Macarthur’s $100M Payday Disappears

VANCOUVER –It seemed too good to be true and it was: Macarthur Minerals(MMS-V, MMSDF-O) fell 45% on news that a $100-million deal for its Lake Giles iron ore deposit in Western Australia fell through.

In November 2007, Macarthur struck a deal giving LPD Holdings the right to acquire an 80% interest in Internickel Australia, Macarthur’s subsidiary and the owner of its Lake Giles iron ore project, for $110 million. At the time, the project hosted 82.5 million inferred tonnes grading 24.6% iron.

The agreement saw LPD pay $10 million for 30% of the subsidiary immediately. Macarthur agreed to spend 85% of that initial payment on a drilling program to expand the resource. Then, upon delineation of a 500-million-tonne resource, LPD had the right to pay $100 million to bring its stake to 80%. If it then wanted to buy Macarthur’s remaining free-carried 20%, it could do so for a negotiated amount of up to $40 million.

Macarthur went to work with the first $10 million and by mid-2008 had boosted the Lake Giles resource to 112 million inferred tonnes grading 24.6% iron. In fact, the company conducted six drill programs at Lake Giles over 2008, though it only released drill results from part of one program. Despite a lack of drilling news, there was no lack of news releases reminding investors that LPD was still looking to put down another $100 million for the project.

Furthermore, Macarthur said it planned to distribute 80% of the $100-million payday (after tax) to investors as a special dividend. The company only has just over 18 million shares issued, so if management followed through on that promise the holder of each share would get something like $3.50. That’s where things started to seem too good to be true — during 2008, Macarthur shares were never worth more than $2.50 and usually sat below $2.

In the fall came news that wet weather at Lake Giles had delayed drilling. The companies agreed to extend the deal deadline from late September to mid-November. Then it was extended to mid-December, and then to late February.

In November, while announcing one of the deadline extensions, Macarthur said the company provided LPD with a “positive independent geological report supporting the resource calculation which placed the proposed project “on track” and met all of the benchmark requirements for a move to completion of the acquisition by LPD.” Macarthur’s CEO then said in the release that LPD had informed Macarthur it intended to proceed with the second-stage acquisition for $100 million.

One key question remained unanswered: Had LPD dropped its requirement from the original deal that Lake Giles carry a 500-million-tonne resource?

With that issue never addressed, dealings continued. In December LPD Holdings, which until then had been representing another, unnamed party, revealed its partner to be Minmetals Mining, a subsidiary of China National Products. Macarthur’s management hoped news that a well-known major was involved in the transaction might improve investor confidence. That did not transpire.

Then the British Columbia Securities Commission (BCSC) got involved, slamming Macarthur for a litany of disclosure failings including insufficient discussion around liquidity, capital resources, related-party transactions, fourth-quarter items, and results of operations. In addition, Macarthur had to retract the life-of-project iron concentrate quantity and grade it had included in its technical reports, as National Instrument 43-101 regulations do not allow economic assessments of inferred resources. The BCSC also chastised the company for not releasing drill results.

Nevertheless, Macarthur pressed on. It held a shareholders’ meeting and got the official go-ahead for the $100-million deal. It extended the deadline deal to March 2. And then came the news: Minmetals Mining decided not to exercise the option. Macarthur’s share price went into freefall, losing $1 in a day to close at $1.20. It is worth noting that Lake Giles is the company’s only project.

Now LPD, Minmetals, and Macarthur have three months to find another buyer or rework the deal. If three months passes without a new agreement, Macarthur is entitled and intends to acquire back the 30% by issuing 4.7 million shares at $2.12 apiece. The company says that will give it full ownership and roughly $6 million in working capital.