Debt-Laden Liberty Looks To Sell 51% Stake To Chinese

VANCOUVER — In debt and bereft of cash, Liberty Mines (LBE-T) is seeking permission to sell 51% of its shares to a Chinese nickel company without a shareholder vote.

Liberty is in default on a US$16.5-million loan after the dramatic fall in the price of nickel forced the company to put its two new nickel mines, near Timmins, Ont., on care and maintenance in late October. The average cost to produce a pound of nickel had crept up to US$6.46 and the price of nickel had just fallen to around US$5 per lb.

The mothballing move was necessary but difficult because Liberty had already pre-sold nickel concentrate to Jilin Jien Nickel Industry.

In May 2008, Liberty signed on for a US$15-million credit facility with Jilin Jien, wherein the credit payments were structured as prepayments for concentrate from Liberty’s Redstone nickel concentrator. Liberty agreed to ship 20 tonnes of concentrate daily from the concentrator, which was fed by Liberty’s two nearby nickel mines, from mid-2008 until late 2010.

Now Jilin Jien is offering $30 million to buy a controlling stake in Liberty and forgive the nickel concentrate owing. The financing offer would see Jilin Jien pay $9.4 million for 86 million common shares as well as $20.6 million for 187 million preferred shares, with both share types valued at 11¢. Liberty would use the $30 million to pay off the US$16.45 million it owes and to pay amounts due to employees, contractors, and suppliers.

The deal would give Jilin Jien 51% of Liberty’s common shares; if the Chinese company were to convert all of the preferred shares to common shares it would control 76.8% of Liberty. But that’s not the intention from either side; in a release, Liberty said the two companies would work together to “minimize the common share dilution” from preferred share conversion. Jilin Jien can convert preferred shares at a 1:1 ratio but the other option is for Liberty to buy back preferred shares with cash or nickel concentrate.

Another interesting aspect of the deal is that the preferred shares would pay an 8% cumulative annual dividend.

Since the deal would result in a change of control of Liberty and a dilution of more than 25% of its outstanding shares, shareholder approval would normally be required. Liberty is applying to the Toronto Stock Exchange for an exemption from that requirement on the basis that it is in financial difficulty. The TSX is considering the application; it is also reviewing Liberty’s eligibility for continued listing on the board.

Liberty signed the deals that became its key stumbling blocks within days of each other last May. First it completed a US$16.45- million debt financing, which involved issuing close to 20,000 promissory notes with $1,000 par values and 14% annual interest rates. The notes were secured by a charge on the mining leases home to Liberty’s Redstone mine and McWatters mine. The notes were due on Oct. 29, 2009. A few days later, the company signed the US$15-million Jilin Jien concentrate prepayment agreement.

Combined, the deals gave Liberty the cash it needed to get its nascent McWatters mine into production, and that’s exactly what it did. Construction at McWatters had begun in late 2007 and by late summer 2008, the mine was producing 200 to 600 tonnes of ore daily. By early 2009, the company expected the mine to produce 1,200 tonnes daily from high-grade lenses; by the end of the year, Liberty expected 1,600 tonnes of nickel ore each day from McWatters.

And at Redstone, just 10 km west of McWatters, the mine was spitting out 200 tonnes of ore grading better than 2% nickel daily. The on-site concentrator, which has a flotation circuit designed specially to separate nickel sulphides from the high talc component typical of nickel ores in the Shaw Dome nickel belt, was built to handle 2,000 tonnes per day, to accommodate ore from the McWatters mine.

But with the global economic downturn gaining steam and the price of nickel falling, Liberty realized it was not going to be able to repay the US$16.45 million due in late October. The company tried to arrange a US$32-million secured notes financing in September, but it fell through. A month later, it mothballed Redstone and McWatters, saying it was “seeking partners with which to complete a business combination,” effectively putting itself on the block.

Only a few weeks later, in mid- November, the company reported that a $20.3-million asset impairment charge against Redstone and McWatters had forced it to a $26- million loss for the third quarter.

By mid-February, directors were jumping ship: the chief financial officer, chief operating officer, and another director all resigned. And the trustee for the US$16.45-million worth of notes, as well as certain contractors and suppliers, started placing liens on Liberty’s properties. By late March, the company did not even have enough cash to complete its annual financial statements; a week later, the company was cease-traded, leaving its share price stuck at 16.5¢.

Then Jilin Jien stepped in with its offer. The deal needs approval from the Chinese government and the TSX. Depending on the TSX’s decision with regards to Liberty’s exemption application, it may also require approval from Liberty shareholders. The timeline for these decisions has not been released.

Liberty has a 52-week trading range of 2.5-93¢.