Core Gold Inc. ("
Core Gold" or the
"
Company") (TSX-V: CGLD, OTCQX: CGLDF) is today
providing this update to its previously announced strategic
process. As well, on December 9, 2019, Core Gold announced that it
was in advanced negotiations with another company as a result of
that strategic process. Core Gold is also providing an update on
those negotiations.
Strategic Process Summary
In July 2019, Core Gold recommenced its
strategic review process of alternatives available to Core Gold,
including equity or debt financings, core and non-core asset sales,
strategic investments and joint ventures, as well as a potential
merger of Core Gold with another company. The opening phase of that
process continued through to the end of October, 2019.
In the strategic process, 65 parties were
contacted by Core Gold, of which 49 responded and 17 entered into
confidentiality agreements. Titan Minerals Limited
("Titan") (which announced on December 9, 2019
that it will improve its existing unsolicited offer to purchase all
of the outstanding Core Gold common shares by increasing the
consideration in its offer to 3.1 Titan ordinary shares for each 1
(one) Core Gold common share (the "Titan Increased
Offer") from the original 2.5 Titan ordinary shares (the
"Titan Original Offer")), did not sign a
confidentiality agreement or participate in the strategic process,
although they were invited to do so.
As a result of the strategic process, 5
non-binding confidential proposals were made to Core Gold, and all
of which were subject to conditions. Three (3) of the proposals
related to proposed joint ventures on Core Gold's projects, two (2)
of which were related exclusively to the Company's Copper Duke
Project, and all were considered unanimously by the board of Core
Gold (the "Board") to be insufficiently value
maximizing directly to Core Gold shareholders to warrant pursuing
further given the other proposals that were made. The fourth
proposal was an all-share merger proposed by another TSX listed
junior mining producer with a similar market capitalization to Core
Gold. That proposal did not specify an exchange ratio, and remained
subject to diligence and the necessity of financing, and was
unanimously not considered sufficiently attractive for financial
and strategic reasons by the Board to continue to pursue.
The final non-binding proposal was made by a
senior producing gold company with a market capitalization in
excess of US$4 billion (the "Interested Party").
This non-binding proposal has been subject to significant and
lengthy negotiations, but the Board has, for the reasons set forth
below, determined not to accept the Interested Party's stated last
and final offer.
Core Gold and the Interested Party did enter
into a confidentiality agreement in September 2019. On December 13,
2019, in its stated last and final non-binding offer, the
Interested Party waived the confidentiality provisions of that
agreement thus permitting Core Gold to make these disclosures.
Third Party Non-Binding Proposals and
Negotiations
Chronology of Key Events
On September 2, 2019, Core Gold received the
first non-binding proposal from the Interested Party. Core Gold
subsequently received non-binding amendments and revisions to that
original non-binding proposal in October and November 2019 as the
negotiations progressed. The last amendment to that proposal was
received on December 12, 2019 following Titan's announcement of the
Titan Increased Offer.
The original September 2, 2019 non-binding
proposal from the Interested Party had the following key terms (the
"Original September Proposal"):
- C$0.225 in cash per Core Gold
common share.
- Issuance by Core Gold of a
convertible security prior to completion of the transaction for
gross proceeds of C$5M which would automatically convert to Core
Gold common shares at C$0.225 per share within 60 days of
issuance.
- The proceeds from the convertible
security would have had a restricted use of proceeds, with C$1M
being used for working capital and C$4M being available only for
specific debt repayment.
- Creation of a new company
("SpinCo") which would contain all of Core Gold's
projects (Zaruma, Portovelo, Copper Duke and Linderos), other than
the Dynasty Goldfield Project, and which would be spun-out to Core
Gold shareholders but would be unlisted. The Interested Party would
have been entitled to one (1) board seat on the board of directors
of SpinCo.
- The Interested Party would invest
US$10M into the SpinCo for a 19.9% share ownership position.
- Creation of a joint venture in
respect of mining and processing oxide ore from the Dynasty
Goldfield Project with 60% of the profit to SpinCo and 40% of the
profit to the Interested Party.
