Eldorado wins Frontier over with revised bid

VANCOUVER — Frontier Pacific Mining (FRP-V, FRPMF-O) mounted a strong defence but has now submitted to Eldorado Gold’s (ELD-T, EGO-X) revised takeover bid.

The two-month-long battle saw accusations fly both ways over golden parachutes, opportunism, undervaluation, and mistreated information. Theresolution shows the strength of a cleverly revised offer –which adds one exchange receipt for 0.008 of an Eldorado share for each Frontier share, under certain conditions — and reminds us how quickly things can change in the world of mergers and acquisitions.

The end result is that by July 2, Eldorado held some 162 Frontier shares, giving it control of over 93% of the company. Eldorado now plans to exercise its right to acquire the rest of the 12 million outstanding shares.

The road to that result, however, was far from smooth. Eldorado first announced its unsolicited bid for Frontier on April 21, offering 0.122 of an Eldorado share and a fraction of a cent for every common share of Frontier. The price represented a 28.6% premium based on April 18 closing prices and a 35.5% premium based on 10-day volume-weighted average share prices.

Frontier immediately filed a circular recommending shareholders reject the offer, calling it opportunistic. The bid came just as the issuance of permits for Frontier’s flagship Perama Hill gold project, in Greece, was reported to be “tantalizingly close.” Frontier’s board also argued the offer simply did not represent fair value, especially considering Perama Hill’s “extremely compelling” economics.

Eldorado argued that the bid was more than fair, considering the benefits to Frontier shareholders: a substantial premium, significantly enhanced liquidity for Frontier shareholders in the form of Eldorado shares (Eldorado’s four-day liquidity is more than Frontier’s market capitalization), immediate participation in a growing gold producer now holding permits to develop another gold mine in nearby Turkey, elimination of “single project” risk, and the financial platform and flexibility to bring Perama Hill into production without further dilution to shareholders.

But Eldorado did more than stand behind its offer. It also voiced its displeasure with some of Frontier’s actions following receipt of the bid, saying it was “disappointed with Frontier’s adoption. . . of golden parachute termination packages for its management and a tactical poison pill shareholders’ rights plan.”

Eldorado said that the termination packages “have the effect of enriching and entrenching Frontier’s management and are not consistent with Frontier’s stated goal of enhancing shareholder value.” It also contested Frontier’s argument that the shareholders’ rights plan was adopted only to provide management with enough time to find an alternative offer, saying the company had already had plenty of time to do so in the two years during which Eldorado has been pursuing Frontier.

Finally, Eldorado indicated its offer was more than fair based on its recent discovery of two petitions launched by Perama Hill-area municipalities for the annulment of the preapproval act issued for Perama Hill. Eldorado argued that if the petitions were granted, it would take the Perama Hill permitting process back eight years.

Frontier fired back, saying the petitions were in no way new news but have been part of the public record since the process began in 2000. Moreover, a negative outcome would mean restarting the permitting process but much of the work completed to date could be reused.

The company also acknowledged that the compensation committee of the board of directors approved employment agreements for five senior executives one day after Eldorado’s bid was launched. But Frontier pointed out that these contracts had been under consideration for more than three months and that change of control provisions are common in executive employment agreements.

The battle lines seemed well entrenched. But a slight revision to Eldorado’s bid changed everything. On June 20, Eldorado added to its offer one exchange receipt for each Frontier share. The exchange receipts entitled the holder to receive 0.008 of an Eldorado share but only when the Greek Joint Ministerial Council issues a resolution accepting the environmental terms of reference for Perama Hill.

The exchange receipt represents a 6.8% boost to the total deal price, bringing it to $1.101 per share, but only if permitting moves ahead as needed. Blackmont analyst Richard Gray said incorporating the permitting risk into the offer price was a clever move on Eldorado’s part.

Perama Hill is in the Thrace region of northern Greece. The project hosts 11.7 million tonnes of oxide material grading 3.62 grams gold per tonne for 1.36 million oz. gold plus a potential open-pit sulphide resource ranging from 1.5 million tonnes grading 6 grams gold to 2.5 million tonnes grading 5 grams gold.

Interim numbers from a feasibility study under way for the project estimate initial capital costs at US$100.3 million. Operating costs come in at US$20.76 per tonne.

In addition to Perama Hill, Frontier holds a 50% interest in the Macusani uranium project in southeastern Peru. Frontier operates the project, carrying joint-venture partner Solex Resources (SOX-V, SLXRF-O).

Frontier’s third property is the Taraira gold project in southeastern Colombia, adjacent to the Brazilian border. Frontier holds 51% of Taraira, which has seen limited work, with privately owned Cosigo Resources holding the remainder.

Frontier is currently trading around the $1-mark. The company has a 52-week trading range of 44- $1.10 and has 164.6 million shares issued.

On news of the successful takeover, Eldorado’s share price lost 48 to close at $8.13. The company has a 52-week trading range of $3.79-9.01 and has 345.3 million shares issued.

Eldorado currently operates the newly reopened Kisladag gold mine in Turkey, the Tianjianshan gold mine in China, and is developing the Efemcukuru gold project and Vila Nova iron ore project in Turkey and Brazil, respectively.