Candente eyes Cobriza to boost opportunities

The whole appears greater than the sum of its parts for Candente Copper (TSX: DNT), which is acquiring Cobriza Metals (TSXV: CZA; US-OTC: CBZMF) — a company it spun out in late 2011 — to survive and hopefully thrive in a harsh mining environment. 

Nearly two years ago, to better focus on its advanced-stage Canariaco Norte copper-gold project in northern Peru, Candente spun out its early stage base metal assets into Cobriza and gave it US$6 million to get rolling, while retaining a 13.5% interest in the new Peru-focused player. 

But since debuting on the Toronto Stock Exchange at 50¢ in October 2011, Cobriza shares have steadily declined, leading it to move its listing to the TSX Venture Exchange last November. Cobriza has been trading within a 52-week range of 5¢ to 18.5¢. On the upside, the junior still has US$3 million in its treasury and no debt. 

With cash hard to come by these days, Candente looks like it will strengthen its financial position by combining with Cobriza.  

On July 16, Candente said it would acquire all of Cobriza’s shares that it didn’t already own, by offering 0.5 of a Candente share for each Cobriza share. This translates to an offer price of 8.75¢ per share based on Candente’s July 12 close, and represents a 59% premium to Cobriza’s closing price.

While that cash is one motivation for the offer, Candente’s president Sean Waller says that “the more important aspects are trying to create a stronger company with more opportunity for both sets of shareholders, given the current mining environment.”

“It’s a much different world now than it was two years ago when we did our spin out,” he continues. “Now it’s pretty hard to get a reaction in share value just by drilling good drill holes.”

Cobriza’s president Michael Thicke says his company has been in cash-conservation mode over the past 10 months, since promising intersections were unveiled  at its Arikepay copper-gold porphyry project, including 292 metres of 0.33% copper equivalent, which did little to help the stock. It has since halted its drilling.   

“It didn’t make sense there to start burning off our money in drilling our good projects if the market isn’t interested,” Thicke says. 

“The combined entity going forward will have a greater chance for shareholder value increase than being separate,” he adds. 

Candente expects to issue 12.2 million shares so that it can obtain the junior’s remaining 86.5%. The all-share deal is valued at $2.5 million. 

The boards of both companies have approved the transaction, with Cobriza’s management recommending its shareholders to vote in favour of the combination, which is expected to close this September after shareholder and regulatory approvals. Once the deal wraps up, Candente will have 134.3 million shares outstanding and a 9% stock dilution.    

Laurentian Bank Securities analyst Christopher Chang says that “the transaction is prudent, as the company is effectively raising a minimum of $3 million of cash at a premium to its current share price by issuing 12.2 million shares [at about 25¢ per share], while receiving Cobriza’s exploration properties at no additional cost.” 

Cobriza has six primary copper assets, but has concentrated its efforts on three of those projects: Arikepay, Miraflores and Don Gregorio. So far it has only drilled Arikepay, located in southern Peru’s Arequipa department, while carrying out preliminary field work, mapping and rock sampling at Miraflores and Don Gregorio, which are both in northern Peru. 

Cobriza’s Thicke says that advancing these properties “will be a priority for the combined company.” But he says that most importantly,  shareholders will be able to take part in Candente’s Canariaco development project, and the nearby copper exploration projects Canariaco Sur and Quebrada Verde. 

Raymond James’ analyst Adam Low says he forecasts that the merged firms will have more than US$7 million in cash, assuming Cobriza provides US$3 million. He notes this should improve Candente’s ability to continue its sustainable development efforts in the communities surrounding Canariaco Norte. 

In May, Candente said that given the poor economic conditions, it was reining in costs at its flagship asset and suspend drilling. 

But the company added it would continue environmental and social impact studies, and sustainable development programs. Some of these initiatives include supporting the independent organization Save the Children, the coffee-producing association APC, the SocoDevi foundation and monthly discussions where community representatives and government officials meet to discuss development projects.

Waller says the Peruvian government has committed a US$56-million investment to improve the districts of Canaris, Salas and Incahuasi. 

Candente’s assets are in the Canaris district of the Ferrenafe province, 700 km northwest of Lima.

The junior could receive an environmental assessment impact for the Canariaco Norte project in early 2014. A feasibility study is underway at the large copper-gold deposit, which has been on the radar as a potential takeover target for several years.  

Cobriza gained 18.2% on the transaction news to close July 16 at 6.5¢, while Candente fell 6% to 15.5¢.