One uranium junior lacked cash and the other a worthwhile project, but they both had the same chief executive and an overlap of directors, making a merger the obvious choice, says Mark Morabito, president and CEO of Crosshair Exploration & Mining (CXX-T, CXZ-X) and CEO of Target Exploration and Mining (TEM-V, TEMFF-O).
A three-year moratorium on uranium mining on Labrador Inuit Land passed last April has sent investors fleeing from Crosshair even though its Central Mineral Belt project is outside of the affected area.
Meanwhile, the downturn in the market made it difficult for Target to fund a National Instrument 43- 101 resource estimate for its Bootheel uranium project in Wyoming without heavy dilution.
“What Target would have had to have done is raise a million dollars at a nickel or a dime,” explains Morabito. “So it was a dilution thing.”
Morabito says other options were considered for each of the struggling companies, but this one was the best for Crosshair, which will be the name of the combined company.
“You had Target that needed money, the sooner the better, and Crosshair with an asset that is being significantly discounted by the market because it’s in Labrador,” Morabito explains. “Labrador has got this taint on it. . . the market has said ‘we don’t care whether you are directly affected by the moratorium or not, you are in Labrador.'”
Under the merger deal, Crosshair will issue 14.6 million shares in exchange for all of the outstanding Target shares, which is about 15.4% of Crosshair’s outstanding shares.
Crosshair shares fell 6¢ to 24¢ each on a trading volume of 514,000 shares on the news. The company has about 95 million shares outstanding.
Target shares rose 4.5¢ to 22.5¢ on a trading volume of 159,000 shares. It has about 12.2 million shares outstanding.
As a part of the transaction, Crosshair will provide bridge financing to Target in the form of a secured promissory note, maturing in one year at 7% interest.
Morabito says the bridge financing will be for about $1 million plus interest. The money will pay for historical drill logs held by a third party that Target needs to finish a resource estimate, expected to be completed during the first quarter. The information will add to a 50,000-metre drill program completed in 2008.
Bootheel has a historical resource of 11 million lbs. U3O8. Morabito says the company hopes to develop a 20-to 25-million-lb. in-situ recovery project over the next four to five years.
The combined company will have $5.5 million in cash. Morabito says the company will likely spend about $1.5-2 million over the year and about 80% of it will go toward the Wyoming project.
In addition to the resource estimate, Crosshair is planning to do a small field program at Bootheel, which will complete the company’s 75% earn-in with joint-venture partner Ur-Energy (URE-T, URG-X).
Morabito says Crosshair needed to expand its interest out of Labrador.
“Crosshair’s alternative was sit on the money and burn it down and just hope that one day the moratorium comes off,” Morabito says. “We believe (Bootheel) will be in production within the next several years. . . we think it’ll put Crosshair in a pretty good position in a pretty short order.”
Canaccord Adams released a report on Crosshair the same day the merger was announced. Analyst Eric Zaunscherb gave Crosshair a sell rating with a target share price of 15¢. The downgrade was based on Crosshair’s Labrador focus and not on the proposed merger.
Zaunscherb wrote that although Crosshair’s current resources are not located on Inuit lands in Labrador, he applied a discounted multiple to the company’s re-and sources “reflecting the existing moratorium on uranium exploitation on Inuit lands and the market reality of frozen uranium exploration in Labrador.”
“That just underlies the importance of Crosshair finding something else,” Morabito says.
Morabito sat out of the decision-making process because of his position in both companies. Negotiations were conducted by two special committees of independent directors.
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