Mr. Nicholas Mather of Solgold reports
SOLGOLD PLC ANNOUNCES INTENTION TO MAKE OFFER TO ACQUIRE CORNERSTONE
Solgold PLC intends, subject to various conditions noted below, to make an offer to purchase all of the issued and outstanding common shares of Cornerstone Capital Resources Inc. for consideration consisting of ordinary shares of Solgold. If the offer is successfully completed, holders of Cornerstone shares who tender their shares under the offer will receive 0.55 of a Solgold share in exchange for every Cornerstone share tendered.
Readers should note that Solgold has not yet commenced the offer and should carefully review the cautionary statements set out on the company's website in respect of the status of the offer and the factors that may cause Solgold not to make the offer.
Nicholas Mather, chief executive officer of Solgold, stated: "We are pleased to have reached the point where we feel that an offer to combine Solgold and Cornerstone makes sense for Cornerstone shareholders. The combined entity will have tremendous economic upside, further derisk the ownership structure, and present a simplified and highly attractive value proposition for investors. We encourage Cornerstone shareholders to closely consider these factors and we are confident that once they do, they will recognize the potential this proposal holds and tender to our offer."
Solgold believes the terms of the proposed offer are highly attractive for Cornerstone shareholders and reflect fair value for the Cornerstone shares. If the offer is successfully concluded, Cornerstone shareholders can receive Solgold shares in exchange for their Cornerstone shares and thus (i) retain investment exposure to the Cascabel project in Ecuador's Andean copper belt through the ownership of Solgold shares, and (ii) gain upside exposure to Solgold's portfolio of exploration projects in Ecuador, the largest in the country by land area and boasting the country's most active exploration programs. The Cascabel project is 100 per cent owned by Solgold's 85-per-cent-owned Ecuador subsidiary Exploraciones Novomining SA. The remaining 15 per cent of ENSA is currently held by Cornerstone.
As advised to the market, Solgold's exploration programs prior to drilling indicate the opportunity for discovery of numerous additional significant copper gold porphyry systems.
The board of directors of Solgold considers that the ultimate value and market rating for Cornerstone shareholders will be higher if exchanged for Solgold equity.
To facilitate a tax-efficient outcome for holders of Cornerstone shares that are residents of Canada, Solgold intends to offer such shareholders the option to receive exchangeable shares of a wholly owned Canadian subsidiary of Solgold on the same basis of 0.55 of an exchangeable share for each Cornerstone share tendered, in lieu of Solgold shares. The exchangeable shares may be exchanged at the option of the holder for Solgold shares and will thus have the economic exposure to the same collection of assets as Solgold shares but will provide holders of Cornerstone shares that are residents of Canada the ability to file a tax election for Canadian federal income tax purposes to defer all or a portion of any taxable capital gain that would otherwise be realized on a sale of their Cornerstone shares for Solgold shares.
Provided Solgold does not identify information suggesting that the business, affairs, prospects or assets of Cornerstone have been materially impaired, Solgold intends to mail a takeover bid circular to the holders of Cornerstone shares (as required under applicable Canadian securities laws) in late February or early March, 2019. Solgold expects that the offer, when made, will remain open for acceptance for at least 105 calendar days from the date of mailing of its takeover bid circular. Solgold notes that Cornerstone's recently adopted shareholder rights plan is not expected to be engaged since the offer complies with applicable Canadian securities laws.
Solgold anticipates that the offer will be subject to a number of customary conditions, including: (i) there being deposited under the offer, and not withdrawn, at least 50 per cent of the outstanding Cornerstone shares (calculated on a fully diluted basis), excluding Cornerstone shares already held by Solgold; (ii) receipt of all governmental, regulatory and third party approvals that Solgold considers necessary or desirable in connection with the offer; (iii) no change of control of Cornerstone having occurred following commencement of the offer; and (iv) no material adverse change having occurred in the business, affairs, prospects or assets of Cornerstone in the sole discretion of Solgold.
