Noront Ups Its Offer For Freewest

Shares of Freewest Resources Canada (FWR-V) closed 18.8% higher at 76¢ on a trading volume of 8.8 million shares on the development of a bona fide bidding war for the company. Noront Resources (NOT-V) has increased its original offer for the company to counter a competing bid in November from Cliffs Natural Resources (CLF-N).

Noront is boosting its original offer for Freewest to an implied offer price of about 86¢ per share (based on Noront’s Nov. 27 closing share price of $2.25) in a transaction that values the fully diluted share capital of Freewest at about $222 million.

The new Noront offer, which the company says is “final” — represents a 173% premium to Freewest’s closing share price on Oct. 2, the day before Noront’s hostile bid was announced.

Freewest shareholders are being offered two Noront shares for every seven shares tendered, plus one Noront warrant, with each full warrant exercisable for one Noront share.

The warrants will have a strike price of $4 per Noront share and will expire five years after the date on which Noront first pays for Freewest shares tendered to the offer.

On Nov. 23, Cliffs signed a friendly agreement with Freewest under which each Freewest shareholder would receive a fraction of a Cliffs share representing a fixed value of 55¢, and one share of a new company, Freewest Resources (or “New Freewest”), which will hold the junior’s current portfolio of non-chromite exploration properties, estimated by Freewest to have a value of 15¢ per share, for a total estimated value of 70¢ per Freewest share.

“Eighty-six cents is a lot more than 70¢, but my guess is that if Cliffs decides they want it, they’ll be back,” says David MacGregor, a mining analyst with Longbow Research who has covered Cliffs since the mid-1990s. “You probably haven’t heard the end of this yet.”

Noront’s latest offer will expire on Dec. 11 and the company has waived all conditions of the original offer, including the condition that at least two-thirds of the total number of shares outstanding (calculated on a fully diluted basis) would be tendered to its bid by the expiry time.

Under the offer, and based on the number of fully diluted Freewest shares, Noront would issue about 73.7 million shares and 36.8 million warrants (assuming exercise of all in-the-money Freewest warrants and options, and excluding any shares issuable upon exercise of the Noront warrants).

“Noront will focus on completing the necessary exploration on Freewest’s chromite deposits, adding that information to Noront’s already outstanding resource at the Blackbird deposit,” Noront’s president and chief executive, Wes Hanson, said in a statement. “This will result in a larger, more valuable chromite resource that would attract the attention of global companies that are actively developing and mining chromite and producing ferrochrome.”

Noront’s offer “provides exposure to the exploration upside that Noront has with their Eagle Nest deposits, which I believe is attractive, and (Noront) has tacked on a warrant as an additional option on that exploration upside,” Michael Gray, a mining analyst at Genuity Capital Markets, said in a telephone interview from Vancouver. “Some Freewest shareholders may want exposure to a mining house that is going to develop it, others will want exposure to the future discoveries in the belt with an exploration and development-oriented company like Noront.”

Gray added that Noront’s offer is likely final because “in as much as they want to consolidate the Ring of Fire assets and gain a consolidation premium, I think they also recognize that (they will have) a fairly big fight on their hands if Cliffs is intent on winning.”

Gray, who covers Noront, has a 52-week target price on the stock of $3.50 per share.

In a release announcing its revised bid, Noront argued that in unanimously supporting Cliffs’ offer, Freewest’s management had “failed its shareholders” because the deal “does not allow shareholders to continue to benefit from the exciting exploration potential of the Ring of Fire.”

In addition, Noront stated that Freewest’s management had negotiated “preferential treatment for themselves with respect to their options by receiving cash at a premium to the current Freewest share price, at the expense of its shareholders; undertaken a private placement from Cliffs at a discount to the Cliffs offer price; and agreed to conditions with Cliffs, such as the break fee, and a timetable for completion that frustrates and hinders other potential competing offers.”

(On Nov. 25, the TSX Venture Exchange gave the go-ahead for Freewest to issue 6.9 million shares to Cliffs at a price of 60¢ per share, for proceeds of $4.1 million. Following the private placement, Cliffs will indirectly hold about 21.6 million shares of Freewest, represent- ing 9.75% of the Freewest shares that will be outstanding.)

Noront also said that the 15¢- per-share value of a New Freewest share under Cliff’s offer “is highly inflated” and argued that it would be difficult for Freewest shareholders “to realize any significant value from these shares in the near term due to illiquidity of the stock and expected selling pressure upon listing.”

MacGregor of Longbow Research says it’s likely that Cliffs will be back with another offer if it really wants to develop Freewest’s chromium assets because the transaction in terms of its total value is relatively small for Cliffs historically. “Matching that bid financially would not be a challenge for Cliffs,” he says. “It has substantial cash on hand, a lazy balance sheet and capacity to raise capital. . . and because of its size and the resources it has access to, it has access to other sources of capital that Noront does not.”

MacGregor also notes that Cliffs is a very transparent organization and its stock is very liquid — additional advantages that could appeal to Freewest shareholders. Finally, Cliffs probably has the economic clout to develop the project. Cliffs’ chief executive said capital costs for the project were estimated at about US$800 million, excluding the cost of building a 300-km railroad spur to hook up with the CN line somewhere near the town of Nakina in the James Bay lowlands of northern Ontario.

“It’s a credible assertion that Cliffs can raise that capital, whether it’s internal funds or gathering together a group of investors to do it with them,” MacGregor argues. “They have a long history of joint ventures working successfully and if they decided they didn’t want to do this exclusively on their own account, they have a long history of making joint ventures work.”

Cliffs’ president and chief executive, Joseph Carrabba, has said he believes Freewest’s chromium assets are world-class deposits with the potential to support an open-pit mine producing 1-2 million tonnes per year for more than 30 years. The ore would be further processed into 400,000- 800,000 tonnes of ferrochrome, he said in a conference call on Nov. 23.

Currently, only four countries produce chromium in significant amounts: South Africa, Kazakhstan, Finland and Turkey, and Carrabba said he believed Freewest’s chromium assets could make up 6-11% of the global supply.

Concerns about the security of South Africa’s supply is another advantage for Cliffs should it be successful in its bid for Freewest.

“Steel mills are pretty apprehensive about the whole South African source because of depleting ore reserves, intermittent power supply and civil unrest, so it does look like Cliffs would get a pretty good share of the export market,” MacGregor said.

Freewest Resources owns 100% of the Black Thor and Black Label deposits, and 50% of the Big Daddy deposit, which is a joint venture with Spider Resources (SPQ-V) and KWG Resources (KWG-V).

Freewest is urging its shareholders not to tender their shares to Noront’s revised offer until its board of directors and its financial advisers can study the proposal. If t
he board determines Noront’s offer is a “superior proposal,” Cliffs has the right to amend the terms of its arrangement agreement. If it does not, and Freewest accepts Noront’s new bid, Freewest must pay Cliffs a break fee of $6 million.