Nine main conditions were also presented,
including legal, financial and technical due diligence, as well as
drafting definitive documentation. That documentation would have
included a US$3M break fee. The Interested Party also sought 45
days of exclusivity, which the Board was not prepared to grant
given it would have meant terminating the strategic process in its
early stages and thus potentially excluding other parties
interested in proposing a transaction to Core Gold. Nevertheless,
the Board unanimously considered the Original September Proposal to
have merit and be of interest, and instructed management to provide
due diligence access, organize a site visit for the Interested
Party, and commence negotiations to advance the Original September
Proposal. On September 12, 2019, Core Gold and the Interested Party
signed a confidentiality and standstill agreement, and due
diligence commenced.
Through October and November, numerous
discussions and negotiations were held with the Interested Party
and its representatives. On November 25, 2019 Core Gold received a
draft form of arrangement agreement from counsel to the Interested
Party that reflected the non-binding proposal at that time.
Subsequently, the proposal continued to evolve until the last and
final non-binding proposal was received on December 12, 2019 from
the Interested Party.
The last and final December 12, 2019 non-binding
proposal from the Interested Party had the following key terms (the
"Final December Proposal"):
- C$0.33 in cash per Core Gold common
share.
- A private placement by Core Gold of
common shares to the Interested Party of C$10M at C$0.25 per Core
Gold common share, for 19.1% of the resulting Core Gold common
shares.
- Restricted use of funds, with
US$2.5M (approximately C$3.3M) being used only to repay debt
principal and interest owed to Titan (totaling approximately
US$3.0M or C$4.0M) and C$5M being "restricted funds" that Core Gold
could only use with the prior approval of the Interested Party and
then only to be used to advance key projects approved by the
Interested Party, which projects were not identified specifically.
Assuming the full US$2.5M was used to repay debt principal and
interest owed to Titan and assuming the full C$5M was used as
restricted funds to advance key projects, only approximately C$1.0M
(approximately US$0.75M) would remain as a balance to then be used
by Core Gold for general working capital purposes or potentially
transferred to SpinCo.
- The creation of SpinCo, which would
now only contain the Copper Duke and Linderos Projects and which
would be spun-out to Core Gold shareholders, but be unlisted.
- The Interested Party would make no
cash investment into the SpinCo but would receive 19.1% of the
SpinCo shares pro rata with other Core Gold shareholders (as a
result of its up to C$10M private placement).
- The Final December Proposal also
included a break fee of C$7M which would be payable in
circumstances not fully set out in the proposal, but also if a
definitive arrangement agreement between Core Gold and the
Interested Party was terminated. Importantly, the break fee was
expressly set to also be immediately payable by Core Gold to the
Interested Party if Titan took up any shares under the Titan
Increased Offer.
- The Final December Proposal was
also conditional upon the Interested Party entering into voting
support agreements with Core Gold shareholders holding an aggregate
of 40M common shares (representing approximately 24% of Core Gold’s
issued and outstanding common shares).
Assessment of the Final December Proposal
The Board, together with its legal advisors, has
assessed the Original September Proposal and the Final December
Proposal and has unanimously rejected the Final December Proposal.
The Board's decision is based on many factors and assessments, but
when looked at collectively, and considering the current
circumstances of Core Gold, the Board has determined that the Final
December Proposal should be rejected, but remains open to further
amendments and proposals from the Interested Party. The Board has
considered and assessed these factors among others:
- No Material Increase in
Overall Value to Core Gold Shareholders. While the cash
component of the non-binding proposals from the Interested Party
has increased from C$0.225 per common share to C$0.33 per common
share, the actual value increase is limited as the asset mix has
materially changed. In the Original September Proposal, the C$0.225
per share cash component reflected the only asset that would have
remained in Core Gold – the Dynasty Goldfield Project –
with all other assets being transferred to SpinCo.
The Final December Proposal, however, retained the Dynasty
Goldfield Project, the Zaruma Project and the Portovelo plant
within Core Gold, and only would only have the Copper Duke and
Linderos Projects been transferred to SpinCo, meaning that C$0.33
per share also reflects the fact that the Zaruma Project and the
Portovelo plant would remain with Core Gold and be acquired for
C$0.33 per share. The Board believes that the additional cash
consideration per share of C$0.105 from the Original September
Proposal does not fairly reflect the value of the additional assets
that the Interested Party would have been acquiring. In
effect, despite the publicly announced Titan Increased Offer, the
Interested Party has proposed to pay more in cash to Core Gold
shareholders only because it would acquire two more
assets.
- Interested Party would
assume all of Core Gold's Corporate Level Debt. All of the
proposals from the Interested Party reflect that it would assume
all of Core Gold's corporate level debts and none of those
obligations would be transferred to SpinCo, and which was
considered carefully by the Board in assessing the proposals.
