Belmoral looking for buyer to take control position

Within five months Belmoral Mines hopes to find a buyer willing to spend about $24.9 million for two blocks of shares that, combined, represent up to 27.4% of the company’s equity.

In a twist on the White Knight scenario, Belmoral wants to place the common and preferred shares now held by the Continental Illinois Bank (Canada) with a compatible investor, an investor who would “add to our momentum,” says Kenneth Dalton, Belmoral’s executive vice-president.

In the world of business, the term “white knight” is usually used in connection with an unfriendly takeover bid when the object of the takeover bid seeks an alternative buyer — the white knight — to rescue it from the unfriendly bidder.

In this case, there is no takeover bid. Nonetheless, Belmoral is seeking a friendly buyer that would take on the role of protector.

What share purchase involves is a guaranteed — depending on the company’s continued viability — annual return of up to 18% or the ability to gain a substantial stake in a major gold producer. Mr Dalton indicates that potential buyers run the gamut from passive investors such as pension f unds to major mining companies. He also intimates that Belmoral would be amenable to a buyer not yet in the gold mining business that would be an investor in the company over the long haul.

Belmoral could be a logical target for an investor seeking exposure to gold. The company reported its first quarterly profit in three years during 1986’s third quarter and although fourth quarter results are not available yet, the company says it expects an operating profit of more than $7 million, excluding depreciation and amortization.

Preliminary 1986 figures show production of 52,617 oz of gold. Ore reserves have increased to 1.1 million tons and the company expects to further improve those reserves in 1987. Average reserve grade after dilution is 0.222 oz gold per ton.

By 1989 the company expects to be producing 125,000 oz per year at a cost of less than $200(US) per oz.

Belmoral paid $100,000 for the 5-month option to place the bank’s 3,058,859 common shares and 5,861,133 first preferred shares at $3 per common share and $2.69 per preferred share.

The common shares must be sold as a block, subject to a previous agreement giving two directors, Clive and Frank Brown, the right to buy 1,454,545 common shares at a predetermined price. That agreement was between the Browns and the bank and, although the price is not public, it is believed to be substantially higher than $3.

The preferred shares must also be sold as a single block.

Mr Dalton says a buyer might buy either block or both blocks or there may be separate buyers for the common shares and the preferred shares.

There are no restrictions on trading either of the securities once the sale is made. The common shares are listed on the Toronto, Montreal and Vancouver stock exchanges while the preferred shares are unlisted.

The first preferred shares are convertible into Belmoral common shares in December, 1988, on a share-for-share basis provided the market price is at least $2.69 per share. They are also retractable at the option of the holder after that at a price of $2.69 plus a 9% annual premium and redeemable at the option of Belmoral at the same price also after December, 1988.

As well, the holder of the preferred shares has the right to elect annually two directors.

The bank acquired its shares in December, 1985, as part of a refinancing and reorganization of Belmoral. That refinancing virtually eliminated Belmoral’s debt which had risen to about $42 million.

Mr Dalton points out some attractive features available to a potential buyer of the preferred shares. The 9% annual premium is payable only when redeemed or retracted, so a buyer would assume all of the premium that has accrued since December, 1985. As a result, if the buyer purchases the shares in June and exercises the option to retract them in January, 1989, the buyer would receive a 27% yield over about 18 months or an annualized yield of about 18%.

So, while covered by that high yield, the convertible feature makes the potential for capital gains an added benefit.

It’s unlikely, however, that a buyer who intends to retract them as soon as possible would be suitable to Belmoral. What’s more, Belmoral’s preference would probably be to have the preferred shares converted in order to avoid paying out what would amount to about $20 million in January, 1989, to redeem or retract the preferred shares.

If converted and combined with the common shares also up for sale, the two blocks of shares represent about 27.4% of the company’s issued capital. With the next largest block of shares, about 14% if all the preferreds were converted, belonging to the two Brown brothers and their families, the shares now up for sale effectively represent control of Belmoral. The preferreds alone, if converted, represent the largest single block of shares at 17.9% after conversion.

Mr Dalton says several parties have shown interest in buying the shares, but no serious offers have been made.

“We’re talking, but nobody’s right at the table,” he says. “There’s lots of people just tire kicking.”