Royal Oak offers `paper of questionable value’ — Lac strikes

A week and a half after Royal Oak Mines (TSE) made its widely publicized, hostile takeover bid, the management of Lac Minerals (TSE) has responded with a scathing critique of the offer.

Speaking at a press conference in Toronto, Lac Chairman Peter Allen stated: “The board of directors unanimously concluded that the unsolicited offer was inadequate and is not in the best interests of Lac’s shareholders.” Several reasons were cited as to why the 11-member board deemed the offer inadequate.

In a prepared statement, Lac said its shareholders have been asked to finance Royal Oak’s purchase with cash from their own treasury, thus leaving the shareholders of the new company as owners of a highly leveraged operation. As well, the transaction requires Royal Oak to enter into restrictive covenants with lending institutions, thereby limiting the new company’s operational and financial flexibility.

According to James Pitblado, a spokesman for the Lac board: “The deal can be characterized as a 1980s-style deal; it involves lots of creativity and gimmickery but no real value. More than three quarters of the value of what our shareholders are being offered is paper money. How is underlying shareholder value unlocked by offering paper of questionable value, in using financial leverage, in restricting operating and financial flexibility and playing accounting games?”

As negative factors in the bid, Lac also cited Royal Oak’s “questionable” accounting practices and its “low-quality, short-lived and high-cost mines with unknown environmental risks.”

For her part, Royal Oak President Margaret (Peggy) Witte said the Lac response fails to address the key issue of management.

“Royal Oak has always acknowledged Lac’s world-class assets, but it has questioned Lac’s management of those assets. By confirming that it does not intend to change the existing management direction, Lac’s board has indicated it will accept the continuation of the company’s lacklustre performance of the past few years.”

However, there were indications that Lac’s management is aware of its alleged shortcomings. “Perhaps we can be criticized, criticized for hiding our light under a bushel basket,” Pitblado said.

Lac’s board argued that, with a lack of cash in the kitty and restrictions on alternative sources of funds, the new company would be severely limited in its ability to expand reserves and production.

Allen said “we believe that our focused exploration program is a far better use of Lac’s cash than to allow another company to buy Lac shares, leaving shareholders with a company that is unable to grow.”

He then highlighted results from the first year of Lac’s 5-year expansion plan. “We have decided to share with you our updated cents though previously announced] 5-year plan because these are not normal times,” Allen said The 5-year plan, which entails an expenditure of US$600 million over a 3-year period, is designed to triple the major’s reserves by 1998.

Proven, probable and possible reserves at the end of 1993 were 8.6 million oz. Now, at the end of the first year of the 5-year plan, Lac has succeeded in increasing reserves to 13.5 million oz. It also has a geological resource of 13.5 million oz., raising total reserves to 27 million oz. Lac also plans to increase production by 60% — to 1.6 million oz. by 1997 from the current 1 million oz.

The increased reserves and production will come from the Nevada and El Indio projects in Chile, the Red Mountain project in British Columbia, and the Bullfrog and Macassa mines in the U.S. and Ontario, respectively. Some analysts are remaining skeptical about Lac’s chances at fighting off the bid. Egizio Bianchini, gold analyst with Nesbitt Thomson, is neither surprised nor impressed by the increased reserves. “A lot of the increases in reserve numbers we knew about before,” he said, “and we are somewhat skeptical about the geological resource estimates.”

Bianchini does, however, think the defence is probably sufficient to force Royal Oak to up the bid. The company recently enlisted the help of a fourth bank to join its financing group. The Union Bank of Switzerland has strong experience in gold-related transactions, according to Royal Oak. The analyst went on to say that Lac’s efforts to boost confidence in its management “were probably not sufficient” and that there is a “strong possibility” that it will receive the aid of another company in its attempt to prevent a takeover by Royal Oak.

Royal Oak’s offer, consisting of either $3.75 in cash and 1.75 Royal Oak shares or 2.4 royal Oak shares, is to close Aug. 9.