Corona restructures, ups offer in bid to win control of Eskay

Moving to consolidate its position in the Eskay Creek project in British Columbia, Corona (TSE) has tied up control of the gold deposit’s two major players. Under a revised merger deal, Corona has acquired 45% of Prime Resources (VSE) and the right to buy 45% of Stikine Resources (TSE). As part of a proposed corporate reorganization, Prime and Stikine will be merged with a new company, Corona Gold. Corona Gold will be based in Vancouver under the management of President Peter Steen and will own 100% of the Eskay Creek property. The merger will leave Corona with a 50.2% interest in the British Columbia gold play.

“We believe we have locked up control of Eskay Creek,” Corona Chairman Ned Goodman said at a Toronto news conference. In doing so, Corona believes it has shut out competition from Placer Dome (TSE), which made a cash offer of $67.50 per share for Stikine (or, alternatively, 3.5 Placer shares for each Stikine share) in late May.

Placer Dome said it is in the process of plotting a course of action regarding the new Corona arrangement, but declined to comment further.

Analysts agree that Placer probably expected Corona to counter its cash offer, and likely had a contingency plan laid out. One scenario put forward by Richard Cohen at BBN James Capel sees Placer attempting to acquire 26% of Prime and Stikine each. At this point, Placer would become “a thorn in Corona’s side,” agreeing to the Prime-Stikine merger only if Corona was prepared to offer Placer a share in Eskay Creek. (British Columbia law requires that at least 75% of the shareholders agree to the merger.) Placer’s original offer expires on June 19.

The lock-up agreement Corona says it has with certain major Stikine shareholders effectively guarantees Corona control of at least 45% of Stikine. If the required number of shareholders (75%) approve of the merger, Corona Gold will end up with all of Stikine’s 50% interest in Eskay.

“The downside is we own 45% of Prime and 45% of Stikine, so 45% of the orebody,” Goodman said. Corona plans to name the contemplated new mine the Tom MacKay mine, in memory of the discoverer. Corona Gold would be operator at Tom MacKay, Goodman said.

Under the Corona agreement, Stikine and Prime shareholders will acquire an interest in Corona Gold, a new gold mining company with a large reserve base and good potential for growth. As Prime Chairman Murray Pezim pointed out in a telephone interview, the merger will allow shareholders of both companies to remain involved in Eskay Creek. He said he “loves” the deal.

If Corona is successful in its merger attempt and Eskay Creek is developed as Corona plans, Corona Gold will become the largest Canadian producer of gold from Canadian sources, and will rank somewhere between Echo Bay Mines (TSE) and LAC Minerals (TSE) in terms of total production, analysts suggest.

Along with 100% control over Eskay Creek, the gold spinoff will own 40% of the Snip deposit also in northwestern British Columbia. Added to the company’s reserve base at Hemlo and other gold operations, the new reserves will provide Corona Gold with an annual production of 1.2 million oz. per year by 1994 — the expected first full year of production from both Snip and Eskay. Goodman estimated this production could be achieved at cash costs of around US$148 per oz. Based on the most recent estimates, Eskay Creek contains a preliminary reserve estimate of 6.49 million tons grading 0.54 oz. gold per ton and 14.13 oz. silver. The Snip deposit contains diluted reserves of 1.03 million tons averaging 0.88 oz. gold.

Goodman told reporters that the restructuring plan has been in the works for some time, but that the urgency to gain control of Eskay accelerated the reorganization by as much as 18 months. He believes the formation of a pure gold mining company will enhance the value of Corona shares. Up until now, he said some investors have been reluctant to put their money into Corona because of the company’s involvement in other interests including oil and gas, base metals and industrial minerals.

On the first day of trading after the merger announcement, Corona class A shares fell $1 to close at $7.87. Shares of Stikine fell $2.50 to close at $68.50.

As part of the plan, the 33 junior companies controlled by Prime and involved in exploration around Eskay Creek will form a new company, Prime Equities. Corona will own 20% of the junior portfolio.

Analysts are still scratching their heads over how the gold spinoff will affect the market value of Corona, which will become a holding company for the remaining assets. Although Igor Levental, Corona’s director of investments, suggests the share price would likely trade at around $8, some analysts say $4 is a more realistic estimate.

Aside from its resource interests, Corona will also control a major merchant banking and financial services operation. Corona’s subsidiary, New Venture Equities, is looking to expand its interest in Dynamic Capital, and has already approved the purchase of 1.5 million units of the merchant banker at a price of $6.66 per unit. The purchase will give Corona 12% of the Dynamic shares outstanding.

In addition, Goodman intends to increase his share in Dynamic by one million units. Together, Goodman and Corona expect to own 28.75% of Dynamic, and if warrants are exercised, as much as 35.9%. New venture has also acquired over 9% of BGR Precious Metals, an investment company managed by Dynamic.