Exco Resources fights takeover bid

Just two weeks after the board of Australian junior Exco Resources (ESX-A) rejected a hostile all-cash takeover offer from one of its institutional shareholders, the explorer released an updated resource estimate for its Turpentine copper-gold deposit in northwest Queensland that confirmed a 181% increase in contained copper over an earlier 2004 estimate.

Exco identified Turpentine, part of the company’s Hazel Creek project about 120 km north of Cloncurry, as an iron oxide copper-gold (IOCG) target in early 2000. Drilling from late 2011 through to mid-2012 resulted in a 136% increase in Turpentine’s indicated resource at a 0.3% copper cutoff grade to 3.8 million tonnes grading 0.92% copper and 0.19 gram gold per tonne for 35,300 tonnes of contained copper and 23,500 oz. of contained gold. Inferred resources grew 750% to 1.8 million tonnes of 0.98% copper and 0.22 gram gold per tonne for 17,800 tonnes of contained copper and 12,900 oz. of contained gold.

The significant increase over the 2004 resource estimate was based on 48 additional holes or 8,575 metres of drilling that targeted areas outside the resource, and the definition of further mineralization along strike and down dip up to 140 metres below the lowest intercept. Turpentine’s mineralization extends over a strike length of 950 metres and has a width at surface ranging from 2-12 metres. The deposit has vertical extents of up to 300 metres and mineralisation is open at depth.

On Aug. 23, Washington H. Soul Pattinson & Company (SOL-A), an investment house with a portfolio of assets spanning mining and pharmacies to food technology and telecommunications and media, made an off-market cash offer to acquire all the shares of Exco that it did not already own for A$0.19 per Exco share. The offer was an 18% premium to the volume weighted average price of $0.161 per Exco share, but below the 30% premium typical of takeover offers in Australia.

The day before Washington H. Soul Pattison (WHSP) unveiled its A$69.8-million takeover proposal, it bought 24.65 million shares in Exco from Ivanhoe Australia (IVA-T, IVA-A) for about A$4.61 million — bringing its stake in Exco up from 13.1% to 19.9%. After the sale, Ivanhoe Australia held about 55 million shares of Exco.

In a news release Ivanhoe Australia said it intends to accept WHSP’s offer for all of Exco’s issued capital in respect of the remainder of its shares in the absence of a superior alternative proposal for Exco. Ivanhoe chief executive Ines Scotland explained in a statement that management had decided to sell its shares in the junior to focus on core exploration and development assets and continue its strategy at Osborne, a copper-gold project that moved into production in late February. Osborne, 50 km south of Ivanhoe Australia’s Mount Dore copper cathode project and its Merlin molybdenum-rhenium deposit, was acquired from Barrick Gold (ABX-T, ABX-N) in September 2010.

In a statement to shareholders in late August the Exco board argued that WHSP’s A$0.19 per share offer for the company did not fairly reflect the value of the company’s assets; did not offer an adequate premium; and was opportunistic because it appeared to “capitalise on recent difficulties that have forced Ivanhoe Australia Limited to sell non-core assets.”

It also argued that as of Aug. 28, Exco held A$53 million in cash, which represented about 14.4¢ per share. “The Soul Pattison offer therefore values all of Exco’s remaining assets at just A$16.9 million,” the board outlined, an amount it deemed “wholly inadequate.”

Exco’s board also noted that the value of its royalty entitlement over the sulphide ores from the Great Australia lease in Cloncurry, which is being mined by CopperChem, a subsidiary of WHSP, could generate roughly A$25 million over the expected life of the Great Australia project (based on US$3.70 per lb. copper and an estimated 1.7 million tonnes of qualifying sulphide ore). “The value of the CopperChem royalty alone could exceed the A$16.9 million valuation placed on all of Exco’s non-cash assets by the Soul Pattison offer,” the board said.

In terms of Exco’s other assets, the Mt. Colin copper-gold deposit in northwest Queensland, which remains open at depth, has measured and inferred resources totalling 1.9 million tonnes grading 2.29% copper and 0.42 gram gold per tonne for 50,000 tonnes of contained copper and 26,000 ounces of gold. A scoping study envisioning an underground mine with ore being processed by a third party in the Cloncurry area suggested that the Mt. Colin resource “has the potential to unlock significant value to other producers in the Cloncurry region with excess processing capacity — particularly CopperChem,” the board argued in its dismissal of the WHSP offer.

“Your independent directors believe that Great Australia has a limited remaining life of less than two years and that Exco’s resources at Mt. Colin are therefore strategically important to CopperChem,” the Exco management outlined in a news release. “In this regard, for more than two years, Exco has had various discussions with CopperChem about the potential for CopperChem to gain access to Mt. Colin ore or acquire the project outright. During this time, CopperChem have had access to confidential information including the scoping study.”

Meanwhile, at its Kangaroo Rat project, 30 km southwest of Cloncurry, inferred resources add up to 1.25 million tonnes grading 1.29% copper and 0.6 gram gold per tonne for 16,000 tonnes of contained copper and 25,500 ounces of gold. Exco is in the process of completing a pit optimization study but based on its work so far believes that CopperChem or another miner in the Cloncurry region could potentially mine and process the Kangaroo Rat deposit quickly to unlock the value of the deposit.

“Gaining short-term access to Kangaroo Rat resources to augment current production at the Great Australia mine and processing facilities may be another key motivating factor behind the Soul Pattison offer,” it told shareholders.

Exco’s board also contends that the offer does not adequately value the company’s exploration interests in the Mt. Isa Block of northwest Queensland that includes its Cloncurry and Hazel Creek project areas. The Cloncurry project covers more than 1,900 sq km and includes a number of high priority prospects including the Salebury-Tanbah and Weatherly Creek-Canteen areas. Hazel Creek, which includes the Turpentine deposit, incorporates more than 1,000 sq. km of land that Exco claims remains relatively unexplored.   

Finally, its joint-venture White Dam mine in South Australia, although in the final phase of its mine life, is expected to generate about A$4 million in revenue through to the end of December.

At presstime in Sydney Exco was trading at A$0.205 per share.