Exco Resources fights hostile takeover

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 a previous 2004 estimate.

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

On Aug. 23, Washington H. Soul Pattinson and Company (SOL-A) — an investment house with a portfolio of assets spanning mining and pharmacies to food technology and media — made an off-market cash offer to acquire all the shares of Exco that it did not already own for A19¢ per Exco share. The offer was an 18% premium to the volume-weighted average price of A16.1¢ 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 A$4.61 million — bringing its stake in Exco 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 to the remainder of its shares in the absence of a superior alternative proposal for Exco. Ivanhoe chief executive officer Ines Scotland explained in a statement that management has 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 argues that WHSP’s A19¢-per-share offer for the company does not fairly reflect the value of the company’s assets, does not offer an adequate premium and is opportunistic, because it appears to “capitalize on recent difficulties that have forced Ivanhoe Australia Limited to sell non-core assets.”

It also argues that as of Aug. 28, Exco held A$53 million in cash, which represented about A14.4¢ 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 notes 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 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 Mount 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 contained tonnes copper and 26,000 oz. gold. A scoping study envisioning an underground mine with ore being processed by a third party in the Cloncurry area suggests that the Mount Colin resource “has the potential to unlock significant value to other producers in the Cloncurry region with excess processing capacity — particularly CopperChem,” the board argues 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 Mount Colin are strategically important to Copper Chem,” the Exco management outlines 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 Mount 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 contained tonnes copper and 25,500 oz. gold. Exco is completing a pit-optimization study, but based on its work so far, it believes that CopperChem or another miner in the Cloncurry region could mine and process the Kangaroo Rat deposit quickly, and unlock its value. “Gaining short-term access to Kangaroo Rat resources to augment current production at the Great Australia mine and processing facilities may be another motivating factor behind the Soul Pattison offer,” the company tells 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 A$4 million in revenue until the end of December.

At press time in Sydney, Exco was trading at A20.5¢ per share.