collect up to 20,000 tonnes of kimberlite, of which 6,000 tonnes will be processed on site, beginning in the fall, in a 10-tonne-per-hour dense media separation plant.

The bulk-sampling program continues on schedule and within budget. The decline has been extended 700 metres to date and Winspear anticipates it will break into the kimberlite dyke sometime near the end of August. Construction of the 10-tonne-per-hour on-site process plant is about 80% complete.

Not only will the bulk sampling provide a definitive grade and value for the NW dyke; it will allow Winspear to gain mining experience in the kimberlite and firm up the technical aspects and costs of the mining plan.

Just prior to De Beers’ announced takeover bid, Winspear had made plans to raise $20 million in an equity financing to see it through bulk sampling, final feasibility and into 2001. Winspear currently has about $9 million in cash, including $5 million that Aber owes for its share of this year’s Snap Lake costs already incurred. The added cost of the value recognition program is about $2 million.

“Given the De Beers announced offer and the increased spending under the value recognition program, we may need additional funds during the course of the next several months to meet our cash requirements,” warns Donald MacDonald, chief financial officer. “Our focus in funding Winspear will be to ensure that we are able to increase the level of information available to shareholders in assessing the De Beers proposal, while in no way jeopardizing the value of our interest in the Snap Lake diamond project.”

The name of Winspear Resources was recently changed to Winspear Diamonds.