Viceroy unseats Glamis Gold in bid for Rayrock Resources

Rayrock Resources (RAY-T) has left Glamis Gold (GLG-T) alone at the altar after a competing bid by Viceroy Resource (VOY-T) was judged by company officials to be superior to Glamis’ previously announced offer to merge.

Viceroy has structured the offer as a plan-of-arrangement whereby Rayrock shareholders will receive, for each share held, $2.50 in cash and 1.9 shares of Viceroy. In addition, Viceroy will distribute to each shareholder 1.22 shares of Blackrock Ventures (BVI-T), a heavy oil company in which Rayrock owns a 49.5% interest.

The offer is valued at $7.56 per share of Rayrock or $146.8 million — a 16.6% premium over Rayrock’s closing price on Jan. 8, the last trading day before Viceroy made its offer, and a 5.3% premium over the Glamis offer. When considered over a longer time frame of 20 days, Viceroy’s offer is valued at $7.76 per Rayrock share, or $157.4 million, and represents a 23% premium over the Rayrock share price and a 15% premium over the Glamis offer.

Glamis is offering each Rayrock shareholder 2.2 shares of Glamis, or 1.5 shares plus $3 cash, subject to a maximum cash distribution of $24 million, which equates to $1.24 per share.

Rayrock President James Askew explained the deciding factors in supporting Viceroy’s bid over Glamis: “There is more cash to shareholders, and that is an important consideration. At the very senior levels in Viceroy, there is more depth to management. Viceroy has a Canadian institutional following, while Glamis is predominantly U.S. We have a group here which has an excellent exploration track record. Finally, there is the decoupling from the oil and gas. These are all additives in supporting this transaction.”

Viceroy’s offer effectively unwinds the cross holdings between Rayrock and affiliate Blackrock, which in turn owns a 19.3% share of Rayrock, representing 25.4% of the voting rights. Viceroy’s plan of distributing Blackrock shares to shareholders will eliminate Rayrock’s ownership in Blackrock.

Rayrock also owns a 10.8% interest in another oil and gas venture, Magin Energy (MGY-T). Viceroy regards the oil and gas interests as non-core assets and, while not a condition of the proposed merger, the company has arranged to swap Rayrock’s shareholding in Magin Energy to Blackrock in lieu of a portion of Viceroy shares otherwise issuable to Blackrock, on the basis of one Viceroy share for every 0.815 share of Magin.

Upon conclusion of the transactions, Blackrock will own just under 3.1 million shares, or 3% of the new Viceroy, which will have a total of 87.4 million shares outstanding.

“Viceroy has looked at many projects and companies as potential acquisitions but has found flaws in the assets or has considered the asking prices to be too high,” says Clynton Nauman, president of Viceroy. “In Rayrock, we see an excellent opportunity to acquire a company with quality assets that are consistent with our focus in the Americas, as well as an excellent cash position and realizable advancements that will enable Viceroy to build a strong platform for future growth.”

Rayrock is sitting with US$51.4 million in cash and US$4.2 million of debt. Its core assets are its interests in three open-pit gold mines in Nevada (the 66.7%-owned Marigold mine and the wholly owned Daisey and Dee mines) plus the wholly owned Ivan copper mine in Chile.

For the first nine months of 1998, Rayrock’s direct share of production was 74,398 oz. at an operating cash cost of US$247 per oz. Gold production last year is expected to have totalled 100,000 oz. at a cash cost of US$240 per oz.

The Ivan mine produced 16 million lbs. cathode copper for the nine months ended Sept. 30, 1998, at a cash cost of US67 cents per lb. Copper production for 1998 is forecast at 20.3 million lbs. at a cash cost of US66 cents per lb.

Viceroy owns the Brewery Creek gold mine in the Yukon and has a 75% stake in the Castle Mountain gold mine in California. During the first nine months of 1998, Viceroy produced 103,661 oz. to its account at cash operating costs averaging US$267 per oz. For the year-end, Viceroy expects its share of production to total 146,750 oz. at a cash cost of US$246 per oz.

Nauman stresses that the most attractive aspect of Viceroy’s bid is that company’s balance sheet. The pro-forma Viceroy will have net monetary assets of $106 million, including $75 million in cash. This sets the stage for further growth says Nauman.

“Viceroy shareholders will benefit from a strengthened balance sheet and diversification of operations into Nevada,” he says. “We have had the opportunity to do some preliminary on-site due diligence and we see good potential, particularly at Marigold, to expand the resource base. It is our opinion that, historically, Rayrock assets, specifically its assets in Nevada, have not received the exploration funds required to optimize the resource base. We recognize that the Rayrock mines have been somewhat starved for exploration dollars.”

Rayrock recently announced an increase in gold reserves at its three Nevada mines, which will extend the mine life at Daisey and Dee to 2002, and at Marigold to 2007.

The board of directors of both Rayrock and Blackrock have agreed to support Viceroy’s bid. The offer is subject to two-thirds approval by Rayrock’s multiple and subordinate voting shares, as well as regulatory and court approval. Blackrock holds 100% of Rayrock’s multiple voting shares.

A $2-million break-up fee is payable to Viceroy should the arrangement not be completed. Glamis is entitled to that same $2 million fee under a similar arrangement.

An information circular will be mailed to Rayrock shareholders, and a shareholder’s meeting is scheduled for Feb. 23, at which time shareholders will be asked to vote on the bids by Viceroy and Glamis, and consider proposals made by Quest Ventures, a dissident shareholder with a 5% stake in Rayrock.

Quest wants to remove the current Rayrock directors and replace them with its own slate of directors and liquidate the company. Quest plans to pay a special dividend to shareholders using Rayrock’s cash and marketable securities, and then either sell or joint-venture Rayrock’s mining assets.

During the first nine months of 1998, Rayrock incurred a loss of US$24.1 million (or US$1.38 per share) on gold and copper revenues of US$36 million, compared with a loss of $8.8 million (49 cents per share) on $42.1 million in revenue in the first nine months of 1997. Rayrock took a US$15.6-million writedown of investments and mining assets during the third quarter of 1998.

In the first nine months of 1998, Viceroy lost $709,000 (1 cents per share) on sales of $61 million, compared with year-ago earnings of $4.6 million (9 cents per share) on $61.4 million in sales.