CANADIAN PERSPECTIVES: Canadian Royalties target of unsolicited offer

Last week Goldbrook Ventures of Vancouver and Chinese partner Jilin Jien Nickel Industry Co. announced their i...

Last week Goldbrook Ventures of Vancouver and Chinese partner Jilin Jien Nickel Industry Co. announced their intention to launch an all-cash takeover bid for Montreal-based Canadian Royalties. The deal is worth approximately $148.5 million.


Canadian Royalties' chief asset is its Nunavik nickel project in northern Quebec near Xtrata's successful Raglan mine. Since 2001 several nickel-copper-cobalt-platinum-palladium-gold deposits have been outlined. According to the bankable feasibility study completed in June 2007, the deposits contain indicated resources of 19.4 million tonnes and inferred resources of 4.1 million tonnes of grades similar to the reserves. Of that amount, probable reserves are counted at 11.3 million tonnes averaging 0.97% Ni and 1.13% Cu.


Let's do a little math … Canadian Royalties plans to produce 26 million lb of nickel annually over a nine-year mine life, or 234 million lb of nickel. Goldbrook and Jilin Jien have essentially offered C$0.62 per lb for the nickel output potential. Added to the nickel output would be 350 million lb of copper, 8.1 million lb of cobalt, 1.3 million oz of platinum and 707,400 oz of palladium over the same nine years. That is a lot of valuable metal that Goldbrook and Jilin Jien hope to get control of for only $148.5 million.


On the other hand, building the Nunavik mine and concentrator will take an estimated $466 million, and Canadian Royalties has some debt, namely $137.5 million in debentures due in March 2015. The company also claims to have about $20 million cash in hand.


Let's do a little more math … If Goldbrook and Jilin Jien successfully take over Canadian Royalties, the new owners will have to assume the debt load and find the cash to develop the project, but they would benefit from the cash on hand. The net amount is perhaps $583.5 million. Add to that the takeover offer of $148.5 million, and the sum is $732 million. Assuming the debt and construction obligations plus the amount of the takeover offer, makes the 234 million lb of nickel in the ground worth approximately C$3.00 per lb. Still a bargain price for a metal that was trading on Aug. 12 for about US$8.75/lb.


(If I have made a major mathematical error, please let me know.)


At press time, Canadian Royalties was advising its investors to defer any decision on the offer until its board has time to evaluate it and make a recommendation.


Having seen many takeovers, business combinations and mergers over the last few years, I have a feeling this one will go forward but only after some wrangling.


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