In addition to the Cornerstone shares, Solgold intends to include in the offer an offer to acquire those warrants to purchase Cornerstone shares that would be outstanding in accordance with their terms upon the expected expiry of the offer, being the warrants exercisable to acquire Cornerstone shares at a price of 10 cents per share and expiring on May 12, 2021. If the offer is successfully completed, each holder of additional securities who tender their additional securities to the offer will receive 0.402 of a Solgold share for every additional security so tendered. The foregoing exchange ratio implies an offer price of 25.6 cents per additional security, representing an immediate premium of 30 per cent to the Black-Scholes modelled value of the additional securities as of Jan. 30, 2019.
Background to the proposed offer
It has been the view of the board of directors and management of Solgold for some time that the consolidation of 100-per-cent ownership of the Cascabel project into a single listed entity makes eminent sense, would simplify the structure of the project and would remove the risk of dilution for Cornerstone shareholders.
To this end, after completing its preliminary analysis together with its advisers, Solgold approached Cornerstone in 2017 and 2018 in an effort to commence the negotiation of a business combination transaction between the two corporations. Despite Solgold's good faith attempt, Cornerstone's management indicated that it would not engage in any negotiations toward a business combination unless (i) 50 per cent of the seats on the board of directors of the combined entity were allocated to Cornerstone, (ii) the chief executive officer of Solgold was replaced, and (iii) the chairman of the board of directors of Solgold was replaced. The board of directors of Solgold views each of these demands as being highly unrealistic based on the relative size of the two companies and their respective ownership interests in Cascabel by the two entities.
Reasons to accept the proposed offer
The implied value of the offer, based on the closing price of Solgold shares on the London Stock Exchange and converted at the Bank of Canada daily exchange rate on Jan. 30, 2019, represents a premium of approximately 20 per cent over the closing price of Cornerstone shares on the TSX Venture Exchange on Jan. 30, 2019. In addition to representing immediate added value, by receiving Solgold shares in exchange for their Cornerstone shares, Cornerstone shareholders position themselves to participate in the future growth of Solgold.
Elimination of debt-carry constraints
In Solgold's view, management of Cornerstone has been disingenuous over a period of several years in its messaging to Cornerstone shareholders concerning the long-term upside and strategic value of its interest in Cascabel. Cornerstone's communications frequently refer to the carried nature of its 15-per-cent interest ambiguously, leaving shareholders and the investing public to assume that the interest is free carried through to the completion of a feasibility study on the Cascabel project. This is not the case.
Cornerstone's 15-per-cent interest is, in fact, only debt carried through to feasibility, with the result that Cornerstone's 15-per-cent share of the substantial exploration and development costs incurred in the lead up to completion of such feasibility study, anticipated to be approximately $200-million (U.S.) in total (with approximately $117-million (U.S.) already spent by Solgold to date), must be repaid to Solgold out of project cash flow on a 90-per-cent preferential basis. Cornerstone will therefore retain only 10 per cent of the cash flow to which it would otherwise be entitled by virtue of its 15-per-cent Cascabel interest until Solgold has been repaid in full. In Solgold's view, this severely constrains Cornerstone's ability to finance its commitment and is likely to limit appreciation in the value of Cornerstone's interest in Cascabel during the early phases of commercial production.
If at least 66-2/3rds per cent of the Cornerstone shares (on a fully diluted basis) are tendered to the offer, however, the interests of the two entities in the Cascabel project will be combined and the existing debt-carry cash flow waterfall structure will cease to exist. Cornerstone shareholders will receive Solgold shares, giving them a direct interest in an entity with a right to 100 per cent of Cascabel's free cash flows from the commencement of production at the project, and with no further liability by Cornerstone to repay its share of the lead-up expenditures to Solgold.
Removal of Cornerstone financing obstacles
Under the current structure, following the completion of a feasibility study, Cornerstone's debt-carry arrangements will conclude and thereafter it will be required to finance its pro rata share of development expenditures during the capital-intensive construction phase in the lead up to commercial production. In such a context, in accordance with arrangements in place at the ENSA level, Cornerstone will be required to either finance the required cash calls or have its 15-per-cent ownership of ENSA diluted, giving Cornerstone shareholders even less economic exposure to the Cascabel project.