- SpinCo would be
Undercapitalized, Unlisted and have no Project with defined Mineral
Resources. In the Final December Proposal, the Interested
Party would invest no cash into SpinCo and would acquire a 19.1%
interest in SpinCo pro rata as a Core Gold shareholder. It would,
in effect, acquire an interest in Core Gold and
SpinCo for C$0.33 per common share. In contrast, in the Original
September Proposal, the Interested Party would have had to have
invested US$10M into SpinCo in order to gain a marginally higher
share ownership percentage of 19.9%. SpinCo would also only have
the early-stage exploration Copper Duke and Linderos Projects,
neither of which host currently mineral resources, and would at
most, obtain C$1.0M (US$0.75M) of starting capital from the C$10M
private placement, meaning it would need to immediately engage in
an equity or debt fundraising. Effectively, the Interested
Party would, under the Final December Proposal, pay US$10M less to
obtain effectively the same interest in SpinCo as compared to what
it originally proposed, which would now only contain early stage
exploration projects without any current mineral
resources.
- Private Placement would be
Open to Regulatory Challenge. Core Gold is currently
subject to an unsolicited take-over offer from Titan. Titan has
entered into lock-up agreements covering 51.7% of the Core Gold
common shares that it does not own. The Board, on the advice of its
legal counsel, considers that attempting to create a new 19.1%
shareholder in Core Gold via a private placement to the Interested
Party would be considered an inappropriate defensive tactic under
Canadian securities laws and open to regulatory challenge. The
private placement would also require TSX Venture Exchange
("TSXV") approval, which Core Gold considers would
be challenging to obtain given the current circumstances. Finally,
if successful, it could potentially deny Core Gold shareholders
holding almost 50% of Core Gold common shares the opportunity to
accept a take-over offer that they have determined they wish to
accept.
- Restrictions on use of
Private Placement Funds limits Utility of Funding. The
Final December Proposal would leave Core Gold with the use of just
C$1.0M (approximately US$0.75M), which may or may not be used to
initially capitalize SpinCo. The Board would also have to defer
decisions it is required to make in the best interests of Core Gold
shareholders to the Interested Party in order to use the balance of
the funds, and those interests may not be aligned as those funds
could be directed by the Interested Party only to projects that
would not likely form part of SpinCo. The Board determined that it
could not accept such limitations by a counterparty to a
transaction that would not then have been approved by Core Gold
shareholders.
- A Break Fee of C$7M would
be Coercive, Off-Market, and Unfunded. In Canadian dollar
terms, the break fee proposed by the Interested Party between the
Original September Proposal and the Final December Proposal
increased by approximately C$3.1M or approximately
80%, yet there has been no commensurate increase in value
to Core Gold shareholders. Such a break fee would be approximately
12.6% of the cash value of the Final December Proposal which is
severalfold higher than that which is acceptable, customary or
permitted in order to induce a higher offer and for the Board to
accept and be consistent with its statutory duties. As well, the
break fee would be payable in the unique circumstance of Titan
acquiring any common shares under the Titan Increased Offer.
Given the Company's financial situation, Core Gold does not
have sufficient funds to fund such a liability, and given the
current number of locked-up shareholders, Core Gold considers it
probable that such a break fee would be triggered and become
payable. Both the quantum and circumstances of the C$7M
break fee are not justifiable, nor would entering into an agreement
to provide for such a break fee be consistent with the director's
statutory duties. As well, the break fee may also be seen as
coercive in that it would penalize Core Gold shareholders that
accept the Titan Increased Offer by stripping C$7M of value from
Core Gold should that offer be successful. By way of
comparison, the C$7M break fee is more than twice the break fee
agreed in the arrangement agreement with Titan entered into in
February 2019.
- The Final December Proposal
Fails to Respond to the Increased Titan Offer and is Not Likely
Sufficient to Permit or Encourage Withdrawal of Locked-Up
Shares. The Final December Proposal was substantially
unchanged from the Interested Party proposals that were received
prior to the Titan Increased Offer. The Board notes that it would
be unlikely in those circumstances that shareholders who have
entered into "soft" lock-up arrangement would be able to withdraw
their lock-ups to the Titan Increased Offer in the face of a
substantially unchanged proposal. Unless sufficient Core Gold
common shares are withdrawn from the Titan Increased Offer prior to
its expiry date (currently January 14, 2020), then Titan would be
in a position to take-up and acquire those shares (assuming other
conditions to the Titan Increased Offer are satisfied) meaning it
would then be in a position to vote against and block the Final
December Proposal which would require a vote of Core Gold's common
shareholders to approve.
