Lundin agreed to acquire part of Freeport's interest in the huge Cukaru
Peki deposit in Serbia, which Reservoir has the right to match-within 60
days, ~40 remaining-including both the payment and the terms. Lundin will
acquire Freeport's 55% interest and rights in the epithermal deposit at
Cukaru Peki, plus 28% of Freeport's interest in the underlying porphyry, for
US$262.5 million ($262.5M).
Reservoir can match Lundin offer
We believe Reservoir will do this, and not necessarily by teaming with
another partner. The company could match the offer itself, raising the
necessary funds by debt, a royalty on the gold portion of the epithermal, or
equity (or a combination). Debt is the most likely option for the bulk of the
funds; there is aversion to raising too much equity and thereby diluting
shareholders, but equally some concern at encumbering the