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First Mountain firms up Madalena, Point Loma deals

Last updated: 15:25 17 May 2016 EDT, First published: 10:25 17 May 2016 EDT

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Canadian energy stock deals loom

Madalena Energy Inc (CVE:MVN) said on Tuesday it has entered into definitive arms-length agreements with First Mountain Exploration Inc (CVE:FMX) and Point Loma Energy Ltd.

The deals mean Point Loma will acquire Madalena's non-core Canadian petroleum and natural gas assets focused in the Paddle River area of Alberta, while First Mountain will make an offer to acquire all of the issued and outstanding common shares in the capital of Point Loma in exchange for the issuance of common shares in the capital of First Mountain.

Meanwhile, First Mountain will complete a 1:10 share consolidation, change its name to Point Loma Resources Ltd., and its management and board will be reconstituted.

Since the initial announcement on February 9, Point Loma and First Mountain have collectively completed or entered into definitive agreements (with all such proceeds being held in escrow) relating to financings for aggregate gross proceeds of approximately C$2mln.

Upon completion of the proposed transaction, the resulting entity, Point Loma Resources (formerly First Mountain), will be a recapitalised, junior oil and natural gas exploration and production company listed on the TSX Venture Exchange with a consolidated and focused exploration play in the Paddle River area of Alberta.

The Madalena acquisition

Pursuant to a purchase and sale agreement between Point Loma and Madalena dated May 16, Point Loma will acquire Madalena's non-core Canadian assets for an aggregate purchase price of C$5.5mln, prior to closing adjustments, consisting of: (i) 14,522,823 Point Loma shares (6,244,814 post-consolidated First Mountain shares with a deemed value of 40 cents per First Mountain share) with a deemed value of approximately C$2.5mln, and (ii) a C$3mln principal amount 3% subordinate secured convertible debenture due five years from closing of the Madalena acquisition and convertible into postconsolidated First Mountain shares at a price of 50 cents per First Mountain share. Interest on the debenture will accrue but not be due until maturity.

The Madalena acquisition is expected to close on or about June 1, immediately prior to the closing of the Point Loma acquisition, and is subject to a number of terms and conditions including the Point Loma acquisition being unconditional and approval of the TSX-V.

The assets are concentrated in the Paddle River area of Alberta and are currently producing approximately 135 barrels of oil equivalent per day of 70% medium-grade oil. Along with the producing wells, Point Loma will also acquire a significant Canadian land base of approximately 71,000 net acres of land contiguous to Point Loma's current assets in the area.

After completion of the Madalena acquisition, Madalena will be a pure-play Argentina-focused, international oil and gas company.

The Point Loma acquisition

Pursuant to a pre-acquisition agreement between First Mountain and Point Loma dated May 16, First Mountain will make an offer to purchase all of the issued and outstanding Point Loma shares, including those Point Loma shares issuable pursuant to the financing and the Madalena acquisition. The Point Loma shares will be taken up on the basis of 0.43 of a First Mountain share (on a postconsolidated basis) for each Point Loma share.

It is expected that an aggregate of 17,941,379 First Mountain shares (on a postconsolidated basis) will be issuable in connection with the Point Loma acquisition, including: (i) 8,449,387 First Mountain shares (on a postconsolidated basis) issuable to existing holders of Point Loma shares, (ii) 6,244,814 First Mountain shares (on a postconsolidated basis) issuable to Madalena, and (iii) 3,247,178 First Mountain shares (on a postconsolidated basis) issuable to holders of subscription receipts (as defined below), all at a deemed value of 40 cents per First Mountain share (on a postconsolidated basis), for aggregate deemed consideration of approximately C$7.2mln. Concurrent to the execution of the preacquisition agreement, directors, officers and significant shareholders of Point Loma holding approximately 34.2% of the issued and outstanding Point Loma shares have entered into lock-up agreements pursuant to which they have agreed to tender their Point Loma shares to First Mountain.

It is intended that the Point Loma acquisition shall be completed by way of an exempt takeover bid pursuant to Section 4.3 of Multilateral Instrument 62-104, takeover and issuer bids.

The Point Loma acquisition is expected to close concurrently with the completion of the Madalena acquisition, on or about June 1, and is subject to a number of terms and conditions, including a minimum tender condition of 66-2/3rds per cent of the Point Loma shares, the completion of the Madalena acquisition and the approval of the TSX-V.

The financings

Point Loma and First Mountain have completed or entered into definitive agreements relating to the financings for aggregate gross proceeds, to be released on completion of the transaction, of approximately C$2mln. The financings consisted of:

A private placement financing of Point Loma completed on May 4, of an aggregate of 7,551,576 subscription receipts of Point Loma for gross proceeds of approximately C$1.4mln.

If all outstanding conditions to the completion of the Madalena acquisition and the Point Loma acquisition are met and all necessary approvals have been obtained, the proceeds will be released from escrow to Point Loma, and the subscription receipts will be exchanged for an aggregate of 7,551,576 Point Loma shares, with 2,664,046 of such Point Loma shares issued on a flow-through basis pursuant to the Income Tax Act (Canada), for no additional consideration; the subscription receipts relating to the Point Loma shares to be issued on a flow-through basis were issued at a price of 21 cents per subscription receipt and the remaining subscription receipts were issued at a price of 17 cents per subscription receipt.

A private placement financing of First Mountain to be completed concurrently with the transaction for C$650,000 principal amount of 7-per-cent junior subordinate secured convertible debentures of First Mountain, to be issued at par, due two years from the date of issuance and convertible into First Mountain shares (on a post-consolidated basis) at a price of 40 cents per First Mountain share; interest on the debenture will be payable on a monthly basis; the C$650,000 subscription amount has been delivered in escrow with counsel; closing of the debenture financing is subject to acceptance by the TSX-V.

The proceeds of the financings will be used to place some of the acquired Madalena wells back on production and to conduct other oil and gas operations.

Point Loma reorganisation

On May 3, First Mountain mailed its information circular, proxy statement and related materials in connection with its annual and special meeting of the shareholders of First Mountain to be held May 27.

At the meeting, shareholders of First Mountain will be asked to consider and approve certain resolutions including resolutions authorizing a consolidation of First Mountain shares on the basis of 10 preconsolidated First Mountain shares for each one post-consolidated First Mountain share and resolutions authorizing First Mountain to change its name to Point Loma Resources.

First Mountain expects to implement the share consolidation immediately prior to the Point Loma acquisition and to implement the name change immediately after the completion of the Point Loma acquisition.

The proposed transaction will result in a reverse takeover of First Mountain pursuant to the policies of the TSX-V. Sponsorship of a reverse takeover may be required by the TSX-V unless exempt in accordance with TSX-V policies. First Mountain intends to apply for an exemption from the sponsorship requirements pursuant to the policies of the TSX-V. There is no assurance that First Mountain will obtain an exemption from the sponsorship requirements.

Trading in First Mountain shares on the TSX-V will remain halted until the documentation required by the TSX-V has been reviewed and accepted by the TSX-V.

Certain insiders of First Mountain will be participating in the debenture financing. First Mountain intends to rely on certain exemptions from the formal valuation and majority of the minority requirements applicable to related party transactions as set out in TSX-V Policy 5.9 and National Instrument 61-101, protection of minority security holders in special transactions, which reliance will be subject to acceptance by the TSX-V.

Completion of the transaction is subject to a number of conditions, including TSX-V acceptance and disinterested shareholder approval, unless waived by the TSX-V. The transaction cannot close until the required shareholder approval is obtained or waived by the TSX-V. There can be no assurance that the transaction will be completed as proposed or at all.

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