- Cash Consideration offered
by the Interested Party is Important, but Cash Consideration would
truncate Core Gold Shareholders' Upside in Retaining an Interest in
Core Gold's Assets. The Board does note that the Final
December Proposal is a cash and shares offer (SpinCo shares).
However, given that the Interested Party would then be acquiring
all of Core Gold's projects (except Linderos and Copper Duke) for
cash, Core Gold shareholders would be losing any increase in value
that may be generated in the future from the Dynasty Goldfield
Project, the Zaruma Project, the Portovelo plant, and other
projects that would be acquired by the Interested Party. Core Gold
shareholders' "upside" would be limited to any increase in value
from Linderos and Copper Duke, which would then be housed in a then
undercapitalized and unlisted SpinCo company without any current
mineral resources.
- The success of SpinCo is
uncertain. Unlike the Original September Proposal, in the
Final December Proposal only two assets would be contributed to
SpinCo, which would be unlisted, and no new cash would be provided
by the Interested Party. SpinCo would, however, not acquire any of
Core Gold's corporate level debt but given the limited potential
cash resources remaining available from the C$10M private placement
(not more than C$1.0M), SpinCo would need to immediately engage in
an equity or debt financing, the success of which would be
uncertain. The Board considers the these risks are unacceptably
high and likely to lead to a circumstance where SpinCo may not be
successfully launched. Without a listing, SpinCo would not be
subject to any exchange regulation and Core Gold shareholders
acquiring SpinCo shares would have no liquidity. As well, SpinCo's
asset base would be limited to just two exploration projects. By
contrast, should the Titan Increased Offer be successful, Core Gold
shareholders would continue to participate in the upside associated
with all of Core Gold's assets, have a listed trading market for
Titan ordinary shares on the Australian Securities Exchange
("ASX"), and be subject to ASX listing rules,
which under ASX Listing Rule 7.1, limit the size of new share
issuances in placements to 15% of the issued capital without
shareholder approval, unless the offering proceeds by way of rights
issue or entitlement offer. Core Gold is currently subject to no
such limitation under TSXV policies.
Given all of these factors, after careful
assessment and consideration and months of negotiations, the Board
has unanimously determined to reject the Final December Proposal,
being the last proposal emanating from the strategic process. Core
Gold does remain open to receiving any further proposals from the
Interested Party.
The Titan Increased Offer
On December 16, 2019, Titan has announced that
it has now entered into lock-up agreements by which shareholders
holding approximately 51.7% of the outstanding Core Gold common
shares excluding any Core Gold common shares beneficially owned, or
over which control or direction is exercised, by Titan (or any
person acting jointly or in concert with Titan), and approximately
48.9% of the total outstanding Core Gold shares. The number of Core
Gold common shares currently subject to the lock-up agreements
would be sufficient to allow Titan to meet the 50.1% minimum tender
condition required under securities laws.
The Board has not made any
recommendation with respect to the Titan Original Offer or the
Titan Increased Offer and has not entered into any agreement with
Titan. Core Gold shareholders are continued to be advised to take
no further action.
The Board is assessing its response to the Titan
Increased Offer and will issue a press release and responding
Directors' Circular in accordance with applicable securities
laws.
About Core Gold Inc.
The Company is a Canadian based mining company
involved in the mining, exploration and development of mineral
properties in Ecuador. The Company is currently focused on gold
production at its wholly-owned Dynasty Goldfield Project. Mineral
is treated at the Company's wholly-owned Portovelo treatment plant.
The Company also owns other significant gold exploration projects
including the Linderos and Copper Duke area in southern Ecuador all
of which are on the main Peruvian Andean gold-copper belt extending
into Ecuador.
For further information please
contact:
Mr. Mark Bailey, CEO, DirectorSuite 1201 – 1166
Alberni StreetVancouver, B.C. V6E 3Z3Phone: +1 (604) 345-4822Email:
info@coregoldinc.com
Neither the TSX Venture Exchange nor its
Regulation Services Provider (as that term is defined in policies
of the TSX Venture Exchange) accepts responsibility for the
adequacy or accuracy of this release.
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