Investment Comment Analysts give approval to Royex amalgamation

The recent amalgamation of the Royex group of companies under a new entity called Corona Corp. has been a major talking point in mining and investment circles.

Coming, as it did, in the wake of a controversial court battle involving International Corona Resources (TSE) and Lac Minerals (TSE) over ownership of the Page Williams gold mine, the creation of a new tier 1 gold producer caught many analysts by surprise.

But within two weeks of the announcement, a number of brokerage houses have released a flurry of research reports which attempt to place a value on the new company.

Prudential Bache-Securities, Brown Baldwin Nisker Ltd., Kleinwort Grieveson Securities and Alfred Bunting and Co. Ltd. are just some of those offering an early analysis of this complicated merger.

Expected to be completed in June, it has brought together the assets of International Corona, Royex Gold Mining (TSE), Lacana Mining (TSE), Mascot Gold Mines (TSE) and Galveston Resources (TSE) into one large company. Placer Dome

Based on a projected output of 650,000 oz in 1989 from eight North American gold mines, Corona Corp. will rank behind Echo Bay Mines (TSE) and Placer Dome Inc. (TSE) as one of the world’s largest gold producers. As a tier 1 gold company, Corona will have 154.4 million shares outstanding and market capitalization of about $1.5 billion.

Under the new structure, 86% of the votes are tied up among 5.6% of the stock. Management will own approximately 6% of the equity (A and B shares), but will own 46% of the votes.

While this is good news for the management and executive team attempting to run this creation, shareholders of the member companies may wonder if an amalgamation will serve their interests to the same degree.

With about six weeks to go before closing, analysts say there are two main questions that shareholders should be asking themselves before accepting the deal: Are they better served by having all the interests in one company but with voting control solidly held by management and are the terms fair?

Initially at least, the consensus among a number of analysts appears to be yes on both counts.

“In the past, investors have been put off the Royex group because of the complicated corporate structure,” notes analyst Mark Wood in Kleinwort Grieveson Securities’ recent report. New company

“With this now being simplified, much more attention will be paid to the new company,” he said.

“The simplicity of structure, quality of assets, strong cash flow and balance sheet of Corona Corp. are the major strengths of the new company,” says Richard Cohen in Brown, Baldwin, Niskers’ April report.

However, he and other analysts have some reservations about the the multiple voting structure developed by Chairman Ned Goodman and President Peter Steen.

As reported (N.M., April 18/88), the proposed terms of the merger are as follows: One A share for one old Corona common share, 0.61 A share for one Royex common share, 0.43 A share for one Galveston A share, 0.43 B share for one Galveston B share, 1.32 A share for one Lacana common share and 1.11 A share for one Mascot common share.

Each new class A share will carry one vote and each class B share will represent 100 votes with the number of votes on all voting shares outstanding amounting to 981.5 million.

The reservations of the brokerage community centre on a previous transaction involving Galveston and its wholly-owned subsidiary, Blackbird Resources. As reported (N.M., Nov 23/87) the amalgamation combined the assets and interests of two companies with investments in various public companies and exploration projects. Galveston shares

Under the terms of the agreement, Galveston was divided into A and B shares, with the B shares having 100 votes per share. Blackbird shareholders exchanged their own shares for Galveston B shares.

Since the Galveston B shares, having 100 votes each, are being swapped for Corona B shares also having 100 votes, management retains control of the company despite only having a 6% to 7% equity interest.

“In principle, most people including ourselves don’t like this particular part of the transaction,” say analysts Patrick Mars and Gordon McCreary in Alfred Bunting’s recent monthly Metals and Mining Review.

They are also opposed to the distribution to Galveston of smaller portions of a 2-year warrant designed to compensate International Corona shareholders for the latter company’s future performance relative to other group members. “We don’t believe Galveston should get any portion of the 2-year warrant which is exercisable at $12,” say Mars and McCreary. “Aren’t the votes enough?”

Assuming that the Supreme Court of Canada upholds the Ontario Courts’ decisions and the Page Williams mine becomes 50%-owned by Corona, the value of the company would appreciate more significantly than other companies in the group, say Mars and McCreary who don’t see why Galveston shareholders should be rewarded for Corona’s performance. Big producer

“On the other hand, the benefits from one big producer with the lowest average costs of production ($170(US) per oz) amongst major producers cannot be underestimated,” they say.

Depending on the outcome of the Page Williams appeal, the potential still exists for gains or losses, according to the Prudential- Bache report by analysts Barry Allan and Alan Ferry. They estimate that Corona Corp. is worth $11.66 per share with the Page Williams mine included and $8.06 per share without it.

In the Brown, Baldwin, Nisker analysis which is based on annual gold production values of $3,000(US) at Hemlo and $2,000 per oz elsewhere, analysts Richard Cohen and Jonathan Goodman place a slightly higher value on the new company: $13.30(C) with the Williams mine and $8 without it.

In Case 2, with a much higher output ($4,000(US) per oz of production), Corona could be valued at $16(C) per share (including Page Williams) and $9 without.

Nevertheless, with about six weeks to go before it is scheduled to close, much more is likely to be written about the Royex amalgamation. Stay tuned.