Western Prospector rejects Khan’s all-share bid

The board of Western Prospector Group (WNP-V, WEPGF-O) has rejected Khan Resources’ (KRI-T, KHRIF-O) unsolicited takeover bid for the company, saying it is “inadequate and falls significantly short of Western’s true value.”

Under the all-share offer announced in May, Western Prospector’s shareholders would receive 0.685 of a Khan Resources share for each Western Prospector share, representing a 34% premium over Western Prospector’s weighted average closing price for the 20 days prior to the offer. On the basis of Khan’s share price at the time of the announcement, the bid values Western Prospector equity at US$35 million.

“If it were to acquire the company, Khan would acquire with it, cash of US$25 million. That means the remaining US$10 million would acquire all the remaining assets of Western,” Eric Bohren, Western’s president and chief executive explained in a conference call, urging Western shareholders not to tender their shares to the bid.

Western’s assets include the Gurvanbulag project in Mongolia, a uranium deposit with National Instrument 43-101-compliant resources of 22.3 million lbs. uranium oxide and an estimated net asset value of about US$240 million.

“Khan’s offer of US$10 million represents a 95 per cent discount to the Gurvanbulag deposit completely on its own,”Bohren told The Northern Miner in a subsequent telephone interview.

Bohren notes that Western has invested more than US$68 million into Gurvanbulag and other deposits in the area. It dewatered Gurvanbulag a year ago and has advanced infrastructure in place, including 17 km of underground tunnels. There is also 10 megawatts of electrical power available, enough to start full-scale production. A feasibility study is on track to be completed in the third quarter.

A preliminary economic assessment of Gurvanbulag suggests production could start as early as the second quarter of 2010 if the project gets the green light from the Mongolian government.

By contrast, Bohren argues, Khan has not even started to dewater its 500-metre-deep underground deposit No. 7, which has been flooded since the former Russian operators departed 18 years ago. Khan’s open-pit deposit (No. 2) is also flooded and requires dewatering, Bohren claims.

“How do you complete a feasibility study when your main deposit is underwater and has been underwater for eighteen years?” Bohren asked. “The challenge for Khan is that it will have to spend millions of dollars to dewater the mine but how does it get its joint-venture Mongolian and Russian partners to contribute the capital to make that happen?”

So far, Khan has invested about US$6 million in its Dornod project, compared with Western’s US$68 million in Gurvanbulag, Bohren says.

“In a nutshell, we’re on a fast track to production. . . Khan has a long way to go both from a dewatering and feasibility perspective, as well as from an infrastructure perspective.”

Calling Western’s response to its takeover bid “predictable,” Martin Quick, Khan’s chief executive, says he is “still very optimistic that the takeover will go forward” and dismisses Bohren’s claims about water issues at its Dornod deposit.

“We have no doubts that the dewatering will be carried out quickly and successfully once we start it, but we don’t want to invest large amounts of money until such time as we have an investment agreement” with the Mongolian government, Quick says from New York. He cites the case of Ivanhoe Mines (IVN-T, IVN-N) and Rio Tinto (RTP-N, RIO-L), which have spent millions on their Oyu Tolgoi deposit and have yet to sign an investment agreement with the government.

Quick also noted that Khan is in the midst of a feasibility study and had expected to complete it at the same time as Western’s but decided to wait until after the takeover was completed so that the feasibility study could be expanded to include Gurvanbulag.

“Because we are now expecting the takeover to be successful, I’m not going to spend money on a feasibility study for just the Dornod deposit. We expect to expand it to include both (the Dornod and Gurvanbulag) deposits,” Quick says.

Dornod was initially developed by Russian owners between 1988 and 1995. The Russians abandoned it when uranium prices slipped to levels that made the deposit uneconomic. By the time they left, they had invested roughly US$150 million into the project.

Western’s Gurvanbulag deposit and Khan’s Dornod project are about 40 km apart in the Saddle Hills-Mardai area of northeastern Mongolia’s Dornod province.

In addition to Gurvanbulag, Western holds about 1,800 sq. km of land where it has exploration licences compared with about 5 sq. km that belong to Khan, Western contends. Of the combined landholdings between Western and Khan, Western holds 99% and Khan holds less than 1%, Bohren says. Bohren also voiced concerns that shares of Khan are “historically volatile, of uncertain value and thinly traded,” making them “an unattractive form of currency.”

He argues: “They’re paying with stock, so it’s an illiquid currency backed by a business plan that has a lot of uncertainty and risk to it. It’s not like they are putting up real cash for our assets, they’re putting up a weak business plan.”

For its part, Khan says the takeover would lead to combined capital cost savings of more than US$100 million because only one mill would have to be built rather than two. The tie-up would also generate operating cost savings of US$2-4 million, Khan argued at the time the bid was announced on May 12.

On the news, Western shares were up 2 apiece to 73 on a trading volume of 70,700. Western’s 52-week trading range is 47.5-$6.

Khan Resources was trading down 8 a share at 93 on a trading volume of 31,400. Its 52-week trading range is 85-$5.01.