Stornoway bids for Ashton, Contact

Stornoway Diamond (SWY-T) is offering to take over two other diamond explorers to create a $200-million company, and has lined up agreements with controlling shareholders that make the deal look likely to succeed.

Stornoway is offering $115 million in cash and shares for Ashton Mining of Canada (ACA-T) and about $19 million, all in shares, for Contact Diamond (CO-T). Contact management and parent company Agnico Eagle Mines (AEM-T, AEM-N) have already agreed to the offer and Agnico Eagle is financing part of the Stornoway bid.

Under the terms of Stornoway’s offer for Ashton, shareholders get either $1.25 in cash, or one share of Stornoway plus 1. Stornoway limited the cash component of the offer to $59.5 million.

If all Ashton shares were tendered to the cash offer, the payout would be 0.52 of a Stornoway share and 61 for each Ashton share.

Stornoway’s approach included an agreement with Ashton Canada parent Rio Tinto (RTP-N, RIO-L, RIO-A) through subsidiaries Ashton Canada Proprietary and QIT Fer et Titane, under which the 51.7% control block of Ashton Canada will be tendered to the offer. Rio has opted for the cash offer, but given the cash limit will presumably have to take some Stornoway shares. Rio’s subsidiaries would receive a $2-million break fee if the offer were not to succeed.

Ashton’s board appointed a three-director special committee, all independent directors, to examine the Stornoway offer.

The offer for Contact is for 0.36 of a Stornoway share for one share of Contact. Agnico Eagle owns 31% of the company and has already concluded a lock-up agreement with Stornoway, and Contact’s board has recommended the offer to shareholders after receiving an outside fairness opinion.

Contact management, which controls 2% of the company, has also locked up its shares to the bid. Contact shareholders would own 7% of the new company and Ashton shareholders, other than Rio, about 15%.

Agnico has also arranged a private placement, conditional on the Ashton bid’s success, of 17.6 million Stornoway shares for $22.5 million. After that placement and Agnico’s tender of its Contact shares, Agnico would own about 14% of Stornoway. Contact’s president Matthew Manson would become president of Stornoway, and Stornoway’s current chairman, Catherine McLeod-Seltzer, and chief executive Eira Thomas would keep their corner offices.

Both offers are open for 35 days and neither is conditional on the success of the other.

Ashton’s largest project is a joint venture with Quebec para-statal Soquem on a land package in north-central Quebec including the Foxtrot property. At Foxtrot, Ashton has outlined nine kimberlite bodies with diamond grades estimated at 0.08 to 1.24 carats per tonne, and is running a $29-million exploration program this year.

Ashton has estimated sizes for four of the Foxtrot kimberlites — Renard 2, 3, 4, and 9 — but does not consider the estimates to be resource figures. Renard 2 has a drill-indicated size of 6.5 million tonnes grading 0.92 carat per tonne, Renard 3 has 1.7 million tonnes grading 1.24 carats per tonne, Renard 4 has 6.1 million tonnes at 0.46 carat and Renard 9, 3.2 million tonnes at 0.97 carat. Average values have been estimated at US$88 per carat.

The most recent development on the Foxtrot property is the recovery of 31.9 carats of diamonds from a 71-tonne sample of cuttings from reverse circulation drill holes on Renard 9. Two relatively large diamonds, one of 1.7 carats and one of 0.6 carat, were recovered from the sample.

Ashton also has a 45% interest in the Buffalo Hills diamond project east of Peace River, Alta., and has recently signed an agreement under which Vaaldiam Resources (VAA-T) can earn a 40% interest in Ashton’s properties in the Coronation Gulf area of mainland Nunavut by spending $3 million on exploration and issuing Ashton 195,000 shares.

Contact’s main asset is the Timiskaming diamond project on both sides of the Quebec-Ontario border near Lake Timiskaming, where the company has budgeted $2 million for work in 2006. A 380-kg sample on the Timiskaming project’s 95-2 kimberlite, about 15 km west of New Liskeard, Ont., returned a grade of 0.14 carat per tonne.

Contact also has an equal joint venture with Stornoway on the MIP project on Baffin Island, Nunavut, where drilling is scheduled to start this month, and is spending $750,000 on exploration on the IC-LO project in Nunavut, about 95 km northwest of Repulse Bay.

Stornoway plans to fund most of the $59.5-million cash portion of the offer for Ashton out of the proceeds from the Agnico placement and from a $32.5-million bank loan. The company had $23 million in cash and other current assets at the end of January, and has not gone to the market for financing since. About $13 million is already budgeted for exploration work in 2006.