Zeev's Turnips Patch-No Politics (ZEEV)

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U.S. Gold Acquisitions Stall, McEwen Lashes Out

By Ben Abelson
07 Jun 2006 at 03:55 PM EDT

NEW YORK (ResourceInvestor.com) -- U.S. Gold’s [OTCBB:USGL] bid to acquire four Nevada exploration companies has encountered regulatory turbulence that could delay a formal offer from being completed for several months, if at all.

The news sent shares of White Knight Resources [TSXv:WKR], Nevada Pacific Gold [TSXv:NPG], Tone Resources [TSXv:TNS] and Coral Gold [TSXv:CGR] tumbling as much as 20% on Tuesday, as panicked investors sold the stocks into an overall down market.

The possibility that the bid may fall apart has created spreads on the order of 30% between the companies and their acquisitions prices, making a very attractive arbitrage opportunity for investors who remain confident in the deal’s prospects.

White Knight Offer Terminated, Other Offers Delayed

Due to delays in receiving various financial statements, U.S. Gold has been forced to terminate its offer for White Knight, and may have to significantly delay its offers for the other companies. U.S. Gold has said it plans on reinitiating its offer for White Knight once the required documentation is in place.

In a press release issued Tuesday, legendary U.S. Gold CEO Rob McEwen appeared frustrated with the situation, placing the onus for the delayed bid squarely on the shoulders of the four companies to be acquired.

“I’m extremely disappointed with the delays that we have encountered and the lack of cooperation that we have received from the other companies in this effort. We have diligently sought to obtain from each of these companies the necessary information to complete the required regulatory filings but their failure or inability to respond in a timely manner has worked to the disadvantage of our respective shareholders,” he said.

According to U.S. Gold, all four companies have failed to deliver financial documents required by the SEC and TSX needed to make a formal bid. Additionally, neither Nevada Pacific nor Coral Gold has yet to complete a formal financial valuation. The TSX requires this process since McEwen formerly held board seats on those companies, and as such is considered a company insider.

Target Companies Lash Back

Representatives from the target companies protested McEwen’s statements. A Nevada Pacific spokesperson, who requested anonymity, said McEwen had jumped the gun in launching his bid for White Knight, and could only blame himself for the regulatory snafus. McEwen was aware of the SEC requirements, the spokesperson said, and should have waited for the required documentation to be in hand before formally commencing the offer. (White Knight was the only company of the four to have received a formal offer.)

Louis Wolfin, a director with Coral Gold, said while he liked McEwen’s acquisition concept, he couldn’t say if the bid was fairly priced without the formal valuation in place.

“The independent company is proceeding with their valuation…it [the delay] is not up to us, and the auditors simply haven’t finished it yet,” said Wolfin.

U.S. Gold spokesperson Ian Ball attempted to tone down the frustration expressed in the news release, noting that “Rob [McEwen] still fully intends to acquire all four companies…we’re confident that the deal will go through.” But Ball couldn’t give a more specific timeline as to when the formal bids would be made.

Calls to White Knight and Tone Resources were not returned as of publication.

Deal at Risk?

When U.S. Gold’s plan to acquire the junior exploration companies was revealed in early March, the deal was hailed as the second coming of McEwen, the former CEO of Goldcorp [NYSE:GG; TSX:G]. Three months later, with none of the four transactions anywhere near closing, U.S. Gold’s press release was probably intended to move the process along by stirring up shareholder pressure on management of the target companies.

Still, investors have been forced to consider the possibility that the bid could fall apart. According to the news release, U.S. Gold has reserved the right to “reevaluate its intention to acquire any or all of these companies” if it doesn’t receive the required documentation in a “timely manner.”

Although it’s unlikely that McEwen is giving up on his Nevada dream just yet, it would appear that of all the companies Nevada Pacific and Coral Gold are in the most trouble. The two have the largest amount of information to deliver, including the required financial valuations.

Indeed, in the press release McEwen singled these two companies out for this missing documentation. (According to a source, both companies are using the same outside firm to conduct their valuations.) Tone Resources has already submitted their valuation, so it has a smaller remaining burden to meet. White Knight is probably the most attractive of the four companies to McEwen, considering that he has been a long-term shareholder (first via Goldcorp, and later individually).

Arbitrageurs Pick Up on Spreads

Still, the spreads on all four companies remain large. One thing is for certain: the longer the deal drags out, the greater the volatility will be in their share prices. For arbitrageurs who have faith that the deal will be completed, this has also created a significant, albeit speculative, opportunity.

After plunging some 24% yesterday, at the close of trading White Knight was changing hands for C$1.80, some 35% below U.S. Gold’s offer price of C$2.80. Coral Gold fell 21% and closed at C$3.70, 27% below the offer price of C$5.05. Nevada Pacific slumped 23% to C$1.20, 35% below the offer price C$1.84. And, Tone Resources dropped 17% to C$1.41, 32% below the offer price of C$2.08.

Since it is an all stock deal, however, these prices are a moving target, and as of Wednesday afternoon trading some of these spreads had narrowed slightly. Until the market receives clarification on the bids, however, it’s likely that spread between U.S. Gold and the companies it wishes to acquire will remain quite large.

Conclusion

U.S. Gold’s acquisition snarls have presented a classic arbitrage scenario for investors who remain confident that McEwen can pull off a deal. Daring investors could go long the acquiring companies and short U.S. Gold to remain market neutral while capturing this spread. But while Rob McEwen remains a force to be reckoned with in the mining industry, the episode is a key example of why not everything one man touches will necessarily turn to gold.

http://www.resourceinvestor.com/pebble.asp?relid=20465