MacArthur’s $100-million pay day disappears

Vancouver – It seemed too good to be true and it was: MacArthur Minerals (MMS-V) fell 45% on news that a $100-million deal for its Lake Giles iron ore deposit in Western Australia fell through.

In November 2007 MacArthur struck a deal giving LPD Holdings the right to acquire an 80% interest in Internickel Australia, MacArthur’s subsidiary and the owner of its Lake Giles project, for $110 million. At the time the project hosted 82.5 million inferred tonnes grading 24.6% iron.

The agreement saw LPD pay $10 million for 30% of the subsidiary immediately. MacArthur agreed to spend 85% of that initial payment on a drilling program to expand the resource. Then, upon delineation of a 500 million tonne resource, LPD had the right to pay $100 million to up its stake to 80%. If it then wanted to buy MacArthur’s remaining free-carried 20%, it could do so for a negotiated amount up to $40 million.

MacArthur went to work with the first $10 million and by mid-2008 had boosted the Lake Giles resource to 112 million inferred tonnes grading 24.6%. In fact, the company conducted six drill programs at Lake Giles over 2008, though it only released drill results from part of one program. Despite a lack of drilling news, there was no lack of news releases reminding investors that LPD was still looking to put down another $100 million for the project.

Furthermore, MacArthur said it planned to distribute 80% of the $100-million pay day (after tax) to investors as a special dividend. The company only has just over 18 million shares issued, so if management followed through on that promise the holder of each share would get something like $3.50. That’s where things started to seem too good to be true – over 2008 MacArthur shares were never worth more than $2.50 and usually sat below $2.

In the fall came news that wet weather at Lake Giles had delayed drilling. The companies agreed to extend the deal deadline from late September to mid-November. Then it was extended to mid-December, and then to late February.

In November, while announcing one of the deadline extensions, MacArthur said the company provided LPD with a “positive independent geological report supporting the resource calculation which placed the proposed project ‘on track’ and met all of the benchmark requirements for a move to completion of the acquisition by LPD.” MacArthur’s CEO then said in the release that LPD had informed MacArthur it intended to proceed with the second stage acquisition for $100 million.

One key question remained unanswered: Had LPD dropped its requirement from the original deal that Lake Giles carry a 500 million tonne resource?

With that issue never addressed, dealings continued. In December LPD Holdings, which until then had been representing another, un-named party, revealed its partner to be Minmetals Mining, a subsidiary of China National Products. MacArthur’s management hoped news that a well-known major was involved in the transaction might improve investor confidence. That did not transpire.

Then the British Columbia Securities Commission got involved, slamming MacArthur for a litany of disclosure failings including insufficient discussion around liquidity, capital resources, related-party transactions, fourth quarter items, and results of operations. In addition MacArthur had to retract the life-of-project iron concentrate quantity and grade it had included in its technical reports, as National Instrument 43-101 regulations do not allow economic assessments of inferred resources. It also chastised the company for not releasing drill results.

Nevertheless, MacArthur pressed on. It held a shareholders meeting and got the official go-ahead for the $100-million deal. It extended the deadline deal one more time, to March 2.

And then came the news: Minmetals Mining decided not to exercise the option. MacArthur’s share price went into free-fall, losing $1 in a day to close at $1.20. It is worth noting that Lake Giles is the company’s only project.

Now LPD, Minmetals, and MacArthur have three months to find another buyer or re-work the deal. If three months passes without a new agreement, MacArthur is entitled and intends to acquire back the 30% by issuing 4.7 million shares at $2.12 a piece. The company says that will it with full ownership and roughly $6 million in working capital.