Caledon Resources and Polo Resources agree merger

Polo Resources (AIM: POL) and Caledon Resources (AIM: CDN) have agreed, in principle, to merge the two companies to form a coal-focused natural resources company. If the proposed merger goes ahead, Polo will make an all-share offer for Caledon, paying 11.4 shares for every Caledon share.

Based on the 11.4:1 exchange ratio, and Polo’s 5.4p closing price (26th April), the offer has an implied price of 61.56p per share – representing a 14.53% premium.

"The proposed combination offers diversification for Caledon shareholders through Polo's investments in resource companies and its joint venture in Mongolia, while retaining shareholders' exposure to the upside potential contained within our Cook mine and Minyango project”, Caledon MD Mark Trevan commented.

According to the statement, the proposed merger would create a coal-focused natural resources company with investments in geographically diverse exploration and development projects, and direct exposure to the currently high coking coal prices through the producing Cook mine.

“The combined strength of Polo and Caledon's balance sheets will also reduce the risk inherent in financing the development of the Minyango project (in Queensland, Australia).  Access to Polo's strong management team with particular emphasis on capital markets experience will also be a major benefit", Trevan added.

Polo is already Caledon’s largest shareholder, with 54.4 million shares which represents 25.94% of the company, and furthermore through this significant shareholding it has had two non-executive directors appointed to the board - David Weill and Stephen Dattels (Polo co-chairman).

Caledon noted that its independent directors indicated that they are supportive of the proposed merger, and that they currently intend to unanimously recommend the offer. The independent directors and Polo, both believe that the combination represents a clear and compelling strategic fit.

"The transaction will provide all Polo shareholders with a renewed focus and direct exposure to the coking and thermal coal markets through 100% ownership of the Cook mine and the Minyango project", Polo Executive Chairman Neil Herbert said.

Additionally, Caledon and Polo have today entered into two loan facility agreements, whereby Polo will provide Caledon with £18 million and A$4 million respectively.

Under the first agreement, Polo will provide a short-term £18 million credit facility to be used, if required, to aid the repayment of Caledon's 8.5% convertible loan notes, due 5 July 2010.  The first facility will be available for drawdown in the period between 14 June and 20 July 2010, and it will mature on 31 October 2010. 

Secondly, Polo will provide a A$4 million credit facility for the potential lodgment of a bid bond associated with the Wiggins Island tonnage allocation process.  The second facility is available for drawdown immediately until the 1 June, and it will mature on 30 September 2010.

Each agreement is subject to interest at a rate of 10% pa.

Caledon operates the Cook underground coking coal mine and is working towards a feasibility study of the nearby Minyango coking coal deposit in Queensland.

In 2009, Caledon mined 604,000 tonnes of coal from the Cook mine, up from 548,000t in 2008. Coking coal production amounted to 406,900t against the previous year’s 378,000t, while coking coal sales increased from 397,000t of to 403,000t. The company has produced and sold 79,000t and 76,000t of thermal coal during the year, compared to 66,000t produced and sold in 2008.

Also during 2009, Cook’s JORC compliant resource was increased by 230Mt (million tonnes) to 406Mt and the Minyango Resource by 50Mt to 342Mt. The company intends to increase production from to 700,000t in 2010.

Polo Resources has a number of projects, shareholdings and joint ventures which are split between two resources - coal and uranium. Currently, Polo has three strategic shareholdings with its 25.94% stake in Caledon, a 29.83% interest in GCM Resources (AIM: GCM) and a 9.3% interest in Namibia-operating uranium company Extract Resources (ASX, TSX: EXT).

Earlier this month, Polo’s Co-Chairman Dattels announced his decision to step down as a non-executive director of Extract Resources. Polo recently hired BMO Capital Markets to evaluate strategic options with regards to its Extract shareholding.

Extract Resources is conducting a Definitive Feasibility Study (DFS) at Rossing South, in Namibia, and  last month the company said that the DFS, which is expected to confirm the project's potential as one of the world's largest uranium mines, is progressing well.