A proposal by
The share issue would redeem a series of notes issued in March of 1997, on which Echo Bay has had to defer interest payments for the past three years. Franco, which held about 72% of the securities, and Kinross, which had held almost 16%, entered into lock-up agreements with Echo Bay, under which Echo Bay would issue more than 360 million shares to Franco and 57.1 million to Kinross. Franco’s shareholding would represent a 49.5% stake in Echo Bay and give it effective control of the company. Kinross’s interest would be about 11.4%. Echo Bay’s current common shareholders would retain about 28% of the company.
Interest payments on Echo Bay’s capital security series had been deferred for the last three years. The series was accruing interest at a rate of 12% annually (1% greater than the securities’ coupon rate) and represented a US$149-million liability to the company on its second-quarter balance sheet, one that would have grown to US$159 million by the end of the third quarter.
Franco estimated the value of the capital securities it held would be US$115 million by the end of the third quarter. Kinross was carrying its securities at US$6.9 million, but the debt probably represented about US$25 million that Echo Bay owed to Kinross.
Echo Bay would still owe all the securities holders the accrued interest on the notes. In Franco’s case, that amounts to US$43 million; in Kinross’s, about US$9 million.
Franco and Kinross have given their assent to the plan conditional on Echo Bay’s getting the approval of 90% of the remaining holders of the capital securities, and on the consent of a banking syndicate that maintains a US$17-million loan to Echo Bay. The issue of new shares would also have to pass a vote of Echo Bay shareholders and get approval from securities regulators in both Canada and the United States (where Echo Bay is listed on the American Exchange).
Echo Bay has also extended its US$17-million bank debt to Oct. 5, and says it expects to arrange a debt refinancing with its bankers by that time.
Echo Bay produced 695,000 oz. gold last year from four mines in the U.S. and Canada. Two Echo Bay assets appear to be a fit for Kinross: the Lupin mine in western Nunavut and the Aquarius project east of Timmins. Lupin, where production was suspended for about two years due to low gold prices, came back on stream in April 2000 and produced 118,000 oz. gold in 2000 and is slated to produce 150,000 oz. this year.
Kinross holds an option to earn 70% of the George Lake project in Nunavut from junior gold producer
Kinross, which can earn its 70% by spending $20 million by the end of November 2004, has so far worked only on the George Lake deposit itself, where an indicated and inferred resource of 3.9 million tonnes grading 12.5 grams gold per tonne has been outlined. The five other deposits hold a total of 3.9 million tonnes at an average grade of 10 grams, in both indicated and inferred categories.
Aquarius, in the Night Hawk Lake area 40 km east of Timmins, would fit with Kinross’s strategy of amassing a large land position in the western Abitibi. Kinross’s Hoyle Pond gold mine is one of its three strongest performers (Fort Knox in Alaska and Kubaka in Siberia are the others), and the company has already taken over the properties held by the Ontario division of defunct Royal Oak Mines.
Kinross has also made plans for significant Canadian exploration over the next year: it is issuing $3.5 million worth of flow-through shares to finance domestic exploration work.
Echo Bay’s other producing assets are in the western United States, but there are no obvious connections between its projects and Franco-Nevada’s royalty interests. In western Nevada, Echo Bay operates the Round Mountain mine, sharing ownership equally with
Holding a 50% interest in Round Mountain may give Franco — which harbours no operating ambitions — some opportunity to make a deal with Homestake or with
Echo Bay’s other Nevada producer, the McCoy-Cove gold and silver mine in the Battle Mountain trend, stopped mining in 2000 and was processing stockpiled ore this year. A third U.S. asset, the small Kettle River mine in Washington, is slated to produce 60,000 oz. this year, but is a relatively high-cost mine.
Franco is currently considering its reaction to the bid on
If the takeover succeeds, Franco will be trading its interest for a 5% stake in AngloGold. The bid itself is on a leisurely mid-November deadline, and there is time for another bidder to appear if anyone wants to jump AngloGold’s bid.
The valuation implies a cash value of US$320 million on Franco’s holding. That in turn means a profit of US$64 million on the company’s April deal to trade the Midas mine and land package in Nevada, three Australian royalty properties, and US$48 million to Normandy in return for a 20% shareholding.
Wire service reports datelined Sydney had described Franco as “not thrilled” with the offer, though the company has said it will await the recommendation of the Normandy board. (Franco’s president Pierre Lassonde is a Normandy director.) AngloGold’s chief executive officer, Bobby Godsell, told Dow Jones “it’s their job to make it a hard time for us,” but insisted his company wouldn’t increase its offer.
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