The McIlvenna Bay project in Saskatchewan, which is nearing commercial production, is Foran Mining's biggest asset and on the federal government's list of major projects.SUPPLIED
One of Eldorado Gold Corp.’s ELD-T biggest shareholders wants the company to call off its plans to buy copper-focused Foran Mining Corp. FOM-T, saying the acquisition is too expensive, carries significant execution risk, and has governance issues.
Melbourne-based hedge fund company L1 Capital sent a letter on March 21 to Eldorado’s board outlining its concerns, and made it clear that if the deal isn’t aborted, it will vote against it in the upcoming shareholder meeting.
L1 holds shares worth $427-million, or just under 5 per cent of Eldorado, making it the company’s third biggest investor, according to S&P Capital IQ.
“We request that the Eldorado board terminate the arrangement agreement to acquire Foran,” Raphael Lamm, co-chief investment officer at L1, wrote in the letter. “If this is not respected, currently we intend to vote our shares against the transaction.”
Vancouver-based Eldorado in early February announced its intention to buy Foran, also headquartered in Vancouver, for $3.8-billion in a nil premium, almost entirely stock deal. Foran’s biggest asset is McIlvenna Bay copper and zinc project in Saskatchewan, which is nearing commercial production and is on the federal government’s list of major projects identified as being of national importance and earmarked for regulatory streamlining.
Eldorado said the Foran acquisition offers a compelling “rerate” opportunity for the stock, with the pending addition of a new mine, which it predicts will substantially increase its profits and free cash flow. The deal will also diversify the company’s asset base, reduce its exposure to gold, and see it gain a bigger presence in Canada, one of the world’s safest mining jurisdictions.
The early reaction from Eldorado’s investors, however, wasn’t pretty. On the day the deal was announced, Eldorado’s shares fell by 8.5 per cent.
In the letter, Mr. Lamm said that Eldorado is overpaying for Foran by using its discounted stock to buy a company that was trading at a premium.
“Eldorado is inflicting material value destruction on its shareholders issuing undervalued shares to purchase a theoretically overvalued business,” he wrote.
L1 is also deeply concerned about execution risk at Eldorado, which will be juggling two major projects at once if it buys Foran. Eldorado’s Skouries gold project in Greece is slated for commercial production in the fourth quarter. The startup had already been delayed and its capital cost increased on several occasions. By buying Foran, Eldorado will take over the responsibility for ramping up McIlvenna Bay. That mine is slated to start commercial production in the middle of this year.
Eldorado's gold mine project in the mountains of Skouries, northern Greece, pictured in 2015.SAKIS MITROLIDIS/AFP/Getty Images
“With this challenging track record at Skouries, we believe it is inconceivable to take on another late-stage construction asset,” Mr. Lamm wrote, “further exposing investors to additional ramp-up and construction risk, with a leadership team and board that will have focus split between assets on other sides of the world, and at the mercy of contractors.”
Eldorado CEO George Burns declined an interview request, but the company’s communications director Chad Pederson wrote an e-mail to The Globe and Mail defending the company’s plans to buy Foran.
He said that Eldorado is committed to building a leading Canadian gold and copper mining champion, one that can compete long-term on a global basis.
“From an execution perspective, we’re confident in the delivery of the two projects, McIlvenna Bay and Skouries, as risks are mitigated with two independent project teams and separate development paths,” he said.
Earlier this month, Eldorado announced that both its CEO, Mr. Burns, and its chair, Steven Reid, are retiring. Mr. Burns will step down as CEO in the third quarter, but will remain as a board member, while Mr. Reid will retire next year.
The letter from L1 said the management and board changes will lead to a lack of accountability over the Foran transaction.
“It is entirely inappropriate to undertake major M&A with a transitioning chair and CEO,” Mr. Lamm wrote.
Mr. Pederson dismissed L1’s governance concerns, saying that the ongoing involvement of himself and Foran chief executive Dan Myerson, who is set to join Eldorado’s board, provides “long-term stability, experience, and oversight.”
Eldorado shareholders will vote on the issuance of shares connected with the transaction on April 7, with a majority of votes cast needed for success.
Eldorado’s biggest shareholders are BlackRock Inc. BLK-N and Van Eck Associates Corp., which own 15.8 per cent and 7.3 per cent of the company, according to S&P Capital IQ.
Proxy advisory firm Institutional Shareholder Services, which many institutional investors look to for guidance before voting, on Wednesday advised that Eldorado investors vote for the deal.
“The market reaction was negative, and the context of the transaction may raise concerns about execution risk,” ISS said. “With that said, the strategic rationale makes sense, as the resulting issuer may benefit from diversification, increased growth, exploration upside, financial flexibility, and re-rating potential.”
Foran shareholders will also vote on the deal on April 7. At least two-thirds of votes cast must be in favour for the deal to pass.
Foran’s biggest shareholders are Agnico Eagle Mines Ltd. AEM-T, Fairfax Financial Holdings Ltd., Hamblin Watsa Investment Counsel Ltd. and the Canadian federal government through the Canada Growth Fund. Pierre Lassonde, chairman emeritus of Franco-Nevada Corp. FNV-N, is also a significant shareholder of Foran and has been a long-time backer of the company. He’s a big fan of the acquisition by Eldorado and will vote in favour of the deal.
“The tie up with Eldorado will create a powerful international company with multi assets,” he said. “Just the kind of company that I believe can thrive.”