UPDATE: Gold Fields and Bolivar deal under attack

When Gold Fields (GFI-N, GOF-L) first announced its friendly takeover of Bolivar Gold (BGC-T, BGCNF-O), it looked as the though the transaction would sail along smooth waters.

After all, most juniors toil for years, hoping to capture the attention of a large player with the capital to carry management and investors into the land of sunshine.

But a storm is brewing on Bolivar’s horizon. California-based Scion Capital, one of Bolivar’s largest shareholders, is doing all it can to sway other shareholders to a “no” vote — and it doesn’t need to convince many to get its way.

As holder of 19.14% of Bolivar shares, Scion only needs another 13% of shareholders to say nay and the deal is scuttled. The proposed merger needs approval of roughly 66% of shareholders to go through.

When Gold Fields announced the agreement on Nov. 21, it pointed to a 40% premium over Bolivar’s average trading price for the previous 30 days, and a premium of 18.6% over the closing price on Nov. 18, as enticements to shareholders.

In all, Gold Fields was offering to buy Bolivar’s outstanding securities for US$330 million cash, or $3.00 a share.

But a harshly worded dissident circular released by Scion on Dec. 19 labels the offer as opportunistic on the part of Gold Fields, and beneficial to the management of Bolivar at the expense of its shareholders.

Perhaps most importantly, Scion says the upside of Bolivar’s Choco 10 project in Venezuela is not reflected in the offer — a belief Scion says will be born out when Bolivar’s recent drill results are verified early in 2006. In the meantime, Scion claims Gold Fields is taking advantage of the lag-time between drilling completion and the independent verification of those drill results.

“Bolivar is the cheapest and best investment in the gold sector today due to its low cost and significant growth prospects,” the dissident circular says.

Scion estimates cash costs of US$160 per oz. once the mine reaches full production, and says the resource will grow to 5 million oz. gold.

Bolivar began commercial production at Choco 10 on Aug. 1. Bolivar estimates fourth quarter production will be 48,000 oz. gold, from a currently defined reserve of 21.5 million tonnes averaging 1.9 grams per tonne for a total of roughly 1.3 million oz.

Countering Scion’s robust 5-million-oz. projection is Chantal Gosselin, an analyst with Toronto-based Haywood Securities, who says the market doesn’t reward a company for projected resources, only for reserves.

Gosselin estimates Choco 10’s reserves could reach 3.3 million oz. — putting the value of the company more in line with Gold Fields’ offer.

“I think the bid is good,” Gosselin says of the offer. Gosselin has Bolivar’s net asset value (NAV) at US$2.10 a share.

Gosselin’s target for Bolivar matched Gold Field’s offer of $3.00. She says Scion’s dissident circular is really about “squeezing a little more” out of Gold Fields — something she says will be hard to do. Gold Fields has a track record of rarely raising its offers.

Gosselin doesn’t hold shares in either Gold Fields or Bolivar, but Haywood has had an investment banking relationship with Bolivar in the last 12 months.

Scion would not disclose the extent of its research team’s experience in analyzing mining companies, or how many mining companies it has in its portfolio.

Scion’s chief executive and portfolio manager, Michael Burry would say only that, “Scion has a team and it is experienced enough to evaluate such companies.”

The Venezuelan card

The extent to which Choco 10’s location in Venezuela has affected Bolivar’s share price is also at issue. Burry says Gold Fields took advantage of the market’s overreaction to comments Chavez made in September regarding the possibility of nationalizing certain mining projects.

Bolivar shares tumbled nearly 30% after Chavez’s speech. Fellow foreign nationals operating in Venezuela, Crystallex International (KRY-T, KRY-X) and Gold Reserve (GRZ-T, GRZ-X) also fell hard, but have regained momentum in the last month. Analysts say the upswing came as the market began to see Chavez’s comments as less threatening than originally believed.

“It was a misunderstanding that Gold Fields is taking advantage of,” Burry says. “They knew Bolivar’s share price was recovering and the risk was dissipating, so they felt a need to rush Bolivar into responding quickly.”

Bolivar’s political risk is on the decline, he says, pointing out that the company has secured its final permits and begun production at Choco 10. Burry says only companies not using permitted land risk expropriation by the Chavez government.

But Gosselin says the political risk in Venezuela remains real.

“I don’t think you can say Chavez is not dangerous,” Gosselin says. “I was still backing Bolivar, but Venezuela is a higher risk than any other South American country.”

Usually, Gosselin uses a 3% political discount on companies operating in unstable regions, but for Venezuela, she uses 8%. She says many investors remain leery about the country since Chavez’s comments.

Golden parachutes

The circular also draws attention to payments to Bolivar’s management that would be made if the deal goes through, calling them “very excessive.”

Of particular concern for Burry is the “phantom stock plan” — a benefits plan giving senior management many of the benefits of stock ownership without actually giving them company shares. The phantom shares were set to expire on Dec. 31, meaning a deal made after that date would not have resulted in a payout, unless the plan was renewed.

