Raiders target Rayrock

In bear markets, some companies are worth more dead than alive. That appears to be the hard-nosed rationale behind Quest Ventures’ effort to gain control of Rayrock Resources (RAY-T), in which it holds a 5% equity stake.

The Vancouver-based investment company is proposing to take over the historic mining company and liquidate its diverse portfolio of assets. To get the ball rolling, it has requisitioned a special meeting of shareholders, in which it plans to seek approval for the formation of a new board composed of its own nominees, namely Brian Bayley, John Fleming, Stephen Irwin, Henry Knowles, David Lewis, David Rovig and Murray Sinclair.

If successful, the new board would immediately issue a special dividend to shareholders, using Rayrock’s current cash and marketable securities, which together are estimated to be in the range of $5.50 per share. The board would then seek to “surface the value of the mining assets,” which means either an outright sale, or a merger with another mining company.

Owned equally by Murray Sinclair and Brian Bayley, Quest was a co-requisitioner of a special shareholders’ meeting of Inmet Mining (IMN-T), called for Sept. 17. The meeting was to consider a takeover bid spearheaded by Zemex (ZMX-N), an industrial minerals company managed by President Richard Lister, and partly owned by Ned Goodman, best known in mining circles as the former head of International Corona.

Zemex recently called off its plans to solicit proxies for the Inmet meeting, after learning that Inmet shareholders holding more than 30% of the shares did not intend to vote in favor of its proposals. “For practical purposes,” Lister stated in a news release, “[this] renders the required vote for our subsequent merger unattainable.”

Zemex had proposed to distribute $465 million in cash to the current Inmet shareholders. This would have been followed by a consolidation of capital from 103 million to 3.9 million shares, and a subsequent merger between Inmet and Zemex. Inmet shareholders would have received $50 million in shares of the ongoing company.

Inmet fended off the plan by offering to buy back up to 65 million of its own shares — almost two-thirds of its capital — for $5.65 a share, plus a $5.70 purchase warrant.

Buying up the shares will take as much as $367 million off Inmet’s balance sheet. At the end of June, the company had $319 million in cash and $415 million in other current assets. With $70 million coming from the sale of the Antamina project (which was valued at $62 million on Inmet’s books), full tender to the issuer bid would leave the company with about $375 million in cash and current assets and about 38 million shares outstanding.

Sinclair said the two takeover efforts were triggered by growing dissatisfaction about the overall performances of Inmet and Rayrock. Both companies, he says, are under-performers, trading at below their break-up value. “As shareholders, we’re not happy to hold companies with market caps equal to, or less than, their working capital,” he added.

Despite the apparent setback in the Inmet battle, Sinclair hinted it may be too early for Inmet President William James to declare victory. For the time being, though, he intends to focus on Rayrock, which he describes as an overly complex company floundering in the absence of “a compelling business plan, a clear commitment to shareholder value, and a key operating executive.”

Established in 1948, Rayrock currently produces about 90,000 oz. gold annually from three mines in Nevada — the wholly owned Dee, the 66.6%-held Marigold, and the 35%-owned Daisy. Earlier this summer, Rayrock agreed to acquire the remaining 65% interest in Daisy from Inter-Rock Gold (IRO-T) for US$3.8-million, plus a royalty.

Rayrock also owns 100% of the Ivan copper mine in Chile, acquired through a recent merger with an affiliate, Minera Rayrock. Copper production for 1998 is estimated to be 22 million lbs. at an average cash cost of US61 cents per lb.

Rayrock also holds various exploration projects, plus a 45.9% interest in BlackRock Ventures, a Toronto-listed oil and gas company.

Sinclair says he started watching Rayrock in the summer of 1997, when he was assured by analysts that the company was a solid investment, with a break-up value of $12 per share. “That assessment was wrong. The financial performance has been abysmal.”

While it is safe to say Rayrock’s share price has suffered along with those of most other mining companies, it is no secret that shareholders have expressed dissatisfaction with specific areas of the company’s performance, particularly the holding in BlackRock and a complex capital and voting structure.

And, earlier this year, long-time president David Crombie stepped down, leaving the company without a top executive. A management committee is overseeing Rayrock while the search for a new CEO continues.

At presstime, Rayrock President Bruce Burton was not available for comment. A company spokesman said the board will meet and prepare a response to the turn of events involving Quest, “which came out of the blue.”

Rayrock posted a loss of US$5.8 million for the first half of 1998, compared with earnings of US$1.7 million a year earlier. For the latest quarter ended June 30, the loss was US$4.9 million, which includes a US$3.8-million expense for “contractual severance and post-retirement benefits” incurred by Crombie’s departure.

It had US$55.7 million in cash and US$11.8 million in other current assets at the end of the first half of 1998. Rayrock is currently trading at about $5 in a 52-week range of $7.50 to $4.40. Its market capitalization was $87 million (about US$56 million) at the close of the market on Aug. 25. At presstime, the share price was up 75 cents at $5.75, bumping Rayrock’s market cap to $100 million. The book value of the company’s shareholders’ equity at June 30 was $160.9 million or US$121.3 million; in per-share terms, it was $9.25 or US$6.97.

Rayrock appears to be taking some steps to address investor concerns. In the latest quarter, it simplified its capital structure and began evaluating “alternatives” for eliminating cross-holdings with BlackRock.

Sinclair says Quest has no desire to manage Rayrock’s assets. The Vancouver mining executive is best known for his association with Vancouver promoter Bruce McDonald, whose rise to mining fame came in the mid-1980s when one of his juniors was involved in a gold discovery in Quebec’s Casa Berardi region.

McDonald, Bayley and Sinclair subsequently put together a package of projects for a new flagship, Noramco Mining, which included several gold mines that failed to live up to expectations. Noramco’s projects were eventually acquired by Ned Goodman’s Breakwater Mining (BWR-T). Murray Sinclair is on Breakwater’s board.