Cadiscor and Tiomin call off proposed merger deal

A risk of legal action from Jaguar Financial (JFC-T, JGFCF-O) was enough to derail a proposed friendly merger between Cadiscor Resources (CAO-V) and Tiomin Resources (TIO-T, TMIRF-O).

Under the business combination proposed in early February, existing Tiomin and Cadiscor shareholders would own about 53% and 47% of the new company, respectively.

As part of the deal, Tiomin agreed to immediately lend Cadiscor $7.5 million through a debt facility to quickly refurbish its Sleeping Giant gold mine in northern Quebec and fast-track it back into production.

If the Cadiscor-Tiomin transaction had been approved, the new company would have had about $15 million in cash and equivalents and annual production of about 50,000 oz. gold per year when Cadiscor’s Sleeping Giant mine started production in the fourth quarter.

But on Feb. 13, Jaguar Financial, which owns about 10.1% of Tiomin’s stock, called a shareholders meeting for the purposes of removing Tiomin’s board of directors and electing a new slate.

“If we had not stepped forward Tiomin would have loaned Cadiscor $7.5 million without the approval of shareholders,” Jaguar Financial’s president and chief executive, Vic Alboini, said in an interview.
Jaguar also opposed the deal because it was “another example of shifting cash away from shareholders to companies that have common directors,” Alboini explained.

Jean-Charles Potvin, a founder of Tiomin who has been chief executive and a director since its inception in 1992, is also a director of Cadiscor.

Six days after Jaguar called the shareholders’ meeting, Tiomin and Cadiscor announced that they would not pursue the business combination.

“The proposed Cadiscor transaction would have resulted in an immediate $7.5 million loan, representing over half of Tiomin’s cash resources, to Cadiscor, a company of which Mr. Potvin is a director,” Jaguar Financial stated in a press release. “If Tiomin’s board had its way, the $7.5 million loan would have been made to Cadiscor before the transaction was considered by Tiomin shareholders.”

Tiomin rejected the allegations arguing not only that the proposed transaction was fair and had been reviewed by an independent committee of the board and that there were “indications from an investment dealer that the transaction was fair to Tiomin,” but that it was also “not abnormal for individuals to sit on the boards of both companies involved in a transaction.”

In a press release on Feb. 25 Tiomin explained that Potvin had followed standard procedures and abstained from voting on the proposed business combination.

Jim O’Neill, Tiomin’s vice president corporate controller, told The Northern Miner that there is no specific legal requirement under the Canada Business Corporations Act or TSX rules to seek shareholder approval for the loan portion of the proposed transaction. “The loan was not an isolated transaction but rather part of the business combination proposal that Tiomin planned to take to a vote of shareholders,” O’Neill said.

“If for some reason the proposed transaction was not approved by Tiomin’s shareholders, the repayment terms were expected to automatically shorten, resulting in Tiomin recovering its principal and interest at commercial rates. Tiomin was sensitive to the possibility that if the shareholders collectively did not vote for the transaction, it would be reasonable to assume a long-term debt facility granted to Cadiscor would likely not be desirable.”

O’Neill also argued that companies comparable in size to the proposed merger of Tiomin and Cadiscor have market values of two to four times the combinated market capitalization of Tiomin and Cadiscor and said Tiomin’s shareholders may believe Jaguar’s actions have “denied them a highly accretive merger.”

Tensions between Tiomin and Jaguar Financial have not eased since the controversy over Cadiscor, however.

Jaguar has also accused Tiomin of not acting in the interests of its shareholders on other transactions, including Tiomin’s investment in Kivu Gold Corporation, a private company it argues is controlled by Tiomin’s directors and officers.

On Feb. 20, Tiomin announced that it had raised its stake in Kivu Gold from 16.9% to 33.5% through a private placement worth $1.42 million.

According to a Tiomin press release, the company now owns 10.62 million shares of Kivu or about 33.5%, while Tiomin’s directors, officers and employees hold 12.55 million shares of Kivu, of which 10 million shares are held by Potvin, and 1.25 million shares are held indirectly by Bob Jackson, the president and chief executive of Tiomin, who are also directors of Kivu.

“Although the company investment in Kivu was a related party transaction, the completion thereof was not subject to the shareholders meeting and valuation requirements of Multilateral Instrument 61-101 as the fair market value of the investment did not exceed 25% of the market capitalization of the company,” Tiomin stated in a press release.

Jaguar Financial didn’t see it that way.

“Tiomin’s directors and officers did not disclose the first $2 million Kivu investment in a press release; instead they dropped the disclosure on this investment in a note in the 2007 annual financial statements, more than one month after the first Kivu investment was made,” Jaguar’s management noted in a media release on March 2.
“Tiomin then disclosed a proposed second investment in Kivu on Jan. 9, 2009, and then disclosed completion of the second investment of approximately $1.4 million on Feb. 20, 2009. Jaguar intends to hold the directors and officers personally responsible to return the cash resources to Tiomin.”

“If you look at all of their transactions, they include related parties,” he said. “Our focus is to make sure cash resources in varied capital markets are handled properly by companies that have those cash resources. Because cash is very much at a premium the last thing you want to do is spend money on exploration. The last thing you also want to do is shift cash into the hands of the officers and directors of Tiomin.”

Then Tiomin struck back. The company argued that Jaguar Financial’s allegations were untrue and that it had at all times acted in the interests of the shareholders.

“This cheap strategy of alleging corporate malfeasance when none exists can sometimes backfire on the perpetrator when investors start to look closely at who is making the allegations and why,” Jackson, Tiomin’s president and chief executive, said in a prepared statement.

Jackson also noted that Jinchuan, a global mining company, had volunteered in writing to support the board and management of Tiomin with its 18.7% interest in the company.

Tiomin’s four main assets include about $17.3 million in working capital; a 49% interest in the Pukaqaqa copper and gold project in Peru; a 100% interest in the Kwale titanium project in Kenya; and a 33.5% interest in Kivu Gold Corp., a private mineral exploration company focused on sub-Saharan Africa.

At presstime Tiomin was trading at 3 per share and has a 52-week trading range of 1.5-9 per share with 480.8 million shares outstanding.

Cadiscor trades at about 30 per share, with a 52-week trading range of 13-68 per share, and the company has 43.32 million shares outstanding.

Jaguar trades at about 9 per share with a 52-week range of 5.5-22 per share and has 107.6 million shares outstanding.