Thompson Creek’s other suitor

LOff the Record et’s hope the directors at Thompson Creek Metals — a company with interests in copper, gold and molybdenum and whose shares were delisted from the NYSE this year — made the right decision.

In three weeks, shareholders will give their opinion on the takeover by Centerra Gold Inc., the largest Western- based gold producer in Kyrgyzstan. Centerra is of- fering paper to Thompson Creek ( TC) shareholders.

Centerra also raised $ 195 million via an offering of $ 7.35 instalment receipts, the proceeds of which will be used to help repay two maturing TC debt issues. TC’s debt holders will be made whole in the transaction, which was announced in July.

But TC’s equity holders may not be so lucky. They will end up with a minority stake in Centerra, whose main asset is the Kumtor mine in the Kyrgyz Republic.

And a review of Centerra’s latest MD& A indicates that things are far from perfect. In all, five pages of that 44- page document released in late July — a few weeks after the deal with Thompson Creek was announced — were devoted to matters in the Kyrgyz Republic. Readers learn about a no- tice of arbitration involving environmental claims ( a US$ 220- million j udgment against the gold mine is now under appeal); how the gold mine is under an interim order not to pay dividends and of how the mine is not allowed to pay any cash to Centerra; and about plans “seeking to unwind” a US$ 200- million i ntercorporate dividend paid to Centerra in late 2013.

In addition, certain mine employees and managers are not allowed to l eave the country, while “criminal proceedings” have been launched against unnamed managers. To top matters off, the country’s president has “instructed” the General Prosecutor’s Office to “investigate the legality of agree- ments relating to the Kumtor Project,” entered into in 2003, 2004 and 2009.

Relations are not good. Nationalization is a possibility. Relations are also not good between Centerra and Kyrgyzaltyn JSC, a government entity that has a 32-percent stake (27 per cent if the takeover is approved) in the gold mine. And relations are on the slide in part because it seems that the Kyrgyz Republic was not made aware of the transaction prior to it being announced.

Fo r its part, whi l e Centerra remains “committed” to working with authorities to resolve matters, it warned that if things don’t work out then that “would have a material adverse impact on future cash flows, earnings, results of operations and financial condition.”

It isn’t as if Thompson Creek didn’t have an alternative. In its recently 619- page circular, 10 pages are devoted to the background to the arrangement. In those pages we read about Party B, which proposed a “holistic restructuring” — meaning a haircut for the bondholders. Party B was a state- owned enterprise.

It seems Party B’s plan was rejected because of its complex “execution”; because shareholders and debt holders would end up as minority partners with the new owner; and “and because it was “significantly lower” than Centerra’s bid in the amount of cash offered to the noteholders.

Noted one hedge fund manager. “Centerra is the worst buyer i n terms of shareholders but the best buyer in terms of bondholders, who don’t get a vote.”

Centerra closed Wednesday at $7.36.

TC’S EQUITY HOLDERS MAY NOT BE SO LUCKY.