In the dissident circular Scion says Bolivar management will receive roughly $29 million if the deal is completed.

The payout, however, is broken into three separate categories: severance, “phantom stocks,” and stock options. Phantom stocks have been used by Bolivar in lieu of giving senior management annual bonuses. The board approved their renewal on Nov. 15 — shortly before Gold Fields made its accepted offer. Such bonuses are commonly set up to expire after a given term and then renewed.

Question of independence

Scion’s circular doesn’t, however, stop with pointing a finger at management. It also questions the independence of Sprott Asset Management’s independent valuation of the proposal and the advisory work done for Bolivar by GMP Securities.

“Sprott, whose formal valuation the independent committee of Bolivar’s board of directors has relied on in recommending the transaction, is engaged as an investment banker and financial advisor to Pacific Stratus

Energy — a company in which a number of Bolivar’s directors and officers are involved,” the circular states.

Sprott was not available for comment.

As for GMP, the dissident circular says the company acted as an underwriter for an anticipated $150-million offering by Coalcorp Mining (CCJ-V, CCJFF-O) — a company sharing largely the same management as Bolivar.

GMP, however, no longer has any affiliations with Coalcorp, and GMP’s chairman Eugene McBurney freely admits that GMP isn’t “independent” in its role.

“By definition of the Securities Act, we are not independent,” McBurney says. He notes that most investors are aware that GMP is not acting in an independent capacity as its advisory fee is attached to the successful completion of an offer.

Making waves

While smaller investors have been inclined to portray Scion as a market Robin Hood, Burry has no such illusions.

“We’ve had contact from smaller shareholders and we’re aware that we’re being seen as the champion of the little guy that so often gets screwed. But that’s not what is driving us,” he says. “I run a hedge fund. I’m out to make money. This is a valuation call, and Bolivar’s made a very bad judgment.”

On the flip side, Scion has also raised the ire of mining industry experts such as Frank Holmes, chief executive of San Antonio, Texas-based U.S. Global Investors. Holmes calls Burry’s attack on Bolivar “unprofessional.”

“I applaud him for striving to get a higher price,” Holmes says. “But it’s unprofessional making allegations of conflict-of-interest . . . Don’t make personal attacks; it should be done strictly on math and geopolitical risk.”

Holmes dismisses Scion’s attack on Bolivar’s management, and points to the success of Bolivar’s president and chief executive, Serafino Iacono, in Latin America as reason to have faith in the value of the Gold Fields offer.

Holmes says Iacono was one of the only chief executives to turn the buzz surrounding mining in Latin America in the 1990s into a real mine.

“Everything was Latin America back then,” Holmes says, “but the only guy to find a mine and bring it to production was Iacono.”

He challenges Burry to do better.

“If he’s so bullish,” Holmes says, “then he should buy Bolivar.”

But Scion is about investing in the market, retorts Burry, not private equity. “We typically rely on management to look out for the best interest of shareholders,” Burry says. “And in this case we’re not seeing it happen.”

Another analyst, who didn’t want to be named, says the business of valuing a gold company is highly subjective and it’s not unusual for large investors like Scion to believe their shares to be worth more than the market deems them to be.

The analyst points to the fact that Bolivar’s shares have not traded through the $3.00 threshold — Gold Fields’ offer — as evidence the market doesn’t believe Bolivar to be undervalued in the deal.

“A lot of investors want a sale. The market wants a sale,” the analyst says. “Bolivar are among the lucky ones to execute a deal.”

In a letter issued to its shareholders on Dec. 21, Bolivar points to Scion’s own selling of a significant position at $2.98 in September 2005, the lack of competing offers since the bid was announced, and the acceptance of the bid by many of Bolivar’s institutional investors (as shown by their selling at a discount to the offer price) as indicators that the market sees the offer as “more than fair.”

The letter also says the offer currently on the table is the third from Gold Fields — the first two were deemed inadequate by Bolivar — and came only after two other merger candidate’s offers were rejected.

The deadline for voting is Jan. 10, 2006.

Gold Fields purchase of another 2.6 million Bolivar shares on Dec. 21, brought its total of common shares held to 15.5%. It also holds roughly 6 million warrants that represent another 5.1% of common shares on a partially diluted basis, bringing its combined ownership to 19.85%. Scion is the largest holder of common shares 19.4%

Gold Fields’ move to acquire more shares doesn’t faze Burry.

“We’re a lot closer to our target than they are,” he says. “Actually, I think the move shows that they are worried.”

On Friday Dec. 30, the Institutional Shareholder Services Canada, an independent proxy firm and an affiliate of Institutional Shareholder Services (ISS), recommended its clients, including Canadian, U.S. and global institutional investment firms, vote for the proposed combination of Bolivar and Gold Fields.

Scion shot back, saying ISS agreed with many of its concerns over the use of GMP and Sprott as advisors, and the excessiveness of the golden parachute payment to Bolivar officers.

“It is unclear to us how ISS Canada can on the one hand say this offer is not unfair to security holders, but on the other hand criticize and question the process by which this offer came about,” Burry is quoted as saying.