Avoca Resources says takeover target Dioro Exploration needs a "reality check" over the high valuation of its shares which is around 180 per cent higher than the company's current share price.
In its formal response to Dioro's target statement, Avoca today said that the target's directors "must have difficulty believing the KPMG valuation is the fair market value of a Dioro share".
Independent expert KPMG last month valued each Dioro share at $1.88 on a preferred basis.
Shares in Dioro last traded at 66 cents at 11:24 AEST, down two cents on yesterday's close. Dioro has recommended shareholders reject Avoca's offer.
Avoca, which launched its takeover bid in April, is offering one share for every 2.82 Dioro shares held.
"We urge you to critically examine recent statements and arguments made by Dioro's board and its advisers which Avoca believes are at best unrealistic," Avoca said.
The suitor added that Dioro has also not given any "meaningful guidance" on the company's near-term production and financial position and have withheld any information regarding takeover talks Dioro claims to have had in the past year.
"If Avoca offer lapses, in the absence of any other offer, Dioro shareholders should be aware of the very really possibility that the Dioro share price will fall - possibly to pre-offer levels," Avoca said.
Shares in Avoca were up half a cent to $1.65.
The offer is scheduled to close on July 14.
The announcement is below:
DIORO'S TARGET'S STATEMENT - REALITY CHECK NEEDED
As you would be aware, Avoca Resources Limited (ASX:AVO) has recently offered to acquire all of your shares in Dioro Exploration NL (ASX:DIO) to create a company with an achievable objective of becoming Australia's pre-eminent mid-tier gold producer. Avoca's offer is 1 Avoca share for every 2.82 Dioro shares that you hold.
We urge you to critically examine recent statements and arguments made by Dioro's board and its advisers which Avoca believes are at best unrealistic.
A more detailed examination of the Target's Statement is attached to this letter. As at Thursday, 11 June 2009, Avoca's implied offer price was 59.0 cents for each of your Dioro shares1. It represents a significant 49% and 71% premium over the 39.5 cent closing price and the 34.5 cent 6 month volume weighted average price (respectively) of your Dioro shares just prior to the announcement of Avoca's offer.
However, against a backdrop of the Dioro directors having eroded significant shareholder value over the past 18 months, your directors have presented to you a hypothetical 'preferred value' of $1.88 per Dioro share. This is 376% greater than Dioro's pre announcement closing share price and is out of touch with reality.
This 'preferred value' was prepared by Dioro's auditor and tax advisor, KPMG, as an 'Independent Expert'. The KPMG valuation:
bears no meaningful correlation to the pre-announcement, or even the current, Dioro share price;
attributes significant and unrealistic value to Dioro's South Kalgoorlie assets, the majority of which are acknowledged to have significant uncertainty and are unlikely to be mined economically; and
uses inconsistent share price valuation methodology to value Avoca and Dioro - a point that ASIC had concerns about, and required Dioro to issue a Supplementary Target's Statement on 9 June 2009.
In Avoca's opinion, even the Dioro directors themselves must have difficulty believing the KPMG valuation is the fair market value of a Dioro share.
Despite this high valuation, Dioro has not provided any meaningful guidance on its near term production and financial position, such as:
Realistic FY2009 and FY2010 Dioro production forecasts following its multiple pit-wall failures (please refer to Figures 2 and 3 in the attachment), which will cause production delays and require additional expense to remedy (if economic to do so). Avoca believes that it will now be very difficult for Dioro to fulfil its 90,000 ounce production forecast for FY2010; and
Dioro's financial position, given Avoca's expectation that Dioro's revenue will now reduce as a result of its diminished production, the $4 million reduction in available funding for working capital (an apparent requirement for the extension of its debt facility), Dioro's 'outof the money' hedge commitments on gold production, and the continued uncertainty of the 'going concern' note in Dioro's most recent half year accounts.
The Dioro directors have instead maintained their earlier comments about discussions with 'other parties'. Despite these discussions having been held 'over the last 12 months', no further offers (or suggestions of offers) have been forthcoming, there has been no update on the status of these negotiations provided, and Avoca's offer remains the only offer currently available to you.
If Avoca's offer lapses, in the absence of any other offer, Dioro shareholders should be aware of the very real possibility that the Dioro share price will fall - possibly to pre-offer levels.
In contrast to Dioro's poor performance and since the announcement of the offer, Avoca has gone from strength to strength where, in the month of May, it achieved a new production record from the Trident gold mine at Higginsville producing 20,457 ounces of gold, record monthly throughput grade of 6.2 g/t gold, and above expectation mill throughput rates (in excess of 1.2 million tonnes per annum rate) together with record recoveries of 97.6%.
These strong production results consolidate the Avoca board's firm view that Avoca will reach its FY2010 production target of 180,000 ounces at a cash cost of A$450 per ounce (net of royalties).
Dioro shares are currently trading on ASX at a higher level than the implied Avoca offer price but Avoca believes this is due, in part, to speculation that is being fuelled by comments made by the Dioro directors regarding discussions with 'other parties', and by the unrealistic KPMG valuation. If you were simply to sell your shares on market, you may be faced with a tax bill and would have no continuing exposure to the Dioro assets. However, if you accept the Avoca offer and it is ultimately successful on its current terms, you should obtain capital gains tax rollover relief on the sale of your shares and retain an exposure to the Dioro assets as well as obtaining an interest in the Avoca assets.
Avoca's offer gives you an opportunity to become a shareholder in a larger and more liquid ASX 200 gold company with a strong production base, a highly credentialed and experienced management team, and a highly prospective exploration portfolio that we expect will assist to drive company and share price growth. For these reasons, we encourage you to ACCEPT Avoca's offer.
Avoca's offer is currently scheduled to close on 14 July 2009 (unless extended).