Mantle responds to Ecstall Mining Directors’ Circular and Reiterates
Compelling case for its Offer
January 15, 2007
Mantle Resources Inc. has reviewed the Directors’ Circular of Ecstall Mining Corporation dated January 8, 2007 filed in response to Mantle’s Take-Over Bid Circular dated December 22, 2006 and responds as follows:
- In Mantle’s view, its Offer is entirely fair, reasonable and in the best interests of Ecstall’s shareholders. Ecstall shareholders should not be confused by Ecstall – they are not being cashed-out, but quite the contrary, being given the opportunity to maintain their interest in the Akie and other properties and share in the ongoing success of what will be a financially stronger, focussed, and well-managed company. In Mantle’s view, if its Offer is rejected or withdrawn, Ecstall shareholders face a very uncertain future.
- In its Directors’ Circular, Ecstall fails to provide any concrete rationale for recommending that its shareholders reject Mantle’s Offer. The opinion provided by Ecstall’s financial advisor, Westwind Partners Inc. should be discounted as it presents no cogent discussion or financial analysis to support its conclusion and is based upon information that is draft, unpublished and not independently verifiable.
- In determining the appropriate share exchange ratio, Mantle and its advisors completed a detailed analysis of the properties, assets, prospects, capitalization and liabilities of both Mantle and Ecstall. The share exchange ratio offered by Mantle reflects a significant premium for Ecstall’s shares. In Mantle’s view, that premium provides more than adequate compensation for any additional unproven exploration properties held by Ecstall, which were clearly accorded minimal, if any, value in the pre-bid market price of Ecstall’s shares. Ecstall appears to give inadequate weight to the fact that Mantle currently has at least $5 million more in its treasury than does Ecstall, and an additional $6.5 million if Mantle’s in-the-money securities were exercised.
- Ecstall’s response to Mantle’s Offer is essentially to advise shareholders to hold off in hopes that Ecstall management will deliver something better in the future. Ecstall shareholders have heard this before. In Mantle’s view, following that advice is likely to prove detrimental to Ecstall shareholders
- Ecstall fails to address the consequences to its shareholders of rejecting Mantle’s Offer, including, the implications for the 2007 exploration plan in light of its refusal to recognize Mantles exercise of the Akie Option and how Ecstall intends to finance its share of ongoing exploration expenses given its current financial position.
Mantle’s Offer is due to expire January 29, 2007, unless extended. Ecstall shareholders are urged to tender their shares under the Offer as soon as possible in advance of the expiry date. For questions or assistance, Ecstall shareholders should contact Georgeson, the Information Agent for the Offer, toll-free at 1‑866‑568‑7419.
Specific Responses to Ecstall’s Reasons for Rejecting the Offer
In specific response to Ecstall’s recommendation regarding the Offer, Mantle advises as follows:
Ecstall Proposition: Ecstall asserts that the Offer undervalues Ecstall’s exploration properties and its growth potential.
Mantle’s Offer provides a more than adequate premium price for Ecstall’s interest in the Akie Property and for all of Ecstall’s other unproven exploration prospects.
Ecstall’s response appears to confuse or fails to appreciate the simple fact that Mantle’s Offer is a simple share exchange. Ecstall shareholders are not being “cashed-out” but rather given an opportunity to continue their interest in the underlying properties and share in any future success.
Although Mantle questions the purpose or value to be gained from the geological report Ecstall has commissioned on the Akie Property, as Mantle is entitled to a 65% interest in that property and to control its ongoing development, Mantle clearly has more to gain than does Ecstall from any increase in value of that asset. Mantle believes further shareholder value will be realized by consolidating ownership of that asset within a single entity.
Apart from entering into the Akie Option Agreement with Mantle, over the years since Ecstall was formed, Ecstall management have failed to demonstrate their ability to deliver on promises of Ecstall’s growth potential.
- As Ecstall itself says in its Directors’ Circular:
- “the lack of new discoveries, together with current metals market prices, is driving the current industry consolidation”.
