Echo Resources Limited

EAR Details

Proposed Takeover by NST: Echo Resources Limited (ASX: EAR) is engaged in the exploration for, and development of, mineral resources in the Yandal Belt region of Western Australia. The company recently announced about entering into a Bid Implementation Agreement (BIA) with Northern Star Resources Limited (ASX: NST), pursuant to which NSR will offer to acquire all of the issued and outstanding ordinary shares in EAR that it does not already own under the terms of an off-market takeover bid. As per the terms of the Offer, pursuant to the conditions, each Echo Shareholder will receive a cash offer of A$0.33 for every Echo Share held, reflecting a substantial premium to Echo’s recent share trading. Furthermore, the company mentioned that the Offer Consideration contains a premium of ~154% to the A$0.130, a share issue price of Echo’s most recent capital raising which was completed on 6 May 2019. NST is the largest shareholder of EAR, holding a stake of ~21.7% as on 26 August 2019.

Details of the Consideration: The Offer value for fully diluted equity for EAR comes in at ~A$242.6 million. NST will pay up to A$193.0 million to acquire the EAR shares it does not already own. NST, as on 30 June 2019, had cash and cash equivalents of A$361 million and an undrawn debt facility of A$200 million on the books, suggesting sufficient liquidity for the Offer Amount and related transaction expenses.

Echo Board Recommendations: After considering the terms and conditions of the Offer and, in consultation with Echo’s financial and legal advisers, those Directors of Echo independent of Northern Star, have recommended that the shareholders of EAR shall accept the Offer in the absence of a Superior Proposal.

Strategic Rationale behind the proposed Takeover for NST:
With this development, NST will consolidate the mineralisation at the Yandal Gold Project for further evaluation on both an exploration and development basis. Moreover, the company will be able to process gold at the Bronzewing processing plant, if an evaluation of a restart is successful.

How will Echo Shareholders be benefited:
As offer has been proposed in lieu of 100% cash, shareholders of EAR will receive an attractive amount for their holdings. Precisely, with the acceptance of the Offer, the EAR shareholders will be entitled to receive a cash amount of A$0.33 for each share held within seven business days of the later of the date that Echo Shareholders accept the Offer and the date that the Offer becomes unconditional. The Offer represents a significant premium to recent trading levels. On the project front, the Yandal Gold Project, in the medium-term, is likely to need further financing related to future exploration and project developments. The Offer will also nullify the inherent risks, which include, project development and operational risks, regulatory, equity market and economic risks, etc.

Timetable and next steps:
The company mentioned that it will release the detailed information of the Offer in the Bidder’s Statement and Target’s Statement, which are likely to be sent to the Shareholders of EAR in the mid of September 2019.

Advisers:
Northern Star has appointed Canaccord Genuity (Australia) Limited as its financial adviser and Gilbert + Tobin as legal adviser. For Echo Resources, Sternship Advisers and DLA Piper are its financial adviser and legal adviser, respectively.

Highlights of Quarterly Activities in 2Q19: The company recently released its quarterly activities for the second quarter of 2019. In the period, the company undertook a plan related to the Yandal Gold Project for a large scale +25,000m exploration drilling campaign that commenced in early July 2019.

The company also updated with JORC Mineral Resource, calculated for the Mt Joel Project, for which, the results came in as –
 

• 1.4Mt @ 2.1g/t Au for 91,600oz Au
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• Increases the Yandal Project Mineral Resource to 28.6Mt @ 2.0g/t Au for 1.8Moz Au
•  

During the quarter, released Bankable Feasibility Study in the month of April 2019 confirmed the redevelopment of the Yandal Project being technically robust with strong financial metrics.

Stock Recommendation: With the news released related to the proposed takeover by NST, the stock witnessed a gain of 30% as on 27 August 2019. At the latest closed price of $0.325, the stock is trading close to the higher end of its 52-week trading range of $0.098 - $0.325. Hence, considering the terms of the proposed takeover and consideration, strategic benefits to the involved parties, and current trading levels, we recommend a “Sell” rating on the stock at the current market price of $0.325 as on 30 August 2019 and advice investors to book profit at the current levels.


Daily Technical Chart (Source: Thomson Reuters) 

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