There is a sense of déjà vu for shareholders of Frontier Rare Earths Ltd., a mineral exploration and development company whose shares were once listed on the TSX but are now quoted on the friendly confines of the U.S. over-the-counter market.

For the second time in six months, the company, which is principally focused on the development of a rare earth project in South Africa and a graphite project in Mozambique, has called a special shareholder’s meeting to discuss a proposed share consolidation.

And not just any share consolidation: at nine million to one, the plan, which will be put to a shareholder vote in Dublin on April 24, is the mother of all share consolidations. Indeed the ratio is so high that only three shareholders qualify. And if the vote is successful, the three will own the company — and presumably get all the upside if and when the rare earth market returns.

The rest, those who don’t own 9 million shares, will be offered 5 cents a share. How large is 5 cents a share? On the plus side it’s the same as the shareholders were offered last time, but it’s still way below the company’s cash value. (At last count, Sept. 30, the company had $12.59 million in cash and about 90 million shares outstanding.)

So why is a second share consolidation proposal necessary?

Last time, the Ontario Securities Commission got involved, presumably after a shareholder informed the regulator about the Luxembourg-headquartered company’s proposal. Anyway, as a result of that intervention — which the company has said focused on the circular’s “disclosure” and the process followed “in evaluating the potential transaction” — the meeting was postponed.

But the company wasn’t finished. It did a new investigation, formed a new special committee (composed of all independent directors) which in turn hired a financial and legal adviser.

Guess what? The committee and the board reached the same conclusion on the same proposal: the terms of the consolidation “are fair, from a financial point of view, to the company’s minority shareholders.”

While that conclusion brings to mind the famous quote attributed to Einstein, the circular ended up being more than twice as long as the one issued for planned October 2016 meeting.

That process hasn’t impressed one small shareholder, who has contacted the OSC.

“Basically they have spent their time and the company’s money to come up with the usual fairness’ opinions they all do,” he said.

“And the proxy material seems full of excuses of how horrible and valueless this company is, but it is the same company the large shareholders now want to take over. To me it seems the insiders want to take the company private without paying a fair price.”

In their deliberations, the special committee and the company rejected the wind-up option. If it had been pursued “discretionary executive bonuses” of US$1.1 million would have had to be provided for. In that scenario, a further US$2.4 million for “termination payments” would have been required.

Clearly, the fair alternative would have been for the interested parties to form a buying consortium, raise external capital and then make an offer to all the shareholders. In this way the insiders would not be using the company’s funds to take control of the company.

We sent an email to the company asking why this was a good deal for minority shareholders. We didn’t receive a reply.

Financial Post
bcritchley@postmedia.com