- This statement confirms one of Mantle’s principle objectives in making the Offer: to consolidate the Akie and other Kechika Trough properties into a single, larger company with much higher visibility and strong, financial and management capability. If the Offer is successful, that benefit will accrue to all of Mantle’s and Ecstall’s shareholders. Consolidation will serve to remove the discount imposed by the market where this valuable asset is divided between two separate companies.
- Mantle’s Offer represents a 50% premium to the price at which Ecstall shares were trading before Mantle’s Offer, a price which presumably reflected Ecstall’s interest in the Akie and all of its other property interests. Based on the analysis conducted by Mantle, investors were attributing little, if any value to Ecstall’s other, unproven prospective exploration properties. Over the past year, Ecstall has spent considerable funds on its other properties, yet, to date, has made no material discovery. Ecstall itself has written down the value of the majority of its other exploration properties to nominal value. Mantle believes its Offer, in effect, reflects a premium for Ecstall’s properties. Furthermore, as a stand-alone entity, Ecstall currently lacks adequate funds to fully explore its properties. Ecstall shareholders will need to face certain dilution in exchange for Ecstall management’s assertion of future gain. Ecstall shareholders have a clear choice to avoid that risk through Mantle’s Offer.
- Ecstall reports that it has commissioned a National Instrument 43-101 Technical Report which is to include a preliminary resource estimate and either a “pre-feasibility operating plan” (per Ecstall’s Circular) or “pre-feasibility study” (per Ecstall’s news release January 8, 2007). Mantle believes that it is premature and a waste of Ecstall’s money to commission such a report at this time. In particular, the number of drill holes completed during the 2005 and 2006 exploration seasons on the Akie property are, in Mantle’s view, wholly inadequate to support a credible preliminary resource estimate, let alone a pre-feasibility study or a pre-feasibility plan.
- To review its assessment, Mantle engaged Watts, Griffis and McQuatt (“WGM”), one of Canada’s premier engineering firms to complete a technical audit of Mantle’s exploration on the Akie property. WGM concluded that “given the currently known geological information, including all of the data derived from the 2006 exploration program, there is still insufficient information to justify calculating an initial “inferred” resource estimate at this time, as the Akie property is still at an exploration stage of development.”
- It should be noted that if the point of the exercise in commissioning such a report is to demonstrate that Ecstall’s shares are undervalued, then it would stand to reason that Mantle’s shares are even more so undervalued, given that Mantle is entitled to a 65% interest in that property and is well positioned to realize that value. Furthermore, as Mantle’s Offer involves a simple share exchange, Ecstall shareholders should not be mislead or confused in thinking that they are being cashed-out and denied of any future upside – quite the contrary.
- Mantle sees no logic or purpose being served by the commissioning of such a report at this time. Mantle will also be most interested in any pre-feasibility plan or study, in particular, Ecstall’s plans for financing its share of ongoing exploration or development expenses on the Akie Property and plans for the 2007 drilling season, particularly if it intends to continue to refuse to honour Mantle’s exercise of the Akie Option or, even if resolved, given Ecstall’s currently limited financial resources.
Ecstall’s Proposition: The consideration offered under the Offer is inadequate from a financial point of view.
Mantle is of the view that the consideration under its Offer is entirely adequate, particularly when considered in light of Ecstall’s prospects if Mantle’s Offer is rejected or withdrawn.
Ecstall shareholders should seriously question the weight that should be given to the opinion of Ecstall’s financial adviser.
- In recommending Ecstall shareholders reject Mantle’s Offer, Ecstall has relied and advised its shareholders to rely on the opinion of its financial adviser, Westwind Partners Inc.
- It is instructive to review exactly what Westwind’s opinion says and the assumptions, limitations and qualifications used. Mantle does not believe that Ecstall’s shareholders are so naïve as to accept Westwind’s opinion at face value or to accord it much if any weight.
- A quick review of that opinion shows that it does not provide any cogent discussion or financial analysis to support the conclusions reached. It is subject to numerous assumptions, limitations, and qualifications. It is based on and assumes the accuracy of draft, uncertified, unpublished and unverifiable resource estimates and other information. It purports to rely on comparable transactions, without identifying any. The opinion states specifically that it does not constitute a recommendation to shareholders as to whether they should or should not tender their shares.
