"Avoca bides time with Dioro takeover bidFont Size: Bryan Frith...

"Avoca bides time with Dioro takeover bidFont Size:

Bryan Frith | July 22, 2009
Article from: The Australian

SO far this week, Dioro Exploration has announced an upgrade of reserves at its Frog's Leg goldmine in Western Australia and a possible rival takeover bid or transaction -- but to no avail, as the share price continues to track the Avoca Resources offer terms.

Dioro was selling at 68c before those announcements and responded by edging up 3c to 71c on Monday. Yesterday the shares gained a further 2c to 73c. But that's in line with the Avoca offer, which at its prevailing share price of $2.74, values its scrip offer of 1 Avoca for each 2.4 Dioro shares at 72.5c a Dioro share.

That's a far cry from the valuation of $1.40 to $2.28 a share by Dioro's "independent" expert (and auditor and tax adviser) KPMG, with a preferred value of $1.88.

The KPMG report has been undermined by the corporate regulator, ASIC, which has forced the expert to twice elaborate on aspects of its report, including a concession that Avoca's share price is likely to increase if it acquires 100 per cent of Dioro -- effectively improving the offer terms -- and that its valuation equates to a staggering 10 times the typical bid control premium.

But the target board is still pointing to the valuation as a reason to reject the offer.

Dioro shares were selling at only 39.5c before the Avoca bid.

There can't be much left in the takeover defence bag of tricks.

Since Avoca announced its hostile scrip bid almost three months ago, Dioro has been banging on about the possibility of a rival offer, stating that it has been holding discussions with a number of third parties. As some of those discussions went back 12 months or so, the market didn't get too excited.

Avoca has been openly sceptical that a rival bid will eventuate, particularly as it has flagged that it would be unlikely to accept for its stake, but would remain as a committed and active shareholder. Avoca said that if it failed to secure control through its takeover bid, it could continue to build its stake, using the creeping takeover exemptions, and might seek board representation.

Those possibilities, together with the fact that Avoca now holds close to 20 per cent of Dioro, would be likely to act as a deterrent to a potential counter-bidder.

On Monday, Avoca declared that it was now time for Dioro to provide its shareholders with a "frank and complete" report on the status of its discussions and an indication whether any of them were likely to result in a "competing preferable offer".

Later that day, Dioro announced that it was engaged in advanced discussions with the Canadian group Northgate Minerals Corp regarding a "potential material transaction" and expected to announce the details within a week.

The Dioro board added that, on the basis of the discussions to date, it was of the view that the proposed transaction, if completed on the terms currently being contemplated, was likely to be superior to the current Avoca offer in terms of value.

What Dioro didn't do was give any indication as to whether the negotiations with Northgate involved a possible takeover bid or some other transaction, such as a sale of assets. Dioro has previously said that its discussions with other parties could lead to a counter-bid or an offer to acquire all or a significant portion of the company's assets.

There have been suggestions that Northgate, which is listed on the Toronto Stock Exchange, as is Dioro, has been looking at ways to also list on the ASX.

If the Northgate proposition eventuates and it is not a takeover bid, then it raises the issue as to whether it should involve shareholder approval.

Where target companies propose a transaction that could frustrate an existing bid by ensuring a defeating bid condition is met, the Takeovers Panel is likely to require shareholder approval.

That doesn't arise in this case because Avoca has already declared its offer unconditional, so there are no bid conditions that can be defeated. Avoca is committed to pressing ahead with its offer whatever Dioro unveils.

But if it does involve the sale of significant assets, it may require the approval of shareholders under the ASX listing rules.

If so, Avoca would be able to vote its stake.

As to Frog's Leg, Dioro announced that the estimate of proven and probable reserves had risen 45 per cent to 789,504 ounces of gold. Frog's Leg is a joint venture in which the Canadian group La Mancha owns 51 per cent and is the operator. Dioro owns the remaining 49 per cent. So the reserves attributable to Dioro are 386,857oz of gold.

There was nothing unusual about the upgrade. Frog's Legs already had measured and indicated resources of more than 4.5 million tonnes containing about 990,000oz of gold and all that has happened is that in-drilling has enabled some of those resources to be converted to proven and probable reserves. It would have been more significant had the drilling not proved up reserves.

Of more interest is the fact that KPMG's valuation of Dioro was based on an attributable reserve figure for its share of Frog's Legs of 489,745oz of gold -- 102,888oz, or 21 per cent more than the revised figure reported by Dioro.

Predictably, Avoca is calling for KPMG to provide a further update of its valuation. Certainly if it was to value Dioro on the new reserves figure for Frog's Legs it would result in a much lower valuation range for Dioro shares.

Meanwhile, Dioro is pressed for liquidity. As at May 31 its debt facilities were close to fully drawn and it had a working capital deficiency of $1.16 million.

The company's cashflow forecasts indicate that it will be able to get by, but those forecasts are dependent on a number of factors, including meeting production targets, the gold price obtained and achieving operating costs in line with forecast.

There is conjecture whether Dioro will be able to meet its production targets following massive pitwall failures at its Mt Marion and HBJ open pits. As a result there was no production from its South Kalgoorlie operations in the May quarter.

Dioro has also expressed doubt whether the gold buried by the pitwall collapses can be recovered economically.

Avoca to date has made little headway, obtaining acceptances of only 4 per cent. Its offer is scheduled to close next Tuesday, but it can keep extending the offer.

Unless Dioro can extract a demonstrably superior proposition from Northgate, then time would appear to be on Avoca's side."