The BarkerLetter

Last week I wrote about a proposed merger involving Canadian base metals explorer Wolfden Resources Inc. (WLF.T). The stock had dropped to $3.50 Cdn per share while Australian zinc miner Zinifex Ltd. ( ZFX.AU) pondered its final offer.

That came in today at $3.81 but only after the company locked down about 27% of the issued shares through an agreement with management—who will recommend the offer.

I suspect Zinifex now has enough votes to make the merger a fait accompli, with or without the support of the rest of the shareholders. At least I hope so for their sake. The offer doesn’t strike me as overly generous.

I might feel differently if I were getting some discounted Zinifex shares from the deal, since I like the company. But it’s a cash offer.

Zinifex will pay some $331 million Cdn for Wolfden´s copper, gold, silver and zinc properties in Canada´s far north. I think that’s too cheap. In fact it´s a less than 30% premium over the stock´s January high.

Wolfden management will be selling hard, having agreed to pay an $11 million Cdn break-up fee if the deal doesn´t go through.

Ironically, I´ve been telling subscribers recently that I prefer all-cash to all-stock buy outs. This deal is an exception because I´d like to have a piece of Zinifex and the cash offer is too low, in my opinion.

However, to be fair to Zinifex, Wolfden has what appears to be a bit of a dog´s breakfast up there in Nunavut, despite the exceptional zinc and polymetallic grades of the Izok and High Lake deposits.

To make the project work, Wolfden had proposed optimizing the mothballed Lupin Gold Mine, plus dragging various bits and pieces of a recently purchased mill down to High Lake, including concentrate storage facility, power generation installation and all conveyors and associated ship loading equipment.

I’ll bet Wolfden thought long and hard about the economics of acquiring and optimizing existing operations in and around Nunavut versus building them from scratch. At the end of the day, they probably took the cheapest alternative. But what looks good on paper isn’t always the easiest or most efficient way to go.

I haven’t looked at their financials but I’ll wager the company is undercapitalized for either option.

All of which makes any cash offer welcome, especially to those who got cheap stock in the first place.

Be careful out there.