Cliffs says Noront overstated value of its Freewest bid

Four days after Cliffs Natural Resources (CLF-N) upped its bid for Freewest Resources Canada (FWR-V) in an attempt to trump a competing offer from Noront Resources (NOT-V), the major is accusing its junior rival of potential trading irregularities and of overstating the value of its bid.

Cliffs sweetened its offer on Dec. 3, offering a fraction of a Cliffs share representing a fixed value of 90¢ for each Freewest share, above Noront’s final bid of 86¢ per share (in shares and warrants).

Freewest’s board of directors unanimously supported Cliffs’ enhanced offer, which works out to a 5.9% premium to Freewest’s closing price on Dec. 2 and values Freewest at about $211 million.

Cliffs had previously offered 70¢ per share, with 15¢ of that in the form of a planned spinoff of Freewest’s non-chromite assets. In its new offer, Cliffs plans to acquire all of Freewest — including its non-chromite assets.

Currently Cliffs indirectly holds 29.03 million Freewest shares representing about 12.4% of Freewest’s outstanding shares.

Under Noront’s offer, Freewest shareholders would receive two Noront shares for every seven Freewest shares tendered, plus one Noront warrant, with each full warrant entitling the holder to acquire one Noront share, for every seven Freewest shares tendered.

The warrants will have a strike price of $4 per Noront share and will expire five years after the date on which Noront first pays for Freewest shares tendered to the offer.

At the time Cliffs raised its offer price, Mackenzie Watson, Freewest’s president and chief executive officer, said Cliffs’ latest bid provided not only a higher value but was also “far less volatile” than Noront’s and gave shareholders liquid shares in a company with a market capitalization of more than US$6 billion.
“Now it’s time to pass the baton to someone like us who have the corporate and financial ability to execute the project,” Joseph Carrabba told The Northern Miner. “You need a lot of people and skill sets to do that. Where we couldn’t be an exploration company neither can they go into project development.”

But Wes Hanson, Noront’s president and chief executive, said in a telephone interview that if the reason Freewest shareholders invested in the company to begin with “was to have exposure to the Ring of Fire — one of the most unique mineral districts in the world — then they’d tender their shares to Noront as opposed to Cliffs.”

Noront has no intention of raising its offer to match Cliffs, he added: “They can raise the bar by one or two cents and it’s not a game we’re interested in playing.”

Hanson argued that Noront’s offer was a “better deal” that included the value of the future warrants and the company’s rising share price and argued that Noront’s shares were just as liquid as Cliffs.

“I don’t really see their offer as being significantly greater in value than what Noront has already placed on the table,” he explained. “Undoubtedly they’re an operating producer of greater size but at the same token a lot of Canadian companies started off as junior companies but because of the quality of their assets and management they’ve been able to grow into major companies such as Barrick and Teck. They all started as small companies just like us.”

Now the war of words is heating up with Cliffs, the largest producer of iron ore pellets to North America’s steel industry, hurling its weight against the junior exploration company, which has yet to bring a mine into production.

On Dec. 7, Cliffs charged that Noront was making “false and misleading claims” to Freewest shareholders about the value of its bid and said it wants authorities in Quebec to investigate Noront’s public statements and “potential trading irregularities in Noront stock.”

Cliffs argued that Noront’s chromite deposits are “smaller, thinner and deeper than Freewest’s,” were unlikely to be developed “for decades” and that as a result there were “no synergies” in consolidating the two companies’ chromite deposits.

Cliffs also accused Noront of having “grossly overstated” the value of its bid by using “inappropriately aggressive assumptions to value the warrant component of its offer.” The mining giant also noted that there was “no significant tax savings from Noront’s offer, only a tax deferral if a shareholder does not sell the Noront shares.”

Noront violated securities laws, Cliffs added, because “bold pronouncements about the value of its offer” in various press releases were not included in filings with securities regulators.

“If we didn’t have facts behind each allegation we put out we wouldn’t do that,” Carrabba said. “We don’t have to work on rumour and speculation, we’re pretty conservative. It’s disappointing we have to go there but sooner or later we have to stand up for our shareholders as well.”

As part of its allegations, Cliffs believes Noront’s offer includes a fraction of a warrant for each Freewest share “that has a much lower value than advertised and which ultimately may prove to be of zero value to Freewest shareholders.”

Noront valued the fractional warrant at 22¢ per Freewest share. But according to Cliffs, traditional valuation methods and market trading activity on the date of the announcement “indicate the actual value of the warrant is less than half that amount.”

“Only inappropriately aggressive assumptions can be used to arrive at the warrant valuation claimed by Noront,” Cliffs outlined in its press release. “We believe Noront did this deliberately to mislead investors who are not experts in valuing such complex and speculative securities.” According to Cliffs, and based on Noront’s valuation, the fractional warrant represents 26% of the consideration it has offered to Freewest shareholders.

Excluding the fractional warrant, Noront’s offer had an implied value of just 64¢ per Freewest share upon its announcement on Nov. 30, and has traded as low as 55¢ within the past 21 days.

“While Noront’s share price has gone up since then, it appears to have done so on the basis of false and misleading statements,” Cliffs said. “At 64¢ per Freewest share, the announced value of Noront’s increased share consideration represents a 29% discount to the fixed and certain value of 90¢ per share being offered by Cliffs.”

The timing and disclosure of Noront press releases is also suspect, Cliffs says. Before the markets opened on Nov. 19, Noront released its first public statement of “mineralized material” at its Eagle’s Nest property, quoting both estimated tonnage and grades, Cliffs says.

But none of the statements were compliant with National Instrument 43-101 standards, Cliffs charges: The timing and disclosure were “meant to manipulate the Noront share price and impact the perceived value of its bid for Freewest.”

After aggressively marketing the statements to investors during the course of the day, Cliffs notes, which lead to a 39% increase in Noront’s share price, Noront released a “clarification” of its earlier press release at 3:27 p.m. in the afternoon pointing out that its earlier release had not followed NI 43-101 requirements. (Such as disclosing the results are conceptual in nature and that insufficient exploration had been done to define a resource.)

“Cliffs does not believe the omission of the above cautionary language was made in error.”

Noront’s Hanson declined to comment on the “specifics” of Cliffs’ allegations but told The Northern Miner that the company’s legal counsel was reviewing the claims.

“The specific that does count is that our offer is the only one that allows Freewest shareholders continuous exposure to the Ring of Fire and we continue to see that fact as having significant upside for Freewest shareholders,” Hanson said.