Kalahari scraps Extract merger on Rio Tinto concerns

Kalahari Minerals (KAH-L) has called off a merger with Extract Resources (EXT-T, EXT-A) over fears that Rio Tinto (RTP-N, RIO-N), a stakeholder in both, would have too much power once the two explorers merged without having to shell out a premium for it.

Kalahari and Extract agreed to merge in early September, but since then, Rio has been steadily increasing its share position in both companies; as of today, to more than 15% in Extract and 14.9% in Kalahari.

“Concerns were raised by a number of Kalahari’s larger shareholders about the potential for Rio to acquire effective control of the merged company without paying a premium,” Kalahari says.

Kalahari, which is Extract’s largest shareholder with 39%, says that its shareholders worried that Rio would have an “unhealthy” degree of control if it were to buy an asset or even takeover the merged company.

Of particular interest are Extract’s uranium assets in Namibia, located within kilometers of Rio’s 69%-owned Rossing uranium mine, which has been operation for about three decades and produces about 7% of the world’s uranium. Kalahari also has several base metals projects in Namibia.

Kalahari estimates that Rio would hold 19.8% of the combined company (on a diluted basis) and that it would have been able to up its stake beyond the 20% limit under the Australian takeovers provisions.

Kalahari even tried to get Rio to agree to not increasing its position in the combined company for a period of time after the merger went through.

In September, Kalahari said Rio’s investment was “great news” for the company as it should provide “further confidence for shareholders in our decision to acquire the remaining 61% of Extract Resources.”