- Mantle does not believe that Ecstall or its financial adviser has conducted a thorough and adequate evaluation of the Offer to support the assertion that the Offer is inadequate. For example, in addition to its cash position of approximately $6.6 million, Mantle currently has convertible “in the money” securities that on exercise will generate a further approximately $6.5 million. Ecstall has a current working capital of no more than approximately $1.5 million . Even at the share prices reflecting Mantle’s Offer, Ecstall has “in the money” convertible securities that on exercise will generate only approximately $760,000.
- A successful completion of the Offer will immediately allow Mantle to proceed with the full-scale planning and deployment of the 2007 exploration program on the Akie and other Kechika Trough properties.
Ecstall’s Proposition: The share consideration offered by Mantle is volatile and of uncertain value.
History speaks for itself – Mantle management has delivered superior returns to its shareholders over the past years compared to those realized by Ecstall’s shareholders.
Mantle is confident that, on a comparative basis, the future price of its shares will likely be less uncertain than that which Ecstall shareholders are likely to experience if Mantle’s offer is withdrawn or unsuccessful.
Mantle refutes the notion that it lacks technical expertise or that its future operations are highly dependent on Ecstall’s management team. Mantle is confident it has and will continue to have the expertise needed to enhance shareholder value, with or without the ongoing involvement of Ecstall’s current management.
Saying that the value of the consideration being offered is “uncertain and dependent on the future value of the Mantle Shares” is trite. The very nature of microcap mining exploration is uncertain and volatile and subject to numerous risks. In Mantle’s view, if its Offer is rejected or if it were to be withdrawn, the future value of Ecstall shares is likely to be even more so uncertain.
Mantle is not paying a fixed cash price to Ecstall shareholders because it did not believe that a cash offer would be fair or attractive to Ecstall’s shareholders. The Offer is made on a share exchange basis to give Ecstall shareholders the opportunity to continue to participate in the future growth potential and development of the Akie and other properties.
Ecstall assertions regarding the value of Mantle’s shares ignore the simple truth; over the past years, investors in Mantle have seen a significantly higher return as clearly demonstrated by the chart below. Ecstall’s share price never surpassed $0.29 until such time as it became involved with Mantle.
Despite Ecstall’s rhetoric, the actions of Ecstall management speaks for itself – over the prior six month period Mr. Graf, Ecstall’s CEO, and his wife, Ecstall’s Corporate Secretary, and Mr. Evans, Ecstall’s Vice-Chairman have been consistent sellers, disposing of over 534,000 Ecstall shares, all at a price lower than that reflected by Mantle’s Offer.
Ecstall asserts that the value Mantle’s shares may derive from the integration of Ecstall’s operations is uncertain, because in its view, Mantle lacks the technical expertise possessed by Ecstall’s management.
Ecstall’s assertion regarding Mantle’s technical expertise is incorrect and unfounded. Mantle has and is confident the combined entity will have a strong, experienced management team and the ability to attract and retain the partners, service providers, staff, and others needed to advance the combined company’s projects. Mantle has recently demonstrated its ability to do just that.
In December 2006, Mantle appointed of Mr. Henry (Hank) Giegerich to its Board. Mr. Giegerich was the President and General Manager of Cominco Alaska Inc. and in this position was responsible for the development of the Red Dog Mine in northwest Alaska, the largest zinc mine in the world. Prior to that, he was with Cominco Ltd. in various capacities, including Project Engineer on the Black Angel Mine Project in Greenland, Project Manager for the Polaris Mine Project on Little Cornwallis Island, NWT and finally Cominco Vice President, Northern Group, responsible for operations of the Con Mine (Yellowknife, NWT), Pine Point Mine (Pine Point, NWT) and the Polaris Mine. He is an expert on SEDEX zinc-lead deposits and has a well-earned reputation for bringing mines into production.
Furthermore, Mantle has also recently attracted the interest of and secured a significant investment from Lundin Mining Corp., one of the world’s fastest growing mining companies and zinc producers. Lundin Mining Corp. has advised that it is willing and able to provide technical assistance, support and expertise to Mantle.
