Mercator taking run at Tyler

Copper producer Mercator Minerals (ML-T) has announced it will make a takeover offer for Calgary-based explorer Tyler Resources (TYS-V, TYRRF-O), to gain control of Tyler’s Bahuerachi copper project in Mexico.

Mercator is offering 0.113 of a Mercator share for each Tyler share. At presstime Mercator’s share price had closed at $8.98, implying a valuation of $136 million or $1.01 per share for Tyler. Tyler shareholders would have about 16% of the merged company.

Tyler’s shares, which had ranged from 65 to 80 over the last two months, rose to $1.11 on the TSX Venture Exchange. Mercator said the implied price was about 35% over Tyler’s average share price for the last 20 trading days.

“We’ve tried to give a very fair offer that’s to the high side of the market,” Michael Surratt, Mercator’s president, told a conference call. The bid, he said, paid over US5 per lb. for copper resources, against an average in recent acquisitions around US4.

Mercator said the offer would be open for 35 days once the takeover bid circular was mailed. Mercator is seeking a minimum of two-thirds of Tyler shares as a condition of the bid; there are other standard conditions, including regulatory approval and having no material adverse change to Tyler.

Tyler said it had not received any formal offer.

The offer is an outgrowth of earlier discussions between Tyler and Mercator, which had sent people to Bahuerachi for a site visit and initial negotiations for a friendly deal. Tyler described the offer as “materially lower” than a conditional proposal Mercator made after the visit. Gary Simmerman, Mercator’s vice-president, engineering, and a director of Tyler, has stepped down from Tyler’s board to avoid a conflict of interest.

Tyler’s response to the announcement was to appoint a committee of the company’s independent directors to consider the proposal, with power to appoint legal and financial advisors. In a prepared statement, the company said it was “pleased that an experienced and credible mine development company agrees with Tyler’s assessment that the Bahuerachi deposit is now at a size and stage that may support fast-tracking to development,” but that it would be providing a new resource estimate near year-end and finishing its prefeasibility study in the first half of 2008, all on money it currently has in the bank; it implied those developments would push the company’s valuation higher.

Tyler’s six largest shareholders control about 7% of the company’s 112 million trading shares. Fully diluted, the company has 134 million shares.

Bahuerachi, Tyler’s principal asset, is in southwestern Chihuahua state, and hosts a measured and indicated resource of 525 million tonnes grading 0.4% copper, 0.55% zinc, 0.008% molybdenum, 4 grams silver and 0.03 gram gold per tonne. Another 80 million tonnes grading 0.38% copper, 0.45% zinc, 0.007% molybdenum, 3.1 grams silver and 0.02 gram gold per tonne is inferred.

Tyler has just completed a preliminary economic assessment on the project (T.N.M., Oct. 15-21/07), which considered processing of 60,000 tonnes per day to produce 83,000 tonnes copper, 141,000 tonnes zinc, 1,000 tonnes molybdenum, 2.8 million oz. silver and 14,000 oz. gold annually for 12 years. The mined material amounted to 250.5 million tonnes, or about 40% of the indicated and inferred resource.

That study put the net present value of the project at US$216 million, given an 8% discount rate and effective taxation rate of 28% — about one and a half times Mercator’s offer for Tyler.

Mercator says it expects to fund development of Bahuerachi out of cash flow from the Mineral Park copper mine near Kingman, Ariz. Mineral Park produced 1,400 tonnes copper in the third quarter of 2007 from a small solvent extraction and electrowinning (SX-EW) operation. The SX-EW plant is providing cash flow for a larger open pit and conventional milling operation processing 25,000 tonnes per day, with a ramp-up to 50,000 tonnes per day in 2009. Mineral Park is expected to produce 25,600 tonnes copper and 4,700 tonnes molybdenum per year at full production.

Construction on that project is in full swing, and the main semi-autogenous grinding mills are expected to be on their concrete pads in November.

The company lost US$6.5 million on revenues of US$10.5 million in the three months ended June 30, but operations made a profit of US$7.2 million before development and financing costs on Mineral Park. It had US$130 million in cash and US$19.4 million in other current assets at the end of June. Tyler had $9.8 million in cash at the end of April, its most recent filing.