If Cornerstone elects to maintain its 15-per-cent ownership, Solgold believes that financing the required cash calls will present significant difficulties to Cornerstone. As noted above, Cornerstone's interest in the Cascabel project does not carry any operational rights whatsoever that could form the basis of a strong value proposition to potential future Cornerstone investors. Additionally, its economic exposure to the Cascabel project will be burdened by the debt-carry repayment requirements described above. Issuers with minority interests in major mineral projects, such as Cornerstone's in Cascabel, typically already trade at a discount to the implied asset value, but this would be compounded by the likely need to conduct an equity financing at a valuation that is significantly dilutive to existing Cornerstone shareholders. Solgold does not expect Cornerstone to be able to finance its cash call requirements through other traditional financing structures either, since Cornerstone is not permitted to sell or even to encumber its interest in Cascabel, either directly or through a pledge of its shares of ENSA. This makes debt financing, a royalty, metal stream or other similar structure a significant challenge for Cornerstone under current arrangements.
As a result of such challenges, in Solgold's view, there is a high likelihood that Cornerstone's 15-per-cent interest would be significantly diluted during the construction phase. In the event Cornerstone's ownership of ENSA is diluted below 10 per cent, in accordance with the arrangements in place at the ENSA level referred to above, Solgold has the right to convert all of Cornerstone's remaining ENSA shares into a 0.5-per-cent net smelter return royalty, which Solgold may then acquire for $3.5-million (U.S.). In Solgold's view, Cornerstone shareholders should not be comfortable with any risk that this outcome may materialize.
If Cornerstone shareholders tender to the offer, they will become shareholders of Solgold and no longer have to be concerned with the obstacles associated with financing a minority, constrained and non-operating interest in the Cascabel project as these obstacles will be cancelled. Solgold's interest in the Cascabel project and the rights associated therewith have proven to be a very appealing proposition to investors, and Solgold has been able to raise approximately $215-million (U.S.) for the project at attractive and increasing valuations (up to 100-per-cent premiums) since August, 2016.
If the offer is not successful, however, and Cornerstone and Solgold do not combine, Cornerstone shareholders face a significant risk that the value of Cornerstone's 15-per-cent interest, which is its only material asset, may be diminished in the hands of Cornerstone under the current structure over a relatively short period of time as the Cascabel projects development accelerates. Solgold does not expect Cornerstone's other assets to improve its prospects or mitigate any of the issues described, as Solgold suspects that Cornerstone's recent failed spinout of those assets is a strong indication of the lack of willingness of the capital markets to place significant value on those assets.
Ability to influence Cascabel project
Cornerstone shareholders currently have no ability to control, or even provide meaningful input into, the development of the Cascabel project. Cornerstone's 15-per-cent interest in the Cascabel project through its ownership of shares of ENSA carries no operational rights, no rights to representation on the board of directors of ENSA, Solgold or any technical committee with oversight of any aspect of Cascabel and no negative controls or offtake rights. Additionally, Cornerstone's interest in ENSA is not protected by any shareholder or joint venture agreement because, despite Solgold's repeated good faith attempts at negotiation, Cornerstone has delayed engagement in any efforts to finalize such a document. Solgold considers that no common law joint venture or other fiduciary obligations are owed to Cornerstone by Solgold by virtue of their common ownership of ENSA and Cascabel. In the absence of a finalized agreement, this leaves Cornerstone's interest unprotected unless the offer is accepted. By becoming shareholders of Solgold through the offer, Cornerstone shareholders would gain the ability to vote on the members of the board of directors of Solgold and dispense with the need for any cumbersome legal structures to protect a 15-per-cent minority interest.
