THOMPSON CREEK DEAL WAS ‘ TRICKY’
LOTS OF MOVING PARTS IN CENTERRA BID CAME OFF AS ‘WIN-WIN-WIN’
Disgruntled bondholders, a royalty holder to appease, a hostile foreign shareholder: Those are some of the issues that made Centerra Gold’s US$ 1.1 billion takeover of Thompson Creek Metals one of 2016’s most challenging deals.
“This is one that we’ll talk about for many years,” said Jason Neal, co-head of global mining and metals at BMO Capital Markets, the bank that acted as both adviser to the seller — Thompson Creek — and lead financier for the buyer — Centerra.
“It’s highly atypical for the sell side adviser to be top left for the buyer financing — I can’t think of another example in mining.”
The deal may have been particular score for BMO, but all of the bankers involved in getting it done believe it generated a unique string of wins for several parties concerned.
In mid-2015, commodity prices were in the doldrums as the clock was ticking down toward a 2017 repayment date for the first instalment of debt Thompson Creek had amassed to develop its Mount Milligan copper-gold mine in British Columbia. The company had few options but to try and refinance or put itself on the auction block.
Thompson Creek, whose shares had traded at $ 25 at a 2007 peak, had become a penny stock.
It hired the Bank of Montreal to pursue merger and acquisition opportunities and gave interested parties until Apr. 18, 2016, to submit proposals.
“Thompson Creek was certainly on our radar. We saw it as a good gold- copper asset with a good long-life-low-cost operation,” said John Pearson, Centerra’s head of investor relations. “It fit everything we were looking for.”
Centerra was intent on diversifying away from its main asset, t he Kumtor mine in the Kyrgyz Republic, where the company is at odds with the government over several issues.
Centerra’s i nterest in Thompson Creek was so strong that CEO Scott Perry flew to Denver for a dinner with Thompson Creek CEO Jacques Perron to make his pitch a month before the formal process was slated to end. He was told the company needed to stick with the soon-to-be concluded formal process. Still, the connection between Perry and Perron helped Centerra’s bid stand out, said Matthew Hind, head of Canadian metals and mining at Credit Suisse, adviser to Centerra on the deal.
“When you think of doing deals with people, you do them with people you like and trust and they had developed a very good trusting relationship,” Hind said.
Thompson Creek’s board saw one glaring execution risk in Centerra’s bid: It provided full cash payment for the 2017 bondholders, but 2018 and 2019 holders would be compensated with 85-percent cash and 15- per- cent shares. Adding shares to the mix gave the 2018 and 2019 bondholders a say in talks, and added to deal- completion risk. So structuring the deal to provide cash to all bondholders would remove that risk.
Centerra had already used the cash it had available, said Ilan Baher, managing director in the global metals and mining group at BMO and adviser to Thompson Creek.
Yet BMO was convinced it could provide the investor demand Centerra would need to close the deal. But since BMO was already advising on the Thompson Creek side of the asset transaction, the bank had to secure the permission of Thompson Creek’s board to help the asset purchaser, Centerra, raise equity for the deal.
BMO went to Centerra and said it could conduct a bought- deal f i nancing that would convert shares into the $ 170- million cash it needed to help pay bond- holders. The bank committed to buy that equity and sell it on the market, along with Centerra’s adviser Credit Suisse. After exercising an overallotment option, they ended up raising $195 million.
Thompson Creek’s management and board ultimately decided Centerra’s offer had the best value and the lowest execution risk.
It was also the only proposal that offered a full cash payout to bondholders, while also adding value for shareholders.
Thompson Creek shareholders were offered 0.0988 of a Centerra share, about 79 cents per share based on Centerra’s July 4 closing price. That was a 32- percent premium to Thompson Creek’s share price that day, but a sharp haircut from where it had traded in its prime. Thompson Creek shareholders hold eight per cent of the new company.
On July 5, the deal was announced alongside Centerra’s bought deal financing of $170 million, leaving the bankers little time to sell investors on the deal before markets opened the next morning.
B MO believed that Centerra’s risk “overhang” was discounting its share price compared to its peers. “We knew what the parts could sum to,” Neal said. “In determining the pricing of the bought deal and the execution we had to be very confident on how the shares would trade pro forma the M&A transactions.”
“The deal was not without its challenges,” said Peter Collibee, head of global mining and metals at Scotiabank, which underwrote the credit facility. Still, he said, the deal piqued investors’ interest because it fundamentally changed Centerra’s risk profile.
Making Centerra’s offer even more favourable was the fact that its management had already gone to Royal Gold Inc., which had a streaming agreement with Thompson Creek as part of an earlier financing deal.
Prior to approaching Thompson Creek, the two had negotiated new terms that would help a combined company structure Mount Milligan as a mainly gold mine with copper by- product.
Royal Gold’s 52.25- percent gold- streaming interest at Mount Milligan was amended to 35 per cent gold stream and 18.75 per cent copper stream — which would diversify Royal Gold’s revenue stream and remove the risk of Thompson Creek going bankrupt.
Centerra told Royal Gold that Thompson Creek would trade more like a gold mine, and gold companies trade at a higher valuation than copper or molybdenum miners, Pearson said.
State- owned Kyrgyzaltyn, which owned a 32- per- cent stake in Centerra, and had three seats on the company’s 11- member board of directors, voted against the takeover because it would dilute its holdings, it told Reuters in June, adding that it was not informed in advance about the deal.
But the Kyrgyz company was helpless to stop the deal. It’s directors’ ‘nay’ was overruled by positive votes from the majority of board members. And because the equity raise wasn’t large enough to trigger a shareholder vote, there was little else the stateowned player could do.
In the end, the deal diluted the Kyrgyz share down to 26.6 per cent.
“It was a very tricky transaction,” Credit Suisse’s Hind said. Some involved in the deal were nervous about the large Kyrgyz stake in Centerra. Still, Hind believes the risk of the Kyrgyz thwarting the takeover deal was overblown.
“It was a true win-win-win and it was really complex. There were just a lot of different stakeholders with a lot of different interests,” he said.
THOMPSON CREEK WAS CERTAINLY ON OUR RADAR. WE SAW IT AS A GOOD GOLD- COPPER ASSET WITH A GOOD LONG-LIFE-LOW- COST OPERATION. IT FIT EVERYTHING WE WERE LOOKING FOR. — JOHN PEARSON, CENTERRA’S HEAD OF INVESTOR RELATIONS