ARM, Vale To Turn Teal Into 50-50 JV

VANCOUVER– In a roundabout deal, Vale (RIO-N) is paying a hefty premium to get its hands on half of Teal Exploration and Mining (TL-T, TLXMF-O).

Teal holds several advanced-stage projects in Africa, specifically copper and cobalt exploration and development projects in Zambia and the Democratic Republic of the Congo (DRC), as well as a gold exploration project in Namibia.

In a two-step deal, the South African black economic empowerment entity African Rainbow Minerals (ARM) — which already owns 65% of Teal — is offering $3 per share in cash for the rest of Teal, using up about $57 million in cash provided by Vale. ARM will then hand over half of Teal to Vale, getting about $24 million in cash for the 15% difference.

Going forward, Vale and African Rainbow will then operate a 50-50 joint venture for the future development and operation of Teal’s assets.

It’s not too surprising that Teal’s board is recommending non-ARM shareholders tender their shares to the bid, since the offer price represents a premium of 400% over Teal’s 60¢ closing price the day the deal was announced (Dec. 12). Compared with the 30-day volume-weighted average price of Teal shares up to Dec. 12, the offer stands as an 831% premium. And relative to Teal’s 120- day volume-weighted average share price, the deal offers a 123% premium.

Teal has 53.9 million shares outstanding.

The deal still needs a regulatory stamp of approval, and the approval of two-thirds of Teal’s voting shareholders at a meeting in February. The latter, at least, shouldn’t be a problem: on the day the deal was announced, investors boosted Teal’s share price by $2.15 or 307% to close at $2.85. The company has a 52-week trading range of 18¢-$5.

So what is Vale getting for its $80 million?

The Konkola North copper project covers 44 sq. km in the Konkola region of the Zambian Copperbelt. In the South and East Limbs of the project, Teal has delineated an inferred resource of 78.8 million tonnes grading 2.14% copper; Area A and the Area A Extension, which are south of the East and South Limbs, host another 219.5 million inferred tonnes grading 2.64% copper.

Teal’s exploration efforts at Konkola have been focused on Area A, where the company has drilled almost 18,000 metres in its recent program. Teal will use the results to upgrade and, it hopes, expand the current resource. And Teal recently completed a revised feasibility study for the South and East Limbs, where plans focus on rehabilitating and using infrastructure from the adjacent Konkola mine. More work is required before the final feasibility study will be released.

Also in Zambia, Teal holds a 70% interest in the Mwambashi copper project, a joint venture with Korea Zinc. Mwanbashi is home to 8.6 million indicated tonnes grading 2.43% copper and 0.07% cobalt, in an openpittable deposit.

Teal holds three other large exploration licences in Zambia: The Copperbelt Exploration Area is a joint venture with Korea Zinc, with Teal holding 70%; the Kafue Exploration area is a joint venture with BHP Billiton (BHP-N, BLT-L), with Teal holding 51%; and the three other exploration licences are wholly owned by Teal.

In the DRC, Teal is exploring the Kalumines copper-cobalt property through a joint venture with state-owned mining company Gcamines. The 77-sq.-km property hosts four areas of near-surface mineralization; Teal has focused in on one, called Lupoto. Lupoto is home to 14.2 million indicated tonnes grading 2.47% copper plus 9.13 million inferred tonnes of 2.04% copper. The deposit strikes for 3.7 km, is about 25 metres thick, and sits close to surface. It is open for expansion along strike and at depth.

Teal’s Namibian landholding comprises the Otjikoto gold project and Otavi exploration area. The large Otavi area, which covers more than 3,000 sq. km, encompasses Otjikoto, where Teal has defined an indicated resource of 23.3 million tonnes grading 1.4 grams gold per tonne plus 19.4 million inferred tonnes averaging 1.41 grams gold.

Financially, Teal is stretched. The company reported a $14.1-million loss for the third quarter. At the end of that quarter, Teal had fully used its unsecured $85-million facility, repayable in August 2009, and emphasized that it was dependent on its BEE partner for continued support. African Rainbow is lending that support, having offered a letter of financial support providing the company with up to 385 million South African rand (about $48 million) to use until September 2009.