I was Wrong about Champion and Red Back
I just got a thick (hundreds of pages) Notice from Champion Resources (CHA.TO) about its upcoming merger with Red Back Mines (RBK on Australian ASX), dated March 15. I have shares in Champion. Red Back has several promising gold mining properties in Ghana and some in Australia; Champion has a phosphate concession in Guinea-Bissau. Red Back is using Champion as a way to get on the Toronto Stock Exchange; the merged company will be re-named Red Back Mining.
Earlier I posted a message suggesting that I'd figured you'd get more of the new company, per dollar, by buying Champion shares than by buying Red Back shares. But I said I wasn't sure, and now I'm even less sure. I thought that old Red Back stockholders would own 87% of the new company (fully-diluted), and that old Champion stockholders would own 13% of the new company.
But, lo, when I look at page 21, I see that old Champion stockholders only get 7.85% of the new company, not 13%, while another class of "Securities reserved by Champion for future issue as of the date of this circular (excluding securities to be issued pursuant to this merger)" --- 8,854,500 shares --- gets the other 5.55%
Now what are those? My first impression is that they appear to be shares destined for issue to prior Champion warrant and option holders. But it doesn't really say so.
Right after listing these "Securities reserved ... for future issue...", the next paragraph says: "... RBM and Champion have agreed not to issue any securities other than as contained in the Merger Agreement." That Agreement is attached to the Notice, and says: (6.1) "... neither Champion nor Red Back shall ... (d) allot or issue ... shares ... other than pursuant to outstanding options, warrants .., or as provided in this agreement."
Again, if anyone who reads this board has a better understanding of this, please post an explanation. My initial calculations were definitely flawed.
At a mere 7.85% slice, instead of 13%, is the thinly-traded Champion stock a good way to buy into the new Red Back, or not? The current CHA.TO price is C$0.75, with 12,540,894 shares outstanding and a market value of C$9,405,671 (according to TSX), ignoring the warrants and options. The current Red Back price is Aus$0.64, with 134,670,851 shares outstanding and (3,535,000 options) according to the Notice. Since the Australian and Canadian dollars are now almostly exactly equal, the market value of Red Back is about C$86,189,345 ignoring options. The ratio of 9,405,671(Champion)/86,189,345(Red Back) = 0.109127375 is only slightly better than ratio of the percents of the new company, namely 7.85% (Champion without the warrants and options)/84.38%(Red Back without its options) = 0.093031524.
The warrant and option holders (assuming that's who they really are) will dilute the new shares by owning the remaining 7.77% of the new company if they exercise their rights as expected.
However this leaves out some things, such as the agreed-to spinoff of Red Back's Australian properties (value unknown) to old Red Back shareholders alone. And a "Redback Limited" is listed as owning 1,050,000 Champion warrants. Also there's a question about who'll get the northern Ghana properties (as opposed to Chirano and other Ashanti-Ahafo area properties). That's the subject of my next message.
FL
