Canadian Royalties Surrenders

The dream of building a nickel-copper- platinum group metals mine in Northern Quebec is over for Glenn Mullan, Canadian Royalties’ (CZZ-T, CRYAF-O) chairman, CEO and major shareholder, who’s been working on the project since day one.

After more than two months of fighting off a hostile bid by Jien Canada Mining, a 75%-25% partnership of Jilin Jien Nickel Industry Co. of China and Goldbrook Ventures (GBK-V, GBKVF-O), Canadian Royalties’ special committee has signed a support agreement for an improved offer of $192 million.

“I’m very disappointed and I don’t hide the fact that for me this really is the death of a dream,” Mullan said in an interview.

Jien Canada Mining increased its offer from $600 to $800 for each $1,000, 7% convertible debenture, plus accrued interest, and from 60¢ to 80¢ per Canadian Royalties share.

The original bid was made on Aug. 7 and valued the company at $148.5 million.

The offer will expire on Oct. 27. Although Mullan will be lamenting the decision for a while, Raymond James analyst Bart Jaworski says Canadian Royalties probably had no other way out.

“With no White Knight, a looming bankruptcy and capitulating debt holders this may likely be the best exit,” Jaworski wrote in an Oct. 19 client note.

Canadian Royalties delayed construction of the half-built Nunavik Nickel project more than a year ago when it was unable to secure enough funding.

The main problem has been a $137.5-million, 7% convertible debenture that was closed with the intention of later securing a $250- million credit facility; enough cash to reach production. But world credit markets worsened and the second loan didn’t happen, leaving Canadian Royalties in a tight spot.

Since the start of the financial crisis, China has been buying up copper, nickel and iron ore projects around the world to supply its booming economy.

Jilin Jien has been steadily buying stakes in Canadian nickel companies, including Liberty Mines (LBE-T) and Victory Nickel (NI-T), but the Canadian Royalties deal was its first hostile bid.

For Mullan, this deal makes him think back to 2006 when Falconbridge and Inco, both billion-dollar market cap Canadian nickel miners, also succumbed to a wave of foreign acquisitions.

“It was very much our ambition to be a Canadian junior, mid-tier, with ambition to fill part of that void,” Mullan said.

Mullan’s biggest concern now is to get the best possible conclusion for Canadian Royalties stakeholders. Before the board of directors and management will sign the lockup agreement that Goldbrook and Jilin Jien require, the partnership must formally agree to maintain certain corporate social responsibility initiatives.

Mullan wants to ensure that the local Inuit are offered job training, employment and third-party contracts. He is also asking that other employees and management who have played a key role in the Nunavik Nickel project’s development be given the opportunity to continue working on the project with the new owner.

When asked whether he was interested in working on Jilin Jien and Goldbrook’s team he said he was undecided and would take a “walk in the snow,” which is what former prime minister Pierre Trudeau did before deciding to resign from politics.

A life-long prospector, Mullan has spent most of his career working for himself.

“I’m not sure how I’d feel about working for someone else,” he said.

Although Mullan, who personally holds about 5 million Canadian Royalties shares, wasn’t excited about the agreement, the market was.

The stock jumped 34%, or 20¢, to 78¢ apiece on a trading volume of 5.9 million shares, on Oct. 16 when the deal was announced, bypassing its 52-week trading high of 67¢. The company has about 102 million shares outstanding. The stock traded well above $3 in 2007.

A feasibility study said the deposit could annually produce 26 million lbs. nickel in concentrate, 38.8 million lbs. copper in concentrate, 900,000 lbs. cobalt in concentrate, 14,500 oz. platinum and 78,600 oz. palladium over nine years with the potential to double the mine life.

The project is close to Xstrata’s (XSRAF-O, XTA-L) Raglan nickel mine. However, Xstrata hadn’t expressed much interest in collaborating with Canadian Royalties.

Goldbrook also has a nickel-copper- platinum group metals projects in the Ungava region of northern Quebec but it’s at the grassroots stage. Jilin Jien, which produces about 10% of China’s nickel, signed an option last year to earn 50% of Goldbrook’s Raglan project by spending $45 million over three years.

Phone calls and emails to Goldbrook and Jien Canada Mining were not returned.