It is Mantle’s contention that a combined company with a consolidated asset base and enhanced financial capability will have no difficulty in attracting the additional managerial and technical expertise needed.
Mantle is acquiring the shares of Ecstall under its Offer. If successful, Ecstall will continue to be entitled to the ongoing services of Mr. Graf under the terms of his existing employment agreement. Mantle has advised Mr. Graf that it would welcome his expertise going forward; whether he chooses to do so or not is for Mr. Graf to decide.
Ecstall’s Proposition: Alternative transactions are being pursued by Ecstall to generate greater value for Ecstall’s shareholders and therefore, Ecstall’s shareholders should not tender to the Offer.
Ecstall shareholders should disregard the advice to hold off tendering in the hope that Ecstall management will deliver greater value tomorrow . Following that advise may expose Ecstall shareholders to undue risk.
Mantle will vigorously oppose any attempt by Ecstall management to engage in any transaction that would deny the right of Ecstall’s shareholders to exercise their legitimate right or that is abusive, improvident or disregards shareholder’s interests.
As Ecstall’s shareholders are aware, Ecstall has not held an AGM since June 30, 2005 and as a result is in violation of the British Columbia Business Corporations Act and its Listing Agreement with the TSX Venture Exchange. Ecstall postponed its AGM asserting that it was considering various alternatives to maximize shareholder value, several of which alternatives may require shareholder approval.
To date Ecstall has not proposed any transaction that would advance shareholder interests. Mantle is strongly of the view that the real reason for the delay was to avoid facing Ecstall’s shareholders who were likely to seek to remove Ecstall’s current directors and elect new ones. Ecstall’s shareholders have been denied that opportunity for nearly two years now.
Now Ecstall’s management is again telling shareholders to wait. Ecstall shareholders should disregard the statements from Ecstall management not to tender in hopes of an alternative transaction emerging or the hope for short term gain. Ecstall shareholders should be aware that such delay may result in them not being in a position to effect a valid tender before Mantle’s Offer expires on January 29, 2007, unless it is extended. Mantle is not obliged to extend its Offer and may choose to allow it to expire. Only those shareholders who have tendered to the Offer prior to the expiry time will be entitled to have their Ecstall shares taken up. Ecstall shareholders are urged to tender their shares or instruct their broker to tender their shares as soon as possible so as not to deprive them of the opportunity to have their shares taken up. Ecstall shareholders are advised that shares may not be taken up by Mantle until after the expiry time and if tendered may be withdrawn prior thereto under the terms of the prescribed withdrawal rights, as set out in the Offer and Circular.
Mantle itself is a significant shareholder of Ecstall. It has communicated with and has the support of several of Ecstall’s major institutional shareholders. All Ecstall shareholders should be deeply concerned should Ecstall management propose to engage in any transaction that may prove to be improvident or inferior to Mantle’s Offer or designed to frustrate shareholders’ legitimate rights to respond to Mantle’s Offer or otherwise abuse or disregard shareholder interests.
Mantle will vigorously oppose, in the courts or before the securities regulatory authorities, any action which is not in the best interests of Ecstall’s shareholders and, in particular, any transaction that dilutes Ecstall shareholders, entrenchs or enrichs Ecstall management or the disposition of any material asset.
Ecstall’s Proposition: Ecstall states that the timing of the Offer is opportunistic, prejudicial and disadvantageous to shareholders because, if successful, it will deprive them of the potential for near-term enhancement of the value of their shares.
Mantle’s Offer is far from opportunistic or prejudicial; it is a simple share exchange offer to acquire all of the Ecstall shares, is open to all Ecstall shareholders and is between two relatively easily understood companies which share the same principal asset.
Ecstall assertions regarding Mantle not being entitled to a 65% interest in the Akie Property and the arbitration of that dispute are wholly without merit and, in Mantle’s view, a “smoke screen".
