Canada Lithium and Sirocco to merge

A merger between Canada Lithium (TSX: CLQ; US-OTC: CLQMF) and Sirocco Mining (TSXV: SIM; US-OTC: ATAAF) would make the combined entity one of just two public companies that produce iodine and lithium, the companies say.

Their proposed business combination announced on Dec. 4 would also help the new company take advantage of the latest developments in lithium–iodine technology, which Canada Lithium says “demonstrates higher energy levels and increased battery performance over current lithium battery technologies.”

Sirocco Mining is already producing iodine from its Aguas Blancas mine in northern Chile, and iodine production there is expected to reach 1,400 tonnes for 2013. The production forecast for 2014 is only 1,000 tonnes, however, as the company is reducing output and laying off staff during softer iodine markets. As soon as the company installs a semi-autogenous grinding mill — perhaps in 2015 — annual iodine capacity is forecast to grow to 2,000 tonnes.

Sirocco’s balance sheet and cash flow also help de-risk the production ramp-up at Canada Lithium’s 100%-owned lithium project near Val-d’Or, Que., which is expected, once in full production, to turn out 20,000 tonnes of battery-grade lithium carbonate a year, or 12% of global supply.

Canada Lithium has finished construction and is in the commissioning phase of an open-pit mine and on-site processing plant. The company signed a five-year off-take agreement for a minimum 12,000 tonnes a year with Tewoo–ERDC, one of China’s largest commodity traders. It has a second off-take agreement for up to 5,000 tonnes a year with Marubeni Corp., a major Japanese commodity-trading company. 

The two miners are bullish that industry growth in cars and electronics will drive demand for lithium products, while widening applications that are anticipated for X-ray media in Asia will fuel iodine consumption. And in the short- to medium-term, they say, there is potential for downstream, value-added growth into lithium metal, potassium and sodium nitrates, sodium sulphate and lithium hydroxide.

Under the proposal, Canada Lithium shareholders would own 58% of the combined entity, and Sirocco shareholders would own 42%. Sirocco shareholders would receive 1.175 Canada Lithium shares for each Sirocco share, which values each Sirocco share at 48¢, or a 23% premium, to Sirocco’s 20-day, volume-weighted average price.

The companies’ boards have approved the arrangement. Sirocco has also agreed to provide a bridge loan of up to $10 million to Canada Lithium.

Richard Clark, Sirocco’s CEO, said management had been looking for growth opportunities in the mineral sector and described the combination as offering “an excellent opportunity for geographic and product diversification, while at the same time aligning two products with potential future complementary applications.”

If the deal goes through, Clark will become CEO of the combined entity, and Sirocco managers Alessandro Bitelli, Kevin Ross and Hugh Stuart will be appointed officers of the new company. “This is the core team that contributed to the growth of Red Back Mining’s operations, which was acquired by Kinross Gold (TSX: K; NYSE: KGC) for $9.2 billion,” Canada Lithium outlined in its news release.

The companies’s shares rose on the news, but retreated the next day.

Canada Lithium shares rose 1% to 39.5¢ per share on 3.82 million shares traded on Dec. 4, but closed down 3% to 38.5¢ per share on Dec. 5.

Sirocco shares jumped 9% to 41.5¢ per share on Dec. 4 on 6.4 million shares traded, before sliding 7% to a 38.5¢-per-share close on Dec. 5.