Canadian Royalties Rejects Jien’s Hostile Bid

Canadian Royalties (CZZ-T, CRYAF-O), operator of the delayed Nunavik nickel project in northern Quebec, has told its share and debenture holders to reject a hostile takeover offer by Jien Canada Mining, a subsidiary of China’s Jilin Jien Nickel Industry Co. and Vancouver-based Goldbrook Ventures (GBK-V, GBKVF-O), calling it a lowball bid.

But Goldbrook’s president and chief operating officer, Brian Grant, is still hopeful that Canadian Royalties shareholders will tender their shares by the Sept. 15 deadline.

“I think knowledgeable shareholders will realize there are very few options here to move this thing forward,” Grant says. “And Royalties has not offered any solutions to its own problems.”

In March 2008, Canadian Royalties closed a $137.5-million, 7% convertible debenture with the intention of later securing a $250- million credit facility, which together would have given it enough money to bring its Nunavik project into production. But market conditions deteriorated and the loan didn’t happen, leaving Canadian Royalties with a project on care and maintenance and a debenture slowly eroding its treasury.

Glenn Mullan, chairman and CEO of Canadian Royalties, says it’s not game over for the company. He says he’s been talking to share and debenture holders about the takeover offer and the company’s other options for getting Nunavik into production.

“There’s an overwhelming majority who are vehemently opposed to a lowball bid, Mullan says. “We’ve been exploring a range of white knights and potential partners.”

Both Goldbrook and Canadian Royalties have nickel-copper-platinum group metals projects in the Ungava region of northern Quebec, close to Xstrata’s (XSRAF-O, XTA-L) Raglan nickel mine. Goldbrook’s Raglan project is at the grassroots stage, though Jilin Jien, which produces about 10% of China’s nickel, signed an option last year to earn 50% of Goldbrook’s Raglan project by spending $45 million over three years.

Their subsidiary, Jien Canada, has offered $148.5 million in cash for all of Canadian Royalties shares and debentures. In return, Jien Canada would get a partially constructed project that could produce 26 million lbs. nickel in concentrate, 38.8 million lbs. copper in concentrate, 900,000 lbs. cobalt in concentrate, 14,500 oz. platinum and 78,600 oz. palladium per year over nine years with the potential to double the mine life.

Mullan says the difference in what Jien Canada is willing to pay for a grassroots project compared with a fully permitted mining project doesn’t add up.

“If their property is worth $90 million, somebody’s going to have to explain to me how $148 million should look good to us,” Mullan says.

Goldbrook’s Grant points out that the Nunavik project would need added investment to restart development.

“The cost of restarting it is substantial — it’s not just carrying on where they left off,” Grant says. “So everything considered, the offer that’s on the table is a fair one.”

Mullan is still hopeful that one of his alternate plans will work out. A major part of the plan is getting debenture holders to convert their holdings into equity. Mullan says some institutions have said they would follow suit if one of Canada’s largest institutional fund managers, the Caisse de Depot et Placement du Quebec, which holds a significant part of the debenture, agreed to convert.

“We’ve had strong ownership and interest from Quebec institutions,” Mullan says. “We think that if we can convince the Caisse and the other actors in Quebec to convert to equity based on a strong business plan, that at the end of this we’ll come out of what was originally just a hostile takeover with a Quebec solution and hopefully a Quebec-based nickel producer.”

Canadian Royalties began trying to renegotiate its debenture in March. With $20 million in the bank, Mullan says the company could survive for a few more years.

“Being a founder and a major shareholder, it’s been a really difficult period of time to endure downsizing,” Mullan says. “It’s been a really difficult twelve months, but we’ve survived.”

Canadian Royalties shares traded at 58¢ at presstime. The company has 102 million shares outstanding, a 52-week high of 96¢ and a low of 15¢.

Goldbrook Ventures shares traded at 17¢; the company has 178 million shares outstanding.