Noront Looks To Consolidate Ring Of Fire

The remoteness of Noront Resources’ (NOT-V, NOSOF-O) “Ring of Fire” discoveries in the James Bay lowlands of northern Ontario has long been a concern for investors.

Lacking roads or any other forms of basic infrastructure, the economics of its McFaulds Lake project have often come into question.

Noront is trying to allay such concerns through consolidation of the area and the prospective economies of scale that could bring. Towards that end, it is tabling an all-share hostile offer for one of its neighbours in the area, Freewest Resources Canada (FWR-V, FWERF-O).

“Noront believes consolidation of the Ring of Fire is the only course to ensure the development of the region,” the company said in a statement. “This transaction will result in the economics of all Ring of Fire projects improving as the heavy development capital cost burden of the infrastructure will be shared by a series of mines.”

Noront’s unsolicited offer values Freewest at roughly $90 million.

Noront is offering one of its shares for every four Freewest shares, which values Freewest at 40¢ based on closing prices on Oct. 2, the last trading day before the bid was announced.

And while Freewest shares traded between 22¢ and 29¢ throughout September, the targeted company said the offer was “highly opportunistic and significantly undervalues Freewest’s assets and future value-creation potential.”

Still, Freewest said it would consider the offer when it is formally made. One aspect of the deal that Freewest management may find hard to swallow is that Noront is demanding that the company’s “management change of control payments” be severely crimped.

As it stands now, Freewest’s chief executive, Mackenzie Watson, is due to collect a $4-million payout in the event of a management change.

Noront points out that the amount represents 6% of the pre-announcement market capitalization of Freewest.

“Noront believes this change of control payment to Mr. Watson is excessive and is significantly out of line with customary change of control payments made to executives of similar-sized Canadian companies and consequently, is detrimental to Freewest shareholders’ best interests,” the company said in a release.

Noront says that a condition of its offer will be that all change of control payments to Freewest management will be capped at an aggregate amount of $1.5 million.

Noront discovered high-grade nickel and copper in the remote area west of James Bay two years ago, sparking a junior exploration rush.

Since that time, Freewest has managed to attain some of the most consistent drill results. In mid-September, the company announced it had intercepted 41.3% chromium oxide over 44 metres and 42.5% chromium oxide over 26 metres from the Black Thor chromite zone at its McFaulds property.

At presstime, Freewest shares were trading just a shade above the implied value of the deal at 40.5¢.

As for Noront shares, after pausing to digest the news, the market appears to be applauding the company’s strategy. While its share price fell 3% to $1.55 after the deal was announced on Oct. 5, at presstime, they had rebounded 12% or 18¢ to $1.73.