TORONTO () -- Resource Investor has already commented on the inadequacy of Gold Field's [NYSE:GFI] bid for Bolivar [TSX:BGC].
The retail investor without a great knowledge of the sector, and acting alone, is vulnerable to advantage taking by mining companies whose fairness opinions are decided before pen is put to paper, or the first spreadsheet is compiled (it is long past time that the IDA look into this whole fairness opinion situation such that small shareholders are protected by as much objectivity as possible).
It is fortunate that in this case, a hedge fund is on board with the financial and legal firepower to tell the other side of the story, and in that way Scion is in effect , while the investment banks retained to do a valuation are working for management.
As your correspondent noted at the time of the Gold Fields bid for the 89% of BGC the company did not already own, Bolivar is being acquired for what would seem to amount to only about $300 per recoverable reserve ounce.
The valuation looks kosher because:
- The company and its advisors are using last year's reserve numbers (Paradigm Capital and GMP Securities research, plus the company's own October presentation, are a testament to this.) A substantial increase in reserves is expected early in the New Year, which will now fall right to the bottom line for Gold Fields shareholders after the acquisition is consummated, and GFI management can report a big reserve increase and look like heroes.
- It appears as though CAPEX for mill expansion to boost production to 400,000 ounces per annum is being included in the total figure, when in reality this is effectively a post-acquisition decision on a producing asset, and therefore only sustaining CAPEX should be relevant in the acquisition cost per ounce equation.
Those two factors are bringing up the total all-in acquisition cost per recoverable reserve ounce to about $350, and so seemingly in line with recent industry mergers/acquisitions.
Hypocrisy - Bolivar Can't Have It Both Ways
While Scion is tackling this issue purely from a value perspective, our point all along has been that while publicly stating that things in Venezuela are tickety-boo, management has proceeded to sell the company at a discount to recent peer transactions. These two things are by necessity, mutually exclusive:
- Either admit that there is a Venezuela discount (which there is, and should be), in which case C$3 per share seems fair and reasonable to us.
- Or, maintain that there is no Venezuela discount, and demand C$5 per share - because that is what the assets would be worth if they were located in a different country.
It is one, or the other - it cannot be both.
Embry
In an interview with John Embry at the beginning of December, his comment was:
"I think with Hugo Chavez at the helm there [Venezuela], it's a pretty dicey situation. I consider myself extraordinarily fortunate that the only exposure I had there, Bolivar is being taken out at a nice profit for me, so to come out of Venezuela with a win, I consider a major score for me."
"There is a Venezuela discount. If it weren't in Venezuela, Bolivar would probably be, I don't know, C$5 anyway. The fact is that it is in Venezuela, and Venezuela is what it is."
"There are enough other things to play, I'm glad to sell it and move on."
We agree with this, and this is the problem that Scion might have trying to get a better offer for the company - institutional investors, and maybe even some retail investors, realize the risk of operating in Venezuela, and are happy to get out with their capital intact, and maybe even a small return.
Dissident Proxy Circular
Here are some of the interesting, and germane highlights from a valuation standpoint in Scion's Bolivar Proxy Contest - in the absence of an admission of a 'Venezuela discount,' the sound state of the company, and the promise and growth potential of Choco 10 must be taken into account. Quotes from the Dissident Circular are italicized and followed by comments from your correspondent.
"The price neither appropriately nor accurately values the current assets of Bolivar and does not take into consideration any of the significant value that Bolivar is expected to capture in the near future."
With critical mass in place and the ability to ratchet up production fairly quickly and cheaply to 400,000 ounces per year, this is a very salient point.
"We also find Sprott's institutional duplicity in its opinion of Bolivar troubling. How can Sprott analyst David Stein raise his target price on Bolivar from C$3.65 to C$4.00 on November 15, 2005 only to have Sprott deliver a valuation on November 30th that the fair value of Bolivar is only C$2.65 to C$3.25 per share? Presumably, Sprott is relying on a similar set of facts, circumstances and information to develop its valuation, whether that valuation is for its trading clients or its investment banking clients."
Very comical - and revealing.
"As affirmed by Gold Fields itself in public comments its officers have made, Bolivar's cash costs of production are expected to be below US$200 per ounce, and based on our own analysis and due diligence, costs of production of US$160 per ounce (or lower) are more likely. This number is lower than the historic costs for Bolivar, but those historic costs represent significant start-up costs. Costs were being incurred without the accompanying production, temporarily skewing the current costs per ounce produced figures."
This may well be the case, and if so, the bid looks even lower on a per ounce basis.
"Gold Field's bid has been well timed, as it will probably close before a new independent resource estimate will be available (February - March 2006). This is quite unfortunate for Bolivar shareholders as the results for the September and November drill releases have included the best in Choco 10's history."
That's a quote from Paradigm Capital, and there is no denying that this swings the valuation meaningfully.
"Gold Fields touts that its offer constitutes a 40.9% premium over the prior 30-day volume-weighted average of the trading price of Bolivar's common shares and an 18.6% premium over the closing price on November 18, 2005, the trading day immediately preceding the announcement of its offer. While both statements are factually correct, the reality is that the offer by Gold Fields does not truly provide Bolivar shareholders with a 'premium' for their shares. In March 2005, Bolivar common shares traded as high as C$2.97, and in September 2005, the shares traded as high as C$3.05."
This is undeniable - using the 30-day average is not representative of where BGC shares had been, as six weeks prior to the bid the market clobbered Bolivar paper after some remarks from Chavez which cast doubt on the security of land tenure for foreign miners operating in the country. As a follow-up to that point, consider the following:
"Since November 18, 2005 the last trading day before Gold Fields announced its offer, Gold Reserve Inc. ("Gold Reserve") (TSX: GRZ) and Crystallex (TSX: KRY), two other companies with gold mining exposure to Venezuela, saw their share prices increase by 38% and 46% respectively. The Gold Fields Offer only provides Bolivar shareholders with a 19% premium over that November 18th price."
I may not be a fan of those companies, but they have rebounded, as clearly the market is still willing to give Chavez the benefit of the doubt to some degree.
"In response to Gold Fields' request, Bolivar management's initial intent was to seek an exemption from obtaining an independent valuation of Bolivar, a procedure that is required under Canadian law for an insider transaction of this kind. This move by Bolivar and Gold Fields together was a move against shareholder protection. We believe that it was not until we sent a letter to Bolivar management and its board of directors questioning this plan that Bolivar decided to comply with applicable legal obligations and dropped their plan to seek an exemption from the independent valuation requirement."
Surely this isn't acceptable.
Conclusion
Management is effectively hoist by its own petard, as the insistence on sticking to the party line about the secure operating environment in Venezuela should mean that Bolivar can attain full value for its assets. The company now has to argue that C$3 per share is full value, when in fact anyone with the ability to look at recent industry transactions, apply the formula, and do simple arithmetic can see that that is not the case. The only justifiable reason for giving this company away at these levels, with gold passing through the magical $500 mark, is the Venezuela X-factor - and it is long past time that that was officially acknowledged.
