Capital
Gold Corporation (TSX:CGC.to
- News) acknowledges that on February 10, 2011, Timmins Gold Corp.
("Timmins") filed a Form F-4 Registration Statement (the
"F-4") to proceed with an unsolicited exchange offer to acquire
control of Capital Gold Corporation ("Capital Gold").
In
the F-4, Timmins questions Capital Gold's rejection of its previously
announced proposal, the due diligence process undertaken by the special
committee of the Board of Capital Gold (the "Special Committee")
and the Capital Gold Board's unanimous determination to terminate
consideration of the Timmins proposal.
In
response to Timmins' assertions, Capital Gold wishes to provide additional
information about the process undertaken, to summarize its concerns about the
Timmins' proposal and to highlight a number of the reasons why the Capital
Gold Board supports a transaction with Gammon Gold Inc. ("Gammon").
Timmins'
Proposal and the Special Committee's Due Diligence Process
On
December 23, 2010,
a representative of Timmins contacted Capital Gold's legal advisor to
indicate that the proposal previously made by Timmins for a "merger of
equals" remained open. The proposal was not materially different from
that made on September 3, 2010,
which proposed an all-stock transaction in which each share of Capital Gold's
stock would be exchanged for 2.27 shares of Timmins' stock. Notwithstanding
the fact that Capital Gold's Board had unanimously determined, on three
separate prior occasions, that the Timmins proposal was not superior to the
terms set forth in the agreement and plan of merger, dated as of October 1, 2010, by and among Gammon,
Capital Gold Acquireco, Inc. and Capital Gold (the
"Merger Agreement"), based on the price at which Timmins' stock
traded during the month of December 2010
and advice of financial and legal counsel, it was determined that the Capital
Gold Board had a fiduciary duty to further explore the Timmins proposal and
to determine if it was a superior proposal, as defined in the Merger
Agreement.
On
January 6, 2011, members of the
Special Committee and its financial and legal counsel met with
representatives of Timmins and its advisors to discuss aspects of the Timmins
proposal. During that meeting, Timmins represented that Timmins had
sufficient cash available to pay the termination fee and other transaction
expenses required by the Merger Agreement and to fund ongoing operations of
both Timmins and Capital Gold going forward. During that meeting, Timmins was
advised that, in order for the Capital Gold Board to determine if the Timmins
proposal was a superior proposal, Capital Gold would need to conduct and be
satisfied with the results of comprehensive legal, operational, financial and
technical due diligence with respect to Timmins. The Special Committee informed
Timmins that such due diligence was necessary because of, among other
factors, the "going concern" issue set forth in Timmins' most
recent financial statements and concerns that Timmins had insufficient cash
to pay the termination fee, other transaction costs, and the ability to
finance operations of the combined companies going forward. As such, Timmins
was given a due diligence production request, together with a list of
detailed financial and operational questions that were appropriate
considering the nature of the transaction.
After
initial resistance from Timmins, a site visit to Timmins' San Francisco Mine
was arranged; however, Timmins refused to grant Capital Gold's Chief
Financial Officer access to the site or critical financial documents at that
time. Subsequent to the site visit, representatives of Capital Gold provided
Timmins with a second due diligence request list focused particularly on
Timmins' operations.
In
the weeks that followed, Timmins was unresponsive to Capital Gold's due
diligence requests and tried to dictate the depth and scope of Capital Gold's
due diligence review by limiting access to certain financial and technical
information. Capital Gold was never provided access to Timmins' financial
books and records. Despite these challenges, Capital Gold invested a
considerable amount of time and money reviewing the limited due diligence
materials produced by Timmins and publicly-available information. While
individual members of Capital Gold's Board based their determination on different
reasons, they unanimously determined to terminate consideration of the
Timmins proposal based on the due diligence conducted and determination made
by the Special Committee that the Timmons proposal presented too high a level
of financial risk. Specifically:
1.
