Battle For Freewest Gets Ugly

Four days after Cliffs Natural Resources (CLF-N) upped its friendly bid for Freewest Resources Canada (FWR-V) in an attempt to trump a competing hostile offer from Noront Resources (NOT-V), the major is accusing its junior rival of potential trading irregularities and of overstating the value of its bid.

Cliffs sweetened its bid on Dec. 3, offering a fraction of a Cliffs share representing a fixed value of 90¢ for each Freewest share, above Noront’s final bid of 86¢ per share (in shares and warrants).

Freewest’s board of directors unanimously supported Cliffs’ enhanced offer, which works out to a 5.9% premium on Freewest’s closing price on Dec. 2 and values the company at about $211 million.

Cliffs had previously offered 70¢ per share, with 15¢ of that in the form of a planned spin-off of Freewest’s nonchromite assets. In its new offer, Cliffs plans to acquire all of Freewest, including its nonchromite assets.

Currently, Cliffs indirectly holds 29 million Freewest shares representing about 12.4% of the junior’s outstanding shares.

Noront is offering two of its own shares for every seven Freewest shares tendered, plus one warrant. The warrants would have a strike price of $4 per Noront share and expire five years after the date on which Noront first pays for Freewest shares tendered to the offer.

At the time Cliffs raised its offer price, Mackenzie Watson, Freewest’s president and chief executive officer, said Cliffs’ latest bid provided not only a higher value but was also “far less volatile” than Noront’s and gave shareholders liquid shares in a company with a market capitalization of more than US$6 billion.

“Now it’s time to pass the baton to someone like us, who have the corporate and financial ability to execute the project,” Joseph Carrabba told The Northern Miner. “You need a lot of people and skill sets to do that. Where we couldn’t be an exploration company, neither can they go into project development.”

But Wes Hanson, Noront’s president and chief executive, said in a telephone interview that if the reason Freewest shareholders invested in the company to begin with “was to have exposure to the Ring of Fire — one of the most unique mineral districts in the world — then they’d tender their shares to Noront as opposed to Cliffs.”

Noront has no intention of raising its offer to match Cliffs, he adds: “They can raise the bar by one or two cents and it’s not a game we’re interested in playing.”

Hanson argues that Noront’s offer is a “better deal” that includes the value of the future warrants and the company’s rising share price, and argues that Noront’s shares are just as liquid as Cliffs.

“I don’t really see their offer as being significantly greater in value than what Noront has already placed on the table,” he explains. “Undoubtedly, they’re an operating producer of greater size, but at the same token, a lot of Canadian companies started off as junior companies but because of the quality of their assets and management, they’ve been able to grow into major companies such as Barrick (Gold) and Teck (Resources). They all started as small companies, just like us.”

Now the war of words is heating up with Cliffs, the largest producer of iron ore pellets to North America’s steel industry, hurling its weight against the junior exploration company, which has yet to bring a mine into production.

On Dec. 7, Cliffs charged that Noront was making “false and misleading claims” to Freewest shareholders about the value of its bid and said it wants authorities in Quebec to investigate Noront’s public statements and “potential trading irregularities in Noront stock.”

Cliffs argued that Noront’s chromite deposits are “smaller, thinner and deeper than Freewest’s,” were unlikely to be developed “for decades” and that as a result there were “no synergies” in consolidating the two companies’ chromite deposits.

Cliffs also accused Noront of having “grossly overstated” the value of its bid by using “inappropriately aggressive assumptions to value the warrant component of its offer.”

The mining giant also noted there are “no significant tax savings from Noront’s offer, only a tax deferral if a shareholder does not sell the Noront shares.”

Noront violated securities laws, Cliffs says, because “bold pronouncements about the value of its offer” in various press releases were not included in filings with securities regulators.

“If we didn’t have facts behind each allegation we put out, we wouldn’t do that,” Carrabba says. “We don’t have to work on rumour and speculation, we’re pretty conservative. It’s disappointing we have to go there, but sooner or later we have to stand up for our shareholders as well.”

