Nevsun
Resources Ltd. (NSU:TSX; NSU:NYSE.MKT, US$4.40) announced an agreed
take-over by Zijin Mining at C$6 per share, a meaningful premium over
Lundin's hostile C$4.75 bid. Zijin is the third-largest publicly traded gold
miner in the world. Following its purchase of the Bor mine and smelter, it
became a front-runner for Timok. The following day, Lundin said would not increase
its bid for Nevsun.
This is a good offer, though we should have preferred one at least
partially in shares in a good copper company, allowing us to continue to have
exposure to Timok, as well as avoid the immediate tax bill.
Will there be another bid?
The probability now that there will be another bid is low, notwithstanding
that Timok is one of, if not the best undeveloped copper projects in
the world, and that there is a paucity of good copper projects in low-risk
jurisdictions. However, the bid is over NAV, at the high end of a purchase of
an undeveloped project. Zijin has a competitive advantage with its smelter,
so another company bidding higher could not have the same rate of return as
Zijin. And if another company made a higher hostile bid, there is always the
possibility that Zijin would come back topping it, so a third party is
unlikely to go to the time and trouble of a hostile bid they may not win.
But another higher bid is by no means out of the question, given the
quality of the asset and the number of companies that have looked at it
recently. We speculate that Nevsun's somewhat unusual comments that "the
board has preserved the ability to respond to unsolicited proposals"…and
"optionality remains for us to consider a superior bid" mean that
Nevsun knows other companies are still interested.
We are holding for a little longer:
- The stock price is below the bid price (C$5.82 vs C$6).
- The downside is minimal since this is an agreed
acquisition.
- There is still the possibility of another higher offer.
The low break fee (of $50 million) could be interpreted that Nevsun is
leaving the door open, with Nevsun management retaining the right to
consider a superior bid.
On the other hand:
- The bid price is in Canadian dollars, so currency
fluctuations can affect what we receive.
- There is always the risk (albeit low) that Zijin won't
complete, because, for example, it does not receive necessary Chinese
approvals.
- The possibility (as discussed) of a higher offer is low.
In short, we are holding for now. Once the bid circular is filled—by
September 18 at the latest—the tender will remain open for 105 days, unless
Nevsun shortens the bid period. Were this to occur, we would infer that no
other bid was expected. But if you need the funds for something else—whether
a holiday or to buy other resource stocks at bargain prices, then you can
sell with low risk of foregoing meaningful upside.
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Disclosure:
1) Adrian Day: I, or members of my immediate household or family, own shares
of the following companies mentioned in this article: Nevsun Resources. I
personally am, or members of my immediate household or family are, paid by
the following companies mentioned in this article: None. My company has a
financial relationship with the following companies mentioned in this
article: None. Funds controlled by Adrian Day Asset Management hold shares of
the following companies mentioned in this article: Nevsun Resources. I
determined which companies would be included in this article based on my
research and understanding of the sector.
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