Fronteer plans to acquire Aurora Energy Resources

Fronteer Development Group (FRG-T, FRG-x) is the single largest shareholder, with 42%, of Aurora Energy Resources (AXU-T, AUEGF-o). Now it wants all of it – despite a three-year moratorium on uranium development that has put Aurora’s flagship project in Labrador on ice.

News of the proposed offer catapulted Aurora’s shares 60.8% or 59¢ apiece, to close at C$1.56 per share. The markets weren’t as kind to Fronteer however; its shares lost 31.6% or 99¢ apiece, to close at C$2.14 per share.

President and chief executive Mark O’Dea shrugged off the decline, describing it as “pretty standard stuff” in the arbitrage trade, and argued that the fundamentals of the deal make a whole lot of sense for both companies.

“The feedback I’ve been getting back from analysts and shareholders is that they see it as a logical, rational move with lots of positive benefits,” he said in a telephone interview from his office in Vancouver.

Under the proposed acquisition, Aurora shareholders would receive 0.825 of a Fronteer share for each Aurora share they hold. The offer is roughly a 166% premium over the companies’ closing share prices on the last trading day prior to the announcement.

On Dec. 19, Aurora shares closed at 97¢ per share and Fronteer shares at C$3.13 per share. The offer works out to about a 96% premium based on the 20-day volume-weighted average trading prices of the two companies.

Fronteer currently owns 42% of Aurora and some institutional shareholders already have entered into lock-up agreements to tender an aggregate 19.23 million shares, or about 26% of Aurora’s shares. The remaining 32% of Aurora’s shares are widely held.

By joining the two companies, Fronteer’s roughly $81 million in cash and cash equivalents held with large Canadian commercial banks would be combined with Aurora’s roughly C$105 million in cash and cash equivalents for a total of C$186 million. (Aurora has no debt.)

“We recognize the cash Aurora has in the bank and we’re paying a premium for it,” O’Dea said. “We’re not relying on equity finance to keep growing.”  

Indeed, the acquisition means Fronteer won’t need to raise money in the equity markets during the current credit crunch or incur debt to continue its exploration and development projects. The company has no debt and has no investments tied up in any short-term commercial paper or asset-backed securities.

If the offer is completed the transaction would provide an improved cash per share position of about C$1.57 per share in the combined company, compared with Aurora’s current C$1.43 per share, based on Fronteer’s and Aurora’s current cash and equivalents positions.

“That gives us a lot more fire power to continue building our core business through joint ventures, M&A, and exploration,” O’Dea noted.

Fronteer also points out that the acquisition would benefit Aurora shareholders because they would get exposure to Fronteer’s portfolio of gold and copper-gold assets and a higher growth profile in an international setting.

That’s an important consideration in the near term, O’Dea said, because Aurora’s Michelin project in the central mineral belt of coastal Labrador has fallen victim to a three-year uranium mining moratorium that restricts further development, apart from exploration.  

In April, the Nunatsiavut government of Labrador voted 8-7 in favor of a three-year moratorium on uranium development on Labrador Inuit land. Aurora has a pipeline of six growing uranium deposits there with a total of about 134 million lbs of uranium oxide in the ground.

“Long term we’re going to see value flow back into the uranium sector and we’re going to see the perceived risk of this jurisdiction diminish as the project advances,” O’Dea asserted. “We see their being some deep value in that stock.”

In Nevada, Fronteer has a 100% interest in Northumberland, one of the largest undeveloped Carlin-style gold deposits in the state and a 51% interest in Long Canyon as part of a joint venture with AuEx Ventures (XAU-V, AUXVF-o), a discovery defining an entirely new gold trend in the Eastern Great Basin. It also owns Sandman, a property in which Newmont Mining (NMC-T, NEM-N) has the option to acquire up to a 60% interest by advancing the project to a production decision by 2011.

In Turkey, as part of a joint venture with Teck Cominco (TCK.B, TCK-N), Fronteer has a 40% interest in a new mineral district that includes two gold deposits and a third copper-gold porphyry deposit.