- Mantle’s Offer is simple, easily understood, available to all shareholders and has been structured and presented at a time and in a manner that is fair to Ecstall’s shareholders. Mantle has left its Offer open for acceptance for a period longer than the time period required by law.
- Ecstall’s claim that Mantle chose to launch the Offer instead of providing confirmation that it had spent the funds to exercise its option to earn its 65% interest in the Akie property is without merit. Mantle advised Ecstall that it had exceeded the $4 million minimum expenditures prior to completion of the 2006 drill program. Mantle completed the 2006 drill program at the end of October 2006, has now received the final invoices, compiled a detailed expense summary and provided these to Ecstall.
Mantle advises that it has, in fact, spent a cumulative total of approximately $4.75 million in qualified expenditures on the Akie Property, well in excess of the minimum $4.0 million required. Mantle has provided Ecstall with a comprehensive report evidencing those expenditures. If, as Ecstall claims, the main issue in dispute is the quantum of qualified expenditures, then Mantle challenges Ecstall to immediately audit the expense. Mantle is confident that any audit will acknowledge its entitlement to exercise of the Akie Option and obviate proceeding with a costly, time-consuming and wasteful arbitration.
Mantle advised Ecstall that it believed it had exceeded the $4 million minimum requirement prior to drilling the last two holes on the Akie property. As there was a small window to continue drilling prior to the onset of inclement weather conditions, Mantle requested that Ecstall approve the drilling of the additional two holes on the basis that Ecstall would be responsible for its 35% share of the cost, subject to Mantle’s previous expenditures being confirmed in due course. The joint purpose of this enterprise is to find an ore body. Drilling the two additional holes was specifically directed towards that goal, as the results provide valuable information for the next program, yet Ecstall refused to agree to this proposal. Nonetheless, Mantle proceeded in good faith to advance its own funds to complete that drilling.
As far as the timing of the Offer is concerned, shareholders should also bear in mind that the 2006 exploration program has just recently been completed and the results from all but one drill hole have been obtained. Mantle wishes to conduct a significant drill program on the Akie property during the 2007 exploration season. Based on past experience, exploration is restricted to a short season commencing in May until approximately the end of November. Mantle may need to reconsider its plans for the upcoming exploration season pending resolution of the issues in the arbitration proceeding. Furthermore, even if Ecstall acknowledges that Mantle has earned its 65% interest, the parties must still enter into a joint venture agreement governing any further exploration. Mining joint venture agreements are long, complicated, and sophisticated agreements. Based on historical experience, Mantle is not confident that an agreement can be negotiated in the short term given Ecstall’s approach to date. Mantle is also concerned about encountering difficulties in reaching agreement with Ecstall on the 2007 exploration program.
Accordingly, Mantle determined that the fair and appropriate course of action to reduce the risk of protracted delay on the Akie exploration program was to initiate its Offer during this “quiet” period after completion of the 2006 drill program. Mantle believes its Offer presents a positive way to reduce the risk caused by the intransigence of Ecstall management which could otherwise result in serious negative consequences for shareholders of both companies, including the possible loss of the 2007 exploration season.
Ecstall’s Proposition: Ecstall has the management capabilities and access to the financial resources to develop the Akie property and pursue its current corporate objectives.
- To pursue the corporate objectives of Ecstall’s current management, Ecstall shareholders face certain, substantial and in Mantle’s view, unnecessary, dilution if Mantle’s Offer is rejected.
- In Mantle’s view, Ecstall management has failed to demonstrate acceptable corporate governance practices and has demonstrated a disregard for shareholders interests; Mantle’s Offer provides a clear route to avoid that risk.
Mantle notes that Ecstall was incorporated in 1984, publicly listed in 1989, and has held an interest in the Akie property for many years, yet at the time Ecstall entered into the Akie Option Agreement with Mantle, its shares were languishing at less than $0.07 per share. Furthermore, in order to finance its activities, in August 2005, after entering into the Akie Option Agreement, Ecstall completed several private placements at $0.05 per unit. Over the past year, Ecstall’s highest financing price was flow-through units at $0.45 per unit. It is Mantle’s view that should Ecstall remain as a stand alone company, it will need significant financing (which will likely need to be done at a price that is significantly lower than the value reflected in Mantle’s Offer), thereby causing substantial and, in Mantle’s view, unnecessary dilution to Ecstall’s shareholders.
