On Sunday, Reservoir Minerals announced it has agreed to be acquired by
Nevsun Resources. Adrian Day shares his initial thoughts on the deal.
Reservoir
Minerals Inc. (RMC:TSX.V, 6.96) announced it has agreed to be acquired by
Nevsun
Resources Ltd. (NSU:TSX; NSU:NYSE.MKT), which operates the high-grade
copper-zinc Bisha mine in Eritrea. Nevsun has a cash balance of US$438 million.
Under the terms of the deal, Reservoir shareholders will get two Nevsun
shares for each Reservoir share. At Friday's closing price, this amounts to
CA$9.40 in Nevsun shares per Reservoir share, a healthy premium.
Nevsun will also subscribe for a private placement and lend Reservoir
funds to exercise its "right of first offer" to match the offer
Lundin Mining Corp. (LUN:TSX) made in early March for all of Freeport-McMoRan
Copper & Gold Inc.'s (FCX:NYSE) interest in the upper zone and part of
its interest in the lower zone. The new combined Nevsun-Reservoir company
will then own 100% of the upper zone, while it could be diluted by Freeport
down a minimum of 46% of the lower zone.
Nevsun is in a strong financial position to advance the Timok project. For
Nevsun shareholders, who have been wanting Nevsun to undertake an M&A
transaction, it's a good deal: Timok matches Bisha in terms of project
quality, while Serbia is definitely a step up in the geopolitical risk table
from Eritrea (but then virtually everywhere would be).
Is it a good deal for Reservoir shareholders? The premium is attractive,
though it should be pointed out that only 10 days ago, Nevsun shares were
trading at CA$3.90, so it remains to be seen if these new four-year highs for
Nevsun hold. Moreover, we think Nevsun is buying Reservoir cheaply. In other
circumstances there could have been a bidding war, but Lundin's agreement
with Freeport triggered a deadline for the right to match its offer (expiring
May 4), and Reservoir's value is greatly enhanced if it exercises that right
(in other words, there is not much time for anyone else to make a competing
bid).
We are going to hold for now, listen to the conference call, watch how the
market reacts, and assess any possible developments. But clearly, the
end-game is underway, and it's only a question of how much we gain.
Disclosure: 1) Adrian Day: I or my family own shares of the following
companies mentioned in this interview: Reservoir, Freeport. I personally am
or my family is paid by the following companies mentioned in this interview:
None. My company has a financial relationship with the following companies
mentioned in this interview: None. Funds controlled by Adrian Day Asset
Management hold shares of the following companies mentioned in this
interview: Reservoir, Freeport. Clients of Adrian Day Asset Management own
over 5% of the shares outstanding of Reservoir. I determined which companies
would be included in this article based on my research and understanding of
the sector. Statement and opinions expressed are the opinions of Adrian Day
and not of Streetwise Reports or its officers. Adrian Day is wholly
responsible for the validity of the statements. Adrian Day was not paid by
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