Financial Concerns
According
to the information provided (and subsequently publicly disclosed by Timmins),
Timmins had approximately $4 million
in available cash on hand as of December 31, 2010,
with current liabilities exceeding current assets. Timmins has set forth its
financial requirements for 2011 at the bottom of page 60 of the F-4 to
include "exploration expenditures of C$21
million,
capital expenditures of C$5 million
for plant and equipment at the San Francisco Mine and expenditures of C$5 million for general and administrative
expenses." A further $2.55 million
in property option payments are also due in 2011. Should Capital Gold choose
to enter into an agreement with Timmins, additional one-time expenses of
approximately $20 million would be payable,
including the Gammon termination fee, change of control payments and advisory
fees. Additionally, with Timmins' gold loan owing to Sprott
Asset Management LP of approximately $13
million
plus Capital Gold's 2011 capital requirements of approximately $30 million, the combined entity would have 2011
capital requirements of in excess of $95
million.
It is estimated that a substantial portion of these expenditures would need
to be funded from capital raised from third parties in the public markets.
Capital
Gold believes that there is considerable risk associated with Timmins'
ability to raise that amount of capital. Timmins clearly agrees with this
assessment, as the F-4 highlights this risk on page 38: "Timmins'
inability to access additional capital could have a negative impact on its
growth strategy." Moreover, even if Timmins were able to raise the
necessary funds, given the volatility of Timmins stock price, it is
reasonable to conclude that Timmins may be required to raise capital at a
significant discount to prevailing market prices, which would cause immediate
and perhaps substantial dilution to the proposed all stock consideration to
be received by the Capital Gold stockholders under the Timmins proposal. The
Special Committee does not believe stockholders should be subjected to this
amount of financial risk.
In
addition to the above financial concerns, the Special Committee unanimously
based their determination on the fact that the information provided by
Timmins with respect to its financial position was not consistent with prior
statements thus raising concerns about its management, internal financial
controls, the ability to fund transaction costs and the operations of the
combined company going forward. The Special Committee had the following
concerns that led to their determination to terminate negotiations with
Timmins:
2.
Operational Concerns
To
the extent that Capital Gold was permitted to conduct timely due diligence on
the operations of Timmins, the Special Committee noted that Timmins'
principal asset, the San Francisco Mine in Mexico,
is in its initial start-up phase and has yet to reach the operating goals set
forth in the November 2010 Micon
Technical Report. Capital Gold has concerns with respect to (i) the short mine life (ii) the variance in the life of
mine grade disclosed and the actual grade that has been mined to date and
what impact that has on the mine life, (iii) the variance in projected life
of mine cash costs and the costs that have been published to date and what
impact this will have on future cash flows and valuations, and (iii) ultimate
leach recovery not reaching the life of mine expectation of 70%.
Capital
Gold believes that the risk of operational issues is not insignificant.
Timmins clearly agrees with this assessment, as the F-4 highlights this risk
on page 39: "Timmins has a limited operating history and therefore
cannot ensure the long-term successful operation of its business or the
execution of its business plan." The Special Committee does not
believe its stockholders should be subjected to this amount of operational
risk.
3.
Management Depth
Timmins'
inability to respond to Capital Gold's due diligence requests in a timely
manner, its lack of a full time chief financial officer and apparent lack of
appropriate internal financial controls raises significant concerns among
members of the Special Committee. In the assessment of the Special Committee,
the management of Timmins lacks sufficient depth to execute a
transformational merger and to operate the combined companies going forward. The
Special Committee does not believe its stockholders should be subjected to
this amount of management risk.
4.
Other Transaction Risk
Capital
Gold has completed sufficient due diligence to determine, in the prudent
exercise of its fiduciary duties and following a full and fair evaluation
process, that the proposed exchange offer made to Capital Gold stockholders
on February 10, 2011
by Timmins is not in the best interests of the Capital Gold stockholders.
However, the proposed Timmins exchange offer remains subject to a number of
conditions as set forth in the F-4. The most critical include the
reinstatement of a due diligence condition, a shareholder approval condition
on the part of Timmins' shareholders and a listing condition (Timmins' common
stock is not listed on any United States
securities exchange), all of which raise material transaction risk in the
Timmins offer. The Special Committee does not believe its stockholders should
be subjected to this amount of transaction risk.
