It's decision time for Dioro in takeover imbroglio
Bryan Frith | August 12, 2009
Article from: The Australian
http://www.theaustralian.news.com.au/business/story/0,,25917023-16941,00.html
AVOCA Resources has clearly tired of waiting on the Dioro Exploration board to decide between the competing scrip bids of Avoca and Ramelius Resources.
Avoca yesterday declared its bid final, as to both the offer price and the offer period. The bid was due to close today but has been extended by a week.
Given that relatively short time and the fact that there is no longer any prospect of Avoca further sweetening its offer terms, the Dioro board will now be forced to choose between the competing offers.
It is now almost two weeks since Ramelius surprised by announcing an offer of two Ramelius shares for each Dioro share the day after the Dioro board recommended an increased offer from Avoca of one of its shares for each 2.3 Dioro shares.
The Ramelius offer valued Dioro shares at $1, well above the 74.5c a share value of the enhanced Avoca bid. The Dioro responded by advising shareholders to take no action until they make a recommendation on the Ramelius offer, but added that based on the sharemarket price it may be a superior offer.
The decision for the Dioro board should be which company's scrip offers the better prospects.
Dioro shareholders would own 45.5 per cent of a merged Dioro-Ramelius but only 14 per cent of a combined Avoca-Dioro. That reflects not only the offer terms but the fact that Avoca is by far the more substantial company of the two.
In terms of assets, Dioro holders would stand to gain more from the Avoca offer than the Ramelius alternative. In fact, acceptance of the Ramelius bid would involve a transfer of wealth from Dioro shareholders to Ramelius holders.
Following the recent upgrade of the Frog's Legs joint venture, Dioro has reserves of 583,000 ounces, whereas Ramelius does not yet have any JORC compliant reserves; instead it has only 118,000oz of inferred and indicated (not even measured) at its Wattle Dam operation in WA, yet has begun underground development aimed at producing a single year's production of 70,000oz.
Dioro has 2 million ounces of resources and on that basis would be contributing 95 per cent of the resources of a combined Ramelius-Dioro. But around 1.5 million ounces of those resources have been sterilised by two major pitwall collapses at the South Kalgoorlie project, which may now be worthless.
If those resources were excluded, Ramelius would still be providing only 19 per cent of the resources.
Avoca produced almost 53,000oz of gold in the June quarter at its Higginsville operation and is aiming to produce 160,000-200,000oz a year for at least the next eight years. Moreover, the Trident mine is open at depth raising the prospect of a much longer mine life.
Acquisition of Dioro would lift Avoca to a 250,000oz-a-year producer and the company has ambitions to become the pre-eminent mid-tier gold company, producing 5000,000oz a year.
If Dioro holders were to accept the Avoca offer, their implied share of Avoca's production would be 80,000oz, their implied share Avoca's reserves would be 80,000oz and the implied share of its resources would be 203,000oz.
By way of comparison, their implied share of Ramelius' production would be 32,000oz (one year only), no reserves andtheir implied share of resourceswould be 54,000oz.
On that basis, Dioro holders have more to gain by accepting the Avoca offer.
Avoca's share price is at present depressed by its scrip offer, with short sellers active in the stock. At its present price of $1.72, its offer values Dioro shares at 74.8c a share. Dioro's independent expert conceded that if Avoca secured 100 per cent of Dioro, its share price would be re-rated and suggested a price range of $1.96-$2.22, with a preferred price of $2.10 a share.
At $2.10 a share, the Avoca offer would value Dioro at 91c a share. At $2.20 a share the value would increase to 95.6c a share, which is much closer to the implied value of the Ramelius offer.
Curiously, the Ramelius share price has not suffered as a result of its scrip offer, despite the amount of shares that would need to be issued. While the Ramelius share price dipped 1c to 51c yesterday, that still values its offer at $1.02 a Dioro share, or more than when the bid was first announced.
Avoca argues that the Ramelius share price is heavily overvalued and there is a mismatch of asset base and market capitalisation.
Assuming a gold price of $1130 a tonne, Ramelius' stated resources have a value of $134million, yet its market capitalisation is $112m. Avoca points out that Ramelius would need to convert its resources into reserves, complete all operational and capital development, all stoping and cover all overhead costs for zero dollars for Wattle Dam to have an intrinsic value of anything even remotely close to its current market value.
Moreover, Avoca's offer is unconditional, it already owns 24 per cent of Dioro and has stated that it won't accept the Ramelius offer.
Ramelius, therefore, cannot obtain 100 per cent, but it could satisfy its minimum acceptance of 50.1 per cent if the Dioro board were to recommend its offer. Apart from the fact that it raises the prospect of Dioro remaining listed with two holders owning at least 74 per cent of the company, it would also mean that neither Ramelius nor Avoca would be able to access the cashflows generated by Frog's Legs and South Kalgoorlie.
That is likely to be of greater significance to the much smaller Ramelius, as Avoca already generates a strong cashflow from Higginsville.
Ramelius is yet to lodge its bidder's statement, although there are suggestions it is poised to do so. Avoca is urging the Dioro board not to wait on that document, arguing enough is known for it to decide now which bid to support.
That's because Avoca has given itself very little wriggle room. If acceptances over the next week take it to at least 50 per cent of Dioro, then its offer automatically extends for at least a further two weeks, and longer if Avoca wishes it. But if Avoca falls short of 50 per cent, then its offer is over.
There are few large shareholders. Baker Steel owns 12.66 per cent, while Dioro's Frog's Legs joint venture partner, La Mancha, owns another 2 per cent, as does Mark Creasy, but much of the register is held by retail holders.
Avoca has set itself a stiff task to reach 50 per cent within the next week, even if the target board maintains its recommendation, and a possibly herculean task if it recommends Ramelius.
Ramelius last night attempted to make that task even more difficult by removing all conditions (including the 50.1 per cent minimum acceptance) other than FIRB approval. Avoca may yet rue that it did not extend the offer by at least two weeks.