Dayton shareholders battle over merger plans

The directors of Dayton Mining (DAY-T) are facing a shareholder revolt in response to Minorca Resources’ (MAR-T) growing influence in Dayton’s boardroom.

On May 27, New York City-based investment firm Manchester Securities launched the revolt by proposing, via an information circular, an alternative slate of seven directors to be voted on by proxy at Dayton shareholders’ June 17 meeting.

Manchester is a wholly owned subsidiary of the U.S.-based investment fund Elliott Associates. Manchester, Elliot and a related Cayman Islands-based fund hold an aggregate 9.7% interest in Dayton.

“There are a number of shareholders out there who will agree with us and are not happy with the performance of the stock,” says Larry Dennedy of MacKenzie Partners, a proxy solicitation firm hired by Manchester.

Minorca’s relationship with Dayton began in February, when it acquired outgoing Dayton chairman Wayne McClay’s 12.2% interest for $16 million, or $3.20 per share. (The money came from the $67 million originally raised for Minorca’s Indonesian properties, which included an option to earn an indirect interest in Bre-X Minerals’ infamous Busang project.)

With the acquisition, Roland Horst left his post as Minorca president to become Dayton’s chairman and chief executive officer. Since then, Minorca has boosted its stake in Dayton to 14.8% and Horst has become Dayton’s president, all the while remaining vice-chairman of Minorca.

Minorca’s other vice-chairman, Alfred Lenarciak, also became a Dayton director. The other directors are Richard Hall, Michael Korenberg, Robert MacDonald, Robert Fairweather and Herbert Gasser.

In explaining its opposition to Dayton’s new management, Manchester raises the concern that the new regime may be working towards merging Dayton and Minorca in a deal that will be forged at the expense of Dayton shareholders.

Manchester also asserts that by focusing on the potential merger, Dayton management is overlooking other growth opportunities. In addition, Manchester is not satisfied with Dayton’s hiring of CIBC Wood Gundy in March 1998 for help with the identification of possible acquisitions. Says Dennedy: “You can have somebody looking, but you have to ask yourself, ‘how aggressively are they looking and how long have they been at it?’ We’d be much more aggressive.”

Manchester is also objecting to a “golden parachute” clause in Horst’s employment agreement with Dayton that entitles him to $900,000 (or three years’ salary) in the event of termination or a change of control at Dayton.

Manchester has proposed a slate of heavyweight nominees for Dayton’s board: William Myckatyn, former president of both Princeton Mining and Gibraltar Mines; Catherine McLeod-Seltzer, president of Pacific Rim Mining and former president of Arequipa Resources; James Askew, president of International Mining and Finance and former president of Golden Shamrock Mines; David Fagin, chairman of Western Exploration and Development and former president of Homestake Mining; Paul Blythe, former president of Compania Minera Gibraltar; Douglas Donald, former vice-president of Scudder, Stevens & Clark Gold Fund; and Herman Wilton-Siegel, a Toronto-based securities and mining lawyer.

“These people see the potential that this company has,” says Dennedy. “They will undertake a review of the entire range of Dayton’s activities, but we can’t speculate on that until we have the company.”

In response to Manchester’s announcement, Dayton’s banks have requested that, in order to cover its debts, the company set aside $36 million from its $52 million cash position until the fallout from the meeting can be reviewed.

Before Manchester’s proxy action, the remaining scheduled payments under the credit facility were $10 million in 1998, $21 million in 1999 and $5 million in 2000.

At presstime, Dayton had not officially responded to the proxy action, and Horst and other Dayton officers and directors were unavailable for comment.

Manchester’s move came the day before Dayton released first-quarter results that showed disappointing production, revenue and cash-cost figures at the company’s primary asset, the Andacollo open-pit gold mine in central Chile.

During the first quarter, Andacollo produced 18,109 oz. gold (5% under budget), down from the 23,540 oz. gold produced in the first quarter of 1997.

Cash operating costs at Andacollo were US$284 per oz. gold, compared with a restated US$229 per oz. a year earlier. The average sale price of gold produced at Andacollo in the first quarter was US$403 per oz., up from the US$390 per oz. a year earlier.

For the three months ended March 31, Dayton posted a net loss of $3.39 million (or 12 cents per share) on revenues of $10.19 million. This compares with a restated net income of $712,000 (1 cents per share) on revenues of $12.5 million for the corresponding period of 1997.

Dayton paid down, on schedule, about $20 million of its bank loan during the first quarter.

Throughput at Andacollo increased 13%, to 1.4 million tonnes grading 0.78 gram gold per tonne, in the first quarter, compared with 1.24 million tonnes grading 0.93 gram gold a year earlier. The stripping ratio rose to 3.1 to 1 from 2.1 to 1. This rise above the life-of-mine average has prompted Dayton to change its accounting policy. Beginning this year, the company is allocating mining costs based upon the life-of-mine average stripping ratio.

The change lowers the cash operating costs in 1996 and 1997 to US$235 and US$218 per oz. gold, respectively.

Dayton says the lowered production was due to three factors: lower-than-projected grades, particularly at the Socorro deposit; increased mining of the lower-grade Tres Perlas West deposit; and water supply problems.

Dayton has hired a new manager for Andacollo and has retained consultant David Beling to review the operation in conjunction with Denver-based consulting firm Mine Reserve Associates. The company says it wants to improve its grade control, particularly at the Socorro pit where old workings have hampered operations.

Exploration drilling during the past quarter at Andacollo’s Churrumata deposit added 1.9 million tonnes grading 2.84 grams gold to the resource and brought total resources at Churrumata to 30.6 million tonnes of 0.91 gram gold.

About two-thirds of a planned 15,000-metre drill program at Andacollo has been completed. The rest of the program will focus on definition drilling and the testing of new targets.

Dayton has privately placed US$350,000 with Golden Palm Resources (GPR-V), which controls about 90,000 ha of gold properties in Brazil’s Minas Gerais state. Golden Palm will issue Dayton 3.33 million units at 15 cents each.

Each unit consists of one share and one share-purchase warrant entitling Dayton to acquire another share for 15 cents for one year. Should Dayton exercises its warrants, it will own about 32% of Golden Palm.