Azco shareholders dispute Phelps Dodge deal

Certain shareholders of Azco Mining (TSE) are attempting to block the company’s proposed sale of specific mining assets to Phelps Dodge (NYSE).

In late April of this year, Phelps Dodge offered US$40 million for complete ownerhsip of Azco’s Sanchez copper deposit in southeastern Arizona and a 70% interest in the Piedras Verdes copper deposit in Mexico’s Sonora state. Final approval for the transaction is still pending.

Former Azco director John Dreier, acting in concert with brokerage firm Muzinich & Co. and other large shareholders, decided to fight the sale based on a belief that it is not in the best interest of the company.

The Azco shareholders group was then formed in an effort to force the removal and replacement of four of Azco’s five current directors. In a proxy letter sent to all Azco shareholders, the group claims that “management has failed to live up to its stated goals.”

The dissident shareholders currently control 13.2% of the outstanding common stock of the company.

Azco management has countered the group’s efforts to block the deal with Phelps Dodge, and says Muzinich is trying to seize control of the company for its own purposes. The company has filed suit against the dissident group for alleged violations of the Securities Exchange Act.

The shareholders group has issued a plan of action which includes the replacement of the board with nominees from Muzinich. The plan also calls for continuing the pursuit of a financing package to bring the Sanchez mine into production, and completing a feasibility study on the Piedras Verdes project.

The group is considering a US$40-60 million equity offering as part of the financial package for the development of the Sanchez mine. Azco management has considered this option, as well. However, in management’s opinion, an offering would dilute its overall interest in the company and its assets.

The agreement with Phelps Dodge is subject to a US$4-million “break-up fee” to be paid to Phelps Dodge in the event Azco’s board of directors “does not recommend that shareholders approve of the sale of the assets.” If Azco does not accept the deal, it cannot make a deal with another company within 12 months of the agreement with Phelps Dodge without incurring the break-up fee.

The group is still uncertainas to whether the break-up fee applies in the event shareholders disapprove of the sale in the light of a new board. It is also concerned about the effect such a fee would have on future financing.

As part of its defence strategy, Azco management has enacted a shareholders’ rights protection plan designed to keep third parties from controlling more than 15% of the stock in Azco. The rights plan has no bearing on the current solicitation of consent involving the shareholder group.

Phelps Dodge holds the view that the dispute is between Azco and its shareholders, and says any further comment on the matter would be “inappropriate.”

The Sanchez deposit contains minable reserves of 229 million tons grading 0.29% copper. The Piedras Verdes project contains a geologic resource of 154 million tons grading 0.41% copper. Both projects are expected to use heap leaching and solvent extraction-electrowinning in processing.