Ecstall’s management has alienated both its working partner on the Akie project and, from communications Mantle has received, many of Ecstall’s own shareholders. Apart from its agreement with Mantle, it has failed to capitalize on one of the best zinc markets ever. Ecstall has publicly complained about Mantle’s delays in providing assay results, yet it is instructive to note that despite commencing its drill program on its Pie and Yuen properties in June 2006, Ecstall has not released a single assay result to date.
As far as corporate governance is concerned, Ecstall has demonstrated far from exemplary behaviour as evidenced by the fact that it has deprived Ecstall shareholders of a fundamental right – the ability to elect its directors. Ecstall is seriously delinquent in holding its AGM and by doing so, its directors have effectively entrenched themselves. The adoption and re‑adoption of a “poison pill” rights plan is, in Mantle’s view, further evidence of entrenchment. During that time, Ecstall management have continued to enrich themselves by exercising stock options.
In its Offer and Circular, Mantle specifically drew attention to several troubling events, including: Ecstall’s failure to hold its AGM; the 1 million share bonus purportedly granted to its CEO, Mr. Graf; the purported adoption and re-adoption of a “poison pill” shareholder rights plan.
In its Directors’ Circular, Ecstall management fails to even address the first two issues, when they clearly were invited and had the opportunity to do so.
In its Directors’ Circular, shareholders are provided with minimal disclosure regarding Mr. Graf’s generous “golden parachute” severance and change of control bonus.
These types of actions do not inspire confidence that Ecstall’s management is acting honestly, in good faith and with a view to the interests of and respectful of all of Ecstall shareholders.
Ecstall’s Proposition: The Offer is highly conditional and not a firm Offer.
All of the conditions contained in Mantle’s Offer are customary and wholly appropriate in the circumstances.
Ecstall’s management have expressed little willingness to pursue a “friendly” transaction that would entail less conditions.
Mantle re-iterates that upon satisfaction of the conditions under its Offer, it will take up and exchange any shares deposited under the Offer. Mantle is of the view that none of the conditions should serve to impede a successful completion of the Offer unless Ecstall management puts its interests ahead of shareholders or attempts to frustrate or interfere with the shareholders’ legitimate rights.
Ecstall’s Proposition: The Offer is not a Permitted Bid under Ecstall’s Shareholder Rights Plan Agreement.
- Mantle intends to apply to the applicable securities regulatory authorities to have the Rights purportedly issued under the Rights Plan cease traded and the Rights Plan rendered ineffective, unless Ecstall otherwise takes steps to redeem the Rights or otherwise terminate the Rights Plan.
- As set out in Mantle’s Offer and Circular, at the time its Offer was initiated, Ecstall had failed to provide any information about the precise terms and conditions of its “poison pill” Rights Plan. It was not until January 8, 2007 that Ecstall publicly filed a copy of its Rights Plan purportedly made “as of” November 29, 2006. It is entirely disingenuous for Ecstall to now complain that Mantle’s Offer is not a “Permitted Bid”, as contemplated in its only recently disclosed Rights Plan.
- The actions taken by Ecstall management regarding its “poison pill” display a clear disregard for the interests of its shareholders and capital markets, which Mantle intends to address before the securities regulatory authorities.
In conclusion, Mantle urges Ecstall’s shareholders to tender their shares to the Offer, as it is firmly convinced that a consolidation of all the Ecstall and Mantle properties under a strong and capable management team will maximize the value of their investments.
Mantle’s Offer is due to expire January 29, 2007, unless extended. Ecstall shareholders are urged to tender their shares under the Offer as soon as possible in advance of the expiry date. For questions or assistance, Ecstall shareholders should contact Georgeson, the Information Agent for the Offer, toll-free at 1-866-568-7419.
On behalf of the Board of Directors
MANTLE RESOURCES INC.
“Peeyush K. Varshney”
Peeyush K. Varshney, LL.B
President and Director