China's No. 2 nickel producer Jilin Jien's ambition to expand its Canadian footprint, is facing its biggest hurdle as investors look set to reject its final bid for early-stage miner Canadian Royalties.
Even after Jien Canada, a joint venture between Jilin Jien and Vancouver-based Goldbrook Ventures, increased its initial offer to buy Canadian Royalties, the deal fell short of the two-third majority of debenture holders required for acceptance.
On Wednesday, the Jien group extended the expiry on its offer to take over Canadian Royalties for a third time to November 10.
Jilin Jien, partly controlled by the Chinese government, is one of the many Asian companies looking to expand in Canada through cross-border deals, taking advantage of the opportunities created by the global downturn in resource prices.
In April, Jilin Jien bought 51 percent stake in Liberty Mines, which has nickel deposits in Northern Ontario. Jilin Jien also has about 15 percent stake in Victory Mines and Australia's Metallica Minerals.
Jien Canada's C$192 million offer will pay out 80 Canadian cents for each Canadian Royalties share and C$800 for each C$1,000 debenture.
The Jien-led group needs support from two-thirds of shareholders and debenture-holders to take control of the Canadian company.
Jien Canada said more than two-thirds of shareholders have already tendered their shares, but it has a lock-up agreement with only about 60 percent of the debenture holders.
The debenture holders, led by merchant bank Jaguar Financial, are seeking a premium over the principal amount, claiming that the bonds' indenture agreement entitles them to this.
The indenture agreement says if there is a change of control -- (that is) if somebody acquires two-thirds or more shares -- then you got to pay 101 cents on the dollar to the debt holders, Jaguar Chief Executive Vic Alboini said in a telephone interview.
Jaguar, which typically invests in early-stage Canadian companies, said it was confident that Jien Canada's offer won't fly as it now stands.
The debenture holders have already spoken that they will not agree to anything below 101 percent. This deal is over if there is no change made, Alboini said.
Brian Grant, chief operating officer of Goldbrook Ventures, said that though Jien Canada was still talking to the debt holders in an effort to persuade them, this was the best deal available to them.
In a statement on Friday, the JV said that the current offer is final and it will be neither raised nor extended past the deadline.
For Jien, the main attraction of Canadian Royalties is its Nunavik nickel project, which was put on hold last year because of financing difficulties.
Once operational, the project, located near Xstrata Nickel's Raglan Mine in Quebec, is expected to produce about 26 million pounds of nickel and 39 million pounds of copper over its lifetime.
Jaguar's Alboini says he is not overly concerned by the fact that the deal may fall through.
If Jien walks away and Canadian Royalties files for bankruptcy protection, we are happy to own the property for C$137.5 million -- the face value of the debts, Alboini said.
In any bankruptcy sell-off, debt holders would expect to gain control of the lucrative Nunavik project.
In a note to clients, Raymond James analyst Bart Jaworski said he thinks it is likely that Jaguar could achieve the minimum support to block the offer.
This is corroborated by current trading values -- debentures are trading at a premium to the offer, shares are at a discount, he said.
Canadian Royalties debentures have risen 172 percent to C$830 since August 7, when Jien made its initial bid. Shares of the company have risen about 40 percent to 68 Canadian cents in the same period.
If the deal is blocked, Jaworski sees a negative impact for equity holders, whose stock would plummet in any subsequent bankruptcy protection.
But debenture holders would then stand a greater chance of getting their money back, he said.
(Reporting by Ashutosh Joshi; Editing by Anthony Kurian)