The criticism of the Arrangement involves Jing Bao and Shandong Xiangguang Group Co., Ltd . In April they were involved as part of a syndicate with an alternative financing proposal with Reservoir, which Reservoir’s board rejected in favour of the Arrangement with Nevsun.
Nevsun Resources Ltd. today dismissed baseless criticisms from two dissident shareholders for Reservoir Minerals Inc. Nevsun also cautioned that Reservoir could lose the Timok copper and gold project in Serbia under the terms of an alternative financing proposal from one of the losing bidders.
Nevsun reminded Reservoir shareholders of the premium value of the Arrangement Agreement (the “Arrangement”) it has entered into with Reservoir and urged Reservoir shareholders to vote for the Arrangement. Nevsun also cautioned that Reservoir’s shares are currently trading at a premium linked to the Arrangement and the price might decline sharply if the Arrangement is rejected.
“Nevsun believes there is significant risk to Reservoir under the proposed alternative financing, including the risk of a loan default that could cost Reservoir its entire interest in Timok,” said Cliff Davis, President and CEO of Nevsun. “Moreover, the dissident shareholders may have questionable motivations in criticizing the transaction due to their potential interest in offtake contracts.”
Continued Mr. Davis, “Reservoir shareholders should be guided by the unanimous support of Reservoir’s board for the Arrangement, and a supporting fairness opinion from Reservoir’s financial adviser on the consideration to be received by Reservoir shareholders. The compelling value and rationale for this transaction is underscored by the recommendations from both ISS Proxy Advisory Services and Glass, Lewis & Co., two leading independent proxy advisory firms, that Reservoir shareholders vote FOR the arrangement. Clearly the transaction with Nevsun is an excellent outcome for Reservoir and its shareholders.”
The dissident shareholders, risk of a loan default, and proposed equity dilution
The criticism of the Arrangement involves Jing Bao Ltd. and Shandong Xiangguang Group Co., Ltd (“XGC”). In April they were involved as part of a syndicate with an alternative financing proposal with Reservoir, which Reservoir’s board rejected in favour of the Arrangement with Nevsun.
Now, with the support of Jing Bao, XGC has proposed a new, non-binding financing to Reservoir. Proposed terms include a US$50 million loan, secured by Reservoir’s interest in Timok as well as other Reservoir assets. XGC could obtain full ownership of Reservoir’s interest in Timok if Reservoir were to default on the loan, which is a significant risk since Reservoir has no current operations that would allow it to service the loan or repay it when it comes due.
Proposed terms also include a dilutive US$80 million issue of Reservoir equity at just C$8 per share. That’s a significant discount to Reservoir’s closing share price of C$8.76 yesterday (June 7, 2016) and an even greater discount to the price of C$9.40 at which Nevsun recently financed Reservoir.
Moreover, in the event that the Nevsun Arrangement is rejected, there is a risk that XGC might withdraw its offer or substitute terms that are even more onerous to Reservoir. In contrast, the binding terms of the Nevsun Arrangement provide Reservoir shareholders with premium value and increased long-term exposure to the Timok project.
Questionable and self-interested offtake motivations
Nevsun believes the criticism of the Arrangement may be self-serving since the dissident shareholders might be interested in signing offtake contracts to purchase Timok’s output. For example, on its own website Jing Bao states that it is “especially interested in off takes” and that it is “most interested in the right to purchase a percentage of the commodity at a low fixed price over the life of the mine in exchange for upfront payments.”1
Nevsun has the demonstrated expertise to move the Timok project into production – it is not clear how Reservoir shareholders would benefit from such a deal as Jing Bao prefers. Reservoir shareholders have reason to question Jing Bao’s motivations in attempting to hinder the premium transaction with Nevsun.
XGC smelter provides no advantage
Similarly, it is incorrect to ascribe value to synergies involving the Chinese smelter operator XGC. Once Timok is in production, Nevsun will arrange for smelting on the best available terms from the world’s many smelter operators. Nevsun and Reservoir due diligence showed there are competitive markets for Timok products. It would not be in Reservoir’s interest for Timok to become captive to XGC, for either Direct Ship Ore “DSO” or copper concentrates.
Jing Bao admits its estimates and calculations are unsubstantiated “beliefs” and “should not be relied upon”
Jing Bao’s statements of value to Reservoir shareholders are unsubstantiated and include outright errors that should not be relied upon. Jing Bao itself acknowledges this in its disclaimer, which reads in part: “Jing Bao’s expectations as to the value of Reservoir or Nevsun are not based on work conducted by valuation, financial or mining experts. Each only constitute a statement of our beliefs and should not be relied upon”.
Nevsun Arrangement is the result of a rigorous process
In November 2015 the Reservoir Board of Directors contacted approximately 25 parties during a rigorous strategic process to consider potential strategic partners for the Timok project, and in March 2016 the Reservoir Board engaged independent financial advisors to assist in evaluating strategic alternatives.
The Reservoir Board and its advisors considered a number of options, including the April financing proposal from a syndicate involving Jing Bao and XGC, and the Reservoir Board unanimously agreed that the Arrangement with Nevsun was the preferred alternative. The Reservoir Board also received a fairness opinion from its independent financial advisor that the consideration to be received by the Reservoir Shareholders pursuant to the Arrangement is fair, from a financial point of view, to the Reservoir Shareholders.
Nevsun’s strong balance sheet and cash generation to fund Timok’s potential
Following the completion of the Arrangement the pro-forma company will have US$300 million in cash to fund the development of Timok, as well as ongoing cash flow generated by Nevsun’s 60%-owned Bisha mine, a high grade mine which generated US$120 million of operating cash flow in 2015.
As part of its evaluation of alternatives, Reservoir and its advisors conducted extensive due diligence on Nevsun and its operations, including legal, financial, political risk, and technical analyses. Both the Non-Executive Chairman of the Reservoir Board and the CEO of Reservoir visited the Bisha mine site and met with Eritrean government officials. The Reservoir Board concluded that Nevsun has the proven mine development expertise and balance sheet to move the Timok project forward.