As part of its allegations, Cliffs says it believes the fraction of a warrant offered for each Freewest share under Noront’s bid “has a much lower value than advertised” and “ultimately may prove to be of zero value to Freewest shareholders.”

Noront valued the fractional warrant at 22¢ per Freewest share. But according to Cliffs, traditional valuation methods and market trading activity on the date of the announcement “indicate the actual value of the warrant is less than half that amount,” the company said in a statement.

“Only inappropriately aggressive assumptions can be used to arrive at the warrant valuation claimed by Noront,” the release continues. “We believe Noront did this deliberately to mislead investors who are not experts in valuing such complex and speculative securities.”

According to Cliffs, and based on Noront’s valuation, the fractional warrant represents 26% of the consideration it has offered to Freewest shareholders.

Excluding the fractional warrant, Noront’s offer of two of its own shares for every seven Freewest shares had an implied value of just 64¢ per Freewest share upon its announcement on Nov. 30, and has dropped as low as 55¢ within the past 21 days.

“While Noront’s share price has gone up since then, it appears to have done so on the basis of false and misleading statements,” Cliffs said in its statement. “At 64¢ per Freewest share, the announced value of Noront’s increased share consideration represents a 29 per cent discount to the fixed and certain value of 90¢ per share being offered by Cliffs.”

The timing and disclosure of Noront press releases is also suspect, Cliffs says. Before the markets opened on Nov. 19, Noront released its first public statement of “mineralized material” at its Eagle’s Nest property, quoting both estimated tonnage and grades, Cliffs says.

But none of the statements were compliant with National Instrument 43-101 standards, Cliffs charges: The timing and disclosure were “meant to manipulate the Noront share price and impact the perceived value of its bid for Freewest.”

After aggressively marketing the statements to investors throughout the day, Cliffs says, which led to a 39% increase in Noront’s share price, Noront released a “clarification” of its earlier press release in the late afternoon pointing out that its earlier release had not followed NI 43-101 requirements. (Such as disclosing that the results are conceptual in nature and that insufficient exploration had been done to define a resource.)

“Cliffs does not believe the omission of the above cautionary language was made in error.”

Noront’s Hanson declined to comment on the “specifics” of Cliffs’ allegations but told The Northern Miner that the company’s legal counsel was reviewing the claims.

“The specific that does count is that our offer is the only one that allows Freewest shareholders continuous exposure to the Ring of Fire and we continue to see that fact as having significant upside for Freewest shareholders,” Hanson says.

But in a press release the following day, Noront struck back. The junior said Quebec regulatory authorities had “alleged no wrongdoing
on the part of Noront and weren’t pursuing any further action.”

Management also argued that the 22¢ value of the fractional warrant was calculated using “standard market practices” and a volatility assumption of 100% and “compared conservatively” with current Noront one-month, three-month and one-year volatilities of 147%, 102% and 135%, respectively, (and 142% when Noront last granted options.) “If the Ring of Fire potential upside is realized, the value of the warrant has the potential to be materially higher than that stated in our offer,” the company said.

Noront argued that its intention to acquire Freewest was to extract synergies through the sharing of essential logistics infrastructure and that Cliffs was disregarding the “infrastructure development challenges in the Ring of Fire and the value creation” that Noront and Freewest shareholders would enjoy by sharing essential infrastructure.

It dismissed Cliffs’ allegations that it had tried to pump up its stock by releasing drill results — arguing that the company releases “material drill results as they become available” and said Cliffs’ arguments that deferring tax liabilities had no value was untrue.

Noront also urged Freewest shareholders to challenge Cliffs’ assertions about the technical work it had done on Freewest’s deposits over the last year and why the major should be “privy to material, non-public, insider information that is not available to all Freewest shareholders.”

In addition, Noront extended the deadline on its offer to Dec. 11.