Update: Noront ups its offer for Freewest to counter Cliffs

Shares of Freewest Resources Canada (FWR-V) were up 18.8% with more than seven million shares changing hands in early afternoon trading after news that Noront Resources (NOT-V) has increased its original offer for the company to counter a competing bid last week from Cliffs Natural Resources (CLF-N).

Noront is boosting its original offer for Freewest to an implied offer price of about C$0.86 per share (based on Noront’s Nov. 27 closing share price of C$2.25) in a transaction that values the fully diluted share capital of Freewest at about C$222 million.

The new Noront offer, which the company says is “final” –represents a 173% premium to Freewest’s closing share price on Oct. 2, the day prior to the announcement of Noront’s original offer.

Freewest shareholders are being offered two Noront shares for every seven Freewest shares tendered, plus one Noront warrant, with each full warrant entitling the holder to acquire one Noront share, for every seven Freewest shares tendered.

The warrants will have a strike price of $4 per Noront share and will expire five years after the date on which Noront first pays for Freewest shares tendered to the offer.

On Nov. 23, Cliffs signed a definitive agreement with Freewest under which each Freewest shareholder would receive a fraction of a Cliffs share representing a fixed value of 55¢, and one share of a new company, Freewest Resources (or “New Freewest”), which will hold the junior’s current portfolio of non-chromite exploration properties, estimated by Freewest to have a value of 15¢ per share, for a total estimated value of 70¢, per Freewest share.

“Eighty-six cents is a lot more than 70¢ but my guess is that if Cliffs decides they want it, they’ll be back,” says David MacGregor, a mining analyst with Longbow Research who has covered Cliffs since the mid-1990s. “You probably haven’t heard the end of this yet.”

Noront’s latest offer will expire on Dec. 11 and the company has waived all conditions of the original offer including the condition that at least 66 2/3% of the total number of shares outstanding (calculated on a fully-diluted basis) would be validly deposited under the offer by the expiry time.

Under the offer, and based on the number of fully diluted Freewest shares, Noront will issue about 73.7 million shares and 36.8 million warrants (assuming exercise of all in-the-money Freewest warrants and options, and excluding any shares issuable upon exercise of the Noront warrants).

“Noront will focus on completing the necessary exploration on Freewest’s chromite deposits, adding that information to Noront’s already outstanding resource at the Blackbird deposit,” Noront’s president and chief executive, Wes Hanson, outlined in a prepared statement. “This will result in a larger, more valuable chromite resource that would attract the attention of global companies that are actively developing and mining chromite and producing ferrochrome.”

In a conference call announcing Cliff’s bid for Freewest on Nov. 23, the company’s president and chief executive, Joseph Carrabba, said he believed Freewest’s chromium assets are world-class deposits with the potential to support an open-pit mine producing 1-2 million tonnes per year for more than 30 years.

The ore would be further processed into 400,000-800,000 tonnes of ferrochrome. Currently only four countries produce chromium in significant amounts: South Africa, Kazakhstan, Finland and Turkey, and Carrabba said he believed Freewest’s chromium assets could make up between 6% and 11% of the global supply.

“Steel mills are pretty apprehensive about the whole South African source because of depleting ore reserves, intermittent power supply and civil unrest so it does look like Cliffs would get a pretty good share of the export market, MacGregor of Longbow Research said.

In a press release announcing Noront’s revised bid, the company argued that Freewest’s management in unanimously supporting Cliff’s offer had “failed its shareholders” because it “does not allow shareholders to continue to benefit from the exciting exploration potential of the Ring of Fire.”

In addition, Noront stated that Freewest’s management had negotiated “preferential treatment for themselves with respect to their options by receiving cash at a premium to the current Freewest share price, at the expense of its shareholders; undertaken a private placement from Cliffs’ at a discount to the Cliffs’ offer price; and agreed to conditions with Cliffs’, such as the break fee, and a timetable for completion that frustrates and hinders other potential competing offers.”

(On Nov. 25, the TSX Venture Exchange gave the go-ahead for Freewest to issue 6.91 million shares to Cliffs at a price of $0.60 per share, for proceeds of 4.1 million. Following the private placement, Cliffs will indirectly hold about 21.6 million shares of Freewest, representing 9.75% of the Freewest shares that will be outstanding.)

Noront also noted that the C$0.15 per share value of the New Freewest share under Cliff’s offer “is highly inflated” and argued that it would be difficult for Freewest shareholders “to realize any significant value from these shares in the near term due to illiquidity of the stock and expected selling pressure upon listing.”

MacGregor of Longbow Research says it’s likely that Cliffs will be back with another offer if it really wants to develop Freewest’s chromium assets because the transaction in terms of its total value is relatively small for Cliffs historically. “Matching that bid financially would not be a challenge for Cliffs,” he says. “It has substantial cash on hand, a lazy balance sheet and capacity to raise capital…and because of its size and the resources it has access to, they have access to other sources of capital that Noront does not.”

MacGregor also noted that Cliffs is a very transparent organization and its stock is very liquid – additional advantages that could appeal to Freewest shareholders. Finally, Cliffs probably has the economic clout to develop the project. Cliffs’ chief executive said capital costs for the project were estimated at about US$800 million, excluding the cost of building a 300-km railroad spur to hook up with the CN line somewhere near the town of Nakina in the James Bay lowlands.

“It’s a credible assertion that Cliffs can raise that capital,” MacGregor argued, “whether it’s internal funds or gathering together a group of investors to do it with them. They have a long history of joint ventures working successfully and if they decided they didn’t want to do this exclusively on their own account, they have a long history of making joint ventures work.”

Freewest Resources currently owns 100% of the Black Thor and Black Label deposits, and 50% of the Big Daddy deposit, which is a joint venture with Spider Resources (SPQ-V) and KWG Resources (KWG-V).