Regulatory overlap delays plans for Falconbridge Gold

In order to meet regulatory requirements in two separate jurisdictions, Falconbridge Gold (TSE) has been forced to postpone exploration spending in Val d’Or, Que., delay a special shareholders’ meeting and possible expansion of two Zimbabwean gold mines. Falconbridge Gold announced plans in October, 1990, to take over all the Canadian gold exploration properties and the Zimbabwean gold mines of parent Falconbridge Ltd. Falconbridge Gold is to pay the parent about $11 million in shares and convertible debentures.

As a result, it must comply with Ontario Securities Commission Policy 9.1, revisions of which are in force though not yet completely enacted, protecting minority shareholders in related party transactions.

However, Falconbridge’s beef rests not simply with the OSC but with the complexity of the documentation involved. That complexity has led to delays at the Securities and Exchange Commission (SEC) in Washington, D.C.

Falconbridge had only to file the documents with the OSC, which it has done. The OSC selectively reviews such filings, and otherwise delves into specific transactions only when minority shareholders lodge a complaint.

The SEC, on the other hand, must review and approve the documents before Falconbridge, an SEC registrant, can seal the transaction and present it to shareholders. (The final hurdle for Falconbridge Gold will come when minority shareholders, voting exclusively, decide on the deal.) Falconbridge Gold CEO and President Brian Ferguson is eager to as much as double output at the Zimbabwe mines and to get moving on the Val d’Or properties, which haven’t been actively explored since 1986.

But the deal with the parent has yet to be consummated because the SEC is still reviewing the documents, in all 131 pages. These include a full set of financial statements (as well as pro forma statements for both Falconbridge Gold and its parent), a full evaluation of all the assets included in the transaction and the consideration to be given for those assets, and an independent financial evaluation.

So far, meeting the regulatory requirements has cost Falconbridge Gold about $500,000.

Ferguson, meanwhile, is virtually handcuffed. He can’t authorize any material changes to the company’s operations because that would require amendments to the original filings. Nor can he order drill crews on to the Canadian gold properties because they aren’t yet owned by the subsidiary.

The approval process began in January. At one point, Falconbridge had to re-do completely the financial statements in the documents because the 1990 third-quarter results in the original paperwork became outdated. Fourth-quarter results were substituted.

“The reason for it (the new OSC policy) is valid. It’s for the benefit of the minority shareholders,” said Ferguson. Prior to Policy 9.1, regulatory authorities were satisfied with a fairness opinion, rendered by an independent financial analyst who examined the terms of the related party agreement.

“But one has to wonder to what extent the interests of the minority shareholders are being served. Does putting the company under lock and key for this length of time really serve shareholders?” Justin Connidis, general counsel for the OSC, told The Northern Miner that the delay is unfortunate. But both the complexity and the cost involved are a requirement of doing business today.

“That’s the cost of being a public company today,” he said. “It’s the cost of protecting shareholders and reaching as broad a market for shares as possible. It’s one of those tradeoffs.” Generally, a company complying with the regulations would spend 1-5% of the total transaction cost, he added.

Such delays, however, may soon be a thing of the past. A multi-jurisdictional disclosure system (National Policy 45) is currently being discussed. If enacted, this would lead to an issuer’s having to comply only with the regulations of its home jurisdiction.

In Falconbridge’s case, it would mean meeting OSC requirements. The SEC, a party to the multi-jurisdictional system, would not require a full review under the new policy. Connidis said this new system is expected to come into force later this year.

In the deal with parent Falconbridge, jointly owned by Noranda (TSE) and Trelleborg AB of Sweden, the gold subsidiary is in the midst of taking over all gold exploration properties in Canada. This involves as many as 40 properties, the bulk of which are near Val d’Or. Six properties alone cover 5,315 acres within 10 miles of the northern Quebec mining centre.

Falconbridge Gold produced 82,018 oz. of gold in 1990. Hoyle Pond, a high-grade producer near Timmins, Ont., contributed about 64,500 oz. to the total. The remainder came from stockpiled ore from the nearby Owl Creek mine, a former producer.

The parent’s two Zimbabwean gold mines produce about 29,000 oz. per annum. Ferguson is discussing expansion of the Zimbabwean facilities. “We are contemplating doubling production in Zimbabwe,” he said. An improved investment climate (100% after-tax profit repatriation on new investment, for example) allows for the more aggressive stance.

On the exploration front, Ferguson calls its joint venture with Thunderwood Resources on the Pelletier Lake project south of Rouyn-Noranda, Que., an important property. An underground exploration/development program is under way. Undiluted, preliminary reserves stand at one million tons grading 0.17 oz.

Olav Svela is editor of The Northern Miner Magazine.