Strong management team with record of value creation
As noted above, Cornerstone's management is passive and plays no role in the development of Cascabel. Its limited role in administering Cornerstone's 15-per-cent economic interest in Cascabel and its other assets represents a drag on value resulting from duplicative management salaries, head office and listing costs. With respect to Cascabel, Cornerstone's management simply reformats for announcement the work carried out by Solgold for consumption by Cornerstone shareholders and provides limited, if any, additional value.
In contrast, Solgold's multiaward-winning management team has a strong record of value creation and stewardship of investors' capital. Solgold made its first entry into Ecuador in 2013 with the acquisition of a 20-per-cent stake in ENSA, at which time its market capitalization was approximately $23.6-million. In February, 2014, Solgold completed the terms of the earn-in to increase its ENSA ownership to 85 per cent and by the end of that month its market capitalization rose to approximately $90-million. In September, 2016, Solgold started its drilling program; once the first results became public, Solgold's market capitalization rose to approximately $150-million. By December, 2017, SRK Exploration Services Ltd. issued its initial technical report on the Alpala deposit showing total resource of 5.2 million tonnes of copper and 12.3 million ounces of gold, which further increased Solgold's market capitalization to approximately $780-million. As recently as December, 2018, Solgold's successful exploration campaign doubled the project total resource to 10.9 million tonnes Cu and 23.2 million ounces Au, fostering a further rise in market capitalization to approximately $1.2-billion. Over all, Solgold's successful exploration and effective leadership drastically transformed the perception of ENSA, with Cascabel and Solgold management being the primary driver of value for both Cornerstone and Solgold share prices.
By tendering to the offer and becoming Solgold shareholders, Cornerstone shareholders will receive the benefit of this proven, value-creating team. A successful offer would allow the elimination of needless and duplicative corporate overhead, general and administrative expenses.
Certainty of offer and potential lack of competition -- BHP and Newcrest constraints
The offer provides Cornerstone shareholders with a certain offer capable of acceptance. Solgold is aware that there may be a number of other companies interested in Cascabel, such as BHP Billiton Holdings Ltd. and Newcrest Mining Ltd., both of which have acquired substantial shareholdings in Solgold. However, Solgold believes that no assurance can be given that there will be competition to Solgold's offer, now or in the foreseeable future, in light of the rights of voting support, first refusal, pre-emption and standstill that Solgold has in relation to its agreements with Cornerstone, BHP and Newcrest. BHP cannot acquire any interest in Cornerstone without Solgold's approval before Oct. 16, 2020. Similarly, pursuant to its 2016 subscription agreement with Solgold, Newcrest will not be permitted to acquire shares in Cornerstone before Oct. 17, 2019.
Additional upside of other highly prospective Solgold licences
Beyond Cascabel, Solgold holds 72 additional 100-per-cent-owned licences in Ecuador that are highly prospective, and which have yet to have their full potential value assessed. Of these 72 concessions, Solgold has identified 11 priority targets -- the most advanced of which are La Hueca, Porvenir, Rio Amarillo, Cisne Victoria, Cisne Loja, Blanca and Timbara -- which show a strong probability of being added to Solgold's project pipeline. For example:
- The La Hueca project is in the south of Ecuador within the eastern Jurassic belt (which also contains Lundin Gold's Fruta del Norte epithermal gold deposit (14 million ounces Au)), the Mirador copper-gold porphyry deposit (three million tonnes Cu, currently being developed by Chinese consortium CRCC-Tongguan) and the Santa Barbara gold-copper porphyry deposit (eight million ounces Au, contained within Lumina Gold's Condor project). The project area covers 150 square kilometres on three concessions and hosts six identified porphyry centres. Geological mapping, stream sediment sampling and rock chip samples, including a sample containing 13.8 per cent copper, have shown the presence of a quartz vein network containing several minerals characteristic of copper-gold porphyries such as chalcopyrite, bornite and molybdenite.
