Fronteer Development Group (FRG-T, FRG-X) is the single largest shareholder of Aurora Energy Resources (AXU-T, AUEGF-O), with 42% of the company. Now Fronteer wants all of it — despite a three-year moratorium on uranium development that has put Aurora’s flagship project in Labrador on ice.
News of the proposed offer catapulted Aurora’s shares 60.8% or 59¢ apiece to close at $1.56 per share. The markets weren’t as kind to Fronteer, however; its shares lost 31.6% or 99¢ apiece, to close at $2.14.
Fronteer president and chief executive Mark O’Dea shrugs off the decline, describing it as “pretty standard stuff” in the arbitrage trade, and argues that the fundamentals of the deal make a whole lot of sense for both companies.
“The feedback I’ve been getting back from analysts and shareholders is that they see it as a logical, rational move with lots of positive benefits,” he said in a telephone interview from Vancouver.
Under the proposed acquisition, each Aurora share would be exchanged for 0.825 of a Fronteer share. The offer represents a premium of nearly 166% for Aurora, based on the two companies’ closing share prices on the last trading day prior to the announcement.
On Dec. 19, Aurora shares closed at 97¢ per share and Fronteer shares at $3.13 apiece. The offer works out to about a 96% premium based on the 20-day volume-weighted average trading prices of the two companies.
Some institutional shareholders already have entered into lock-up agreements to tender an aggregate 19.23 million shares, or about 26% of Aurora’s shares. The remaining 32% of Aurora’s shares are widely held. By joining the two companies, Fronteer’s roughly $81 million in cash and cash equivalents held with large Canadian commercial banks would be combined with Aurora’s roughly $105 million in cash and cash equivalents for a total of $186 million. (Aurora has no debt.)
“We recognize the cash Aurora has in the bank and we’re paying a premium for it,” O’Dea says. “We’re not relying on equity finance to keep growing.”
Indeed, the acquisition means Fronteer won’t need to raise money in the equity markets during the current credit crunch or incur debt to continue its exploration and development projects. The company has no debt and no investments tied up in any short-term commercial paper or asset-backed securities.
If the offer is completed, the transaction would provide an improved cash per share position of about $1.57 per share in the combined company, compared with Aurora’s current $1.43 per share, based on the two companies current cash and equivalents positions.
“That gives us a lot more fire power to continue building our core business through joint ventures, M&A, and exploration,” O’Dea notes.
Fronteer also points out that the acquisition would benefit Aurora shareholders because they would gain exposure to Fronteer’s portfolio of gold and copper-gold assets and a higher growth profile in an international setting.
That’s an important consideration in the near term, O’Dea said, because Aurora’s Michelin project in the central mineral belt of coastal Labrador has fallen victim to a uranium moratorium that restricts development, apart from exploration.
In April, the Nunatsiavut government of Labrador voted 8-7 in favour of the three-year ban on uranium mining on Labrador Inuit land. Aurora has a pipeline of six growing uranium deposits there with a total resource of about 134 million lbs. of uranium oxide in the ground. Measured and indicated resources, broken into open-pit and underground resources, respectively come in at 15.3 million tonnes grading 0.07% and 21.2 million tonnes averaging 0.08% U308. Inferred open-pit resources add 3.8 million tonnes at 0.05% U308, while inferred underground resources add 15.4 million tonnes grading 0.11% uranium oxide.
“Long term, we’re going to see value flow back into the uranium sector and we’re going to see the perceived risk of this jurisdiction diminish as the project advances,” O’Dea asserts. “We see there being some deep value in that stock.”
Aurora Energy’s president and chief executive, Bruce Dumville, could not be reached for comment before presstime, but in a news release the company said Aurora’s board of directors had formed a special committee of directors who are independent of Fronteer that will evaluate the proposed offer. Because it is not a formal offer, however, action is not yet required by Aurora shareholders.
In Nevada, Fronteer has a 100% interest in Northumberland, one of the largest undeveloped Carlinstyle gold deposits in the state and a 51% interest in Long Canyon as part of a joint venture with AuEx Ventures (XAU-V, AUXVF-O). It also owns Sandman, a property in which Newmont Mining (NMC-T, NEM-N) has the option to acquire up to a 60% interest by advancing the project to a production decision by 2011.
In Turkey, as part of a joint venture with Teck (TCK. B-T, TCK-N), Fronteer has a 40% interest in a new mineral district that includes two gold deposits and a third copper-gold porphyry deposit.
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