By
contrast, Gammon:
- Has sufficient cash on hand
to fund its own and Capital Gold's operational goals going forward;
-
- Does not require approval of
its stockholders for the transaction with Capital Gold;
-
- Has an established and
experienced board and management team;
-
- Is a New York Stock
Exchange-listed company with financial controls in place consistent with
the requirements of the Securities Exchange Act of 1934, as amended, the
Sarbanes-Oxley Act and all applicable legal and regulatory requirements;
-
- Has experienced four quarters
of consecutive growth; and
-
- Has expanded their reserves
in the last 6 months.
-
As
such, the Capital Gold Board has determined that the Gammon transaction
represents a significant growth opportunity for Capital Gold stockholders at
much lower risk.
Accordingly,
the Capital Gold Board continues to unanimously recommend to its stockholders
that they vote in favor of the Gammon transaction. Additional disclosure with
respect to the Board's deliberations will be set forth in an amendment to the
Company's Preliminary Proxy contained within Gammon's Registration Statement
on Form F-4.
About
Capital Gold
Capital
Gold Corporation ("Capital Gold" or the "Company") is a
gold production and exploration company. Through its Mexican subsidiaries and
affiliates, it owns 100% of the "El Chanate"
gold mine located near the town of Caborca in Sonora, Mexico. On August 2, 2010, Capital Gold
acquired Nayarit Gold Inc. Capital Gold is focused on optimizing the El Chanate operations and advancing the Del Norte deposit in
the Orion District in the state of Nayarit, Mexico.
Capital Gold also owns and leases mineral concessions near the town of Saric, also located in
Sonora, that are undergoing exploration for gold and silver mineralization.
Additional information about Capital Gold and the El Chanate
Gold Mine is available on the Company's website, www.capitalgoldcorp.com.
Important
Information about the Proposed Exchange Offer by Timmins
The
exchange offer proposed by Timmins and referred to in this press release has
not commenced. As required, Capital Gold will file with the Securities and Exchange
Commission a Solicitation/Recommendation Statement on Schedule 14D-9. Capital
Gold stockholders are advised to read the Solicitation/Recommendation
Statement on Schedule 14D-9 if and when it becomes available because it will
contain additional important information. Stockholders may obtain a free copy
of the Solicitation/Recommendation Statement on Schedule 14D-9 as well as any
other documents filed by Capital Gold in connection with the proposed
exchange offer free of charge at the SEC's website at http://www.sec.gov.
Cautionary
Note Regarding Forward-Looking Statements
Statements
in this press release and the statements of representatives and partners of
Capital Gold related thereto, other than statements of historical
information, are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements may include,
without limitation, statements with respect to the Company's plans,
objectives, projections, expectations and intentions and other statements
identified by words such as "projects," "may,"
"could," "would," "should,"
"believes," "expects," "anticipates,"
"estimates," "intends," "plans," or similar
expressions. Investors are cautioned that forward-looking statements are
inherently uncertain and subject to material risks. Actual performance and
results may differ materially from those projected or suggested due to
certain risks and uncertainties, some of which are described below. Such
forward-looking statements include comments regarding the future growth of
the Company. Factors that could cause actual results to differ materially
include timing of and unexpected events during
construction, expansion and start-up; variations in ore grade, strip ratio, tonnes mined, crushed or milled; delay or failure to
receive board, regulatory or government approvals; the availability of
adequate water supplies; mining or processing issues, and fluctuations in
gold price and costs. Many of these factors are beyond the Company's control.
There can be no assurance that future developments affecting the Company will
be those anticipated by management.
Any
forecasts contained in this press release constitute management's current estimates,
as of the date of this press release, with respect to the matters covered
thereby. We expect that these estimates will change as new information is
received and that actual results will vary from these estimates, possibly by
material amounts. While we may elect to update these estimates at any time,
we do not undertake to update any estimate at any particular time or in
response to any particular event. Investors and others should not assume that
any forecasts in this press release represent management's estimate as of any
date other than the date of this press release.
Additional
information concerning certain risks and uncertainties that could cause
actual results to differ materially from that projected or suggested is
contained in the Company's filings with the Securities and Exchange
Commission (the "SEC"), copies of which are available from the SEC
or may be obtained upon request from the Company. The Company undertakes no
obligation to publicly update any forward-looking statements, whether as a
result of new information, future events or otherwise, except as required by
applicable law.