- The Porvenir project is also in the south of Ecuador. A stream sediment sampling program initially delineated two geochemical anomalies within a larger six km by 5.5 km stream anomaly. These anomalous zones are known as the Derrumbo and Bartolo prospects. Detailed follow-up mapping and rock chip sampling continue to locate additional mineralized outcrops at both the Bortolo and Derrumbo target, with rock chips grading up to 8.7 per cent copper. Subsequent extended rock saw channel sampling along exposed outcrops yielded 62.4 m at 1.16 per cent copper equivalent (0.71 per cent Cu, 0.71 g/t Au) (open-ended), including 29.5 m at 1.56 per cent CuEq (1.01 per cent Cu, 0.89 g/t Au) from 12.1 to 41.6 m. The main prospective target area covers a zone 1.5 km by one km in area. Drill testing and ground magnetics are planned at the most prospective target in the first quarter of 2019.
- The Blanca project is in Ecuador's Northern Eocene belt eight km northwest of the Cascabel concession. Sampling has identified a gold-rich epithermal quartz vein (with up to 617 g/t Au), known as the Cielito vein prospect. The eastern part of this vein system lies within the area of mutual interest with Cornerstone, but there has been no significant work on the extension.
- The Timbara project is located within the eastern Jurassic belt in the south of Ecuador. Initial stage geochemical sampling and reconnaissance mapping have located promising mineralized outcrops containing chalcopyrite and traces of bornite. A rock chip sample from a bornite-rich vein returned best results of 28.89 per cent Cu. These veins are believed to be a continuation of the porphyry corridor identified at Solgold's La Hueca project described above.
- The Cisne Victoria project is located in southeastern Ecuador, the project consists of an epithermal zone of alteration and mineralization indicative of the presence of a large porphyry system. Best sampling results have returned seven m at 2.29 per cent copper, 0.73 g/t gold and 8.83 g/t silver.
- The Cisne Loja project is again located in southern Ecuador and is characterized by outcropping epithermal-style low-temperature quartz vein metallurgy and a 2.5 to 1.5 km area. Rock chip samples and selected veins range in grade up to 15.25 g/t gold and 23.6 g/t silver.
- The Rio Amarillo project is located in northern Ecuador about 30 km south east of Cascabel. The Rio Amarillo project consists of two target lithocaps which are believed to represent clay, pyrite and silica zones over the top of mineralized copper gold porphyry systems. The longest of these is approximately six km in area has yielded rock chip sample results up to 30 g/t gold from a mineralized epithermal quartz vein.
Readers are cautioned that Solgold may determine not to make the offer if: (i) it identifies material adverse information concerning the business, affairs, prospects or assets of Cornerstone not previously disclosed by Cornerstone; (ii) Cornerstone implements or attempts to implement or activate defensive tactics (such as a material change in Cornerstone's capital structure or the grant of an option (or similar right) to purchase material assets) in relation to the offer; (iii) Cornerstone determines to engage with Solgold to negotiate the terms of a combination transaction and Solgold and Cornerstone determine to undertake that transaction utilizing a structure other than a takeover bid (such as a plan of arrangement); (iv) a third party makes a competing offer for Cornerstone; or (v) there is a change of control of Cornerstone or any of its material subsidiaries. Accordingly, there can be no assurance that the offer will be made or that the final terms of the offer will be as set out in this news release.
Solgold has retained Hannam & Partners and Cormark Securities Inc. as its financial advisers in connection with the offer. Bennett Jones LLP is acting as Canadian legal adviser to Solgold and Hopgood Ganim is acting as Australian legal adviser to Solgold.
About the Cascabel project
The Cascabel project's Alpala deposit is located in northern Ecuador, lying upon the northern section of the prolific Andean copper belt, renowned as the base for nearly half of the world's copper production. The project area hosts mineralization of Eocene age, the same age as numerous Tier 1 deposits along the Andean copper belt in Chile and Peru to the south. The project is a three-hour drive north of Quito, close to water, power supply and Pacific ports. Solgold holds an 85-per-cent registered and beneficial interest in ENSA which holds 100 per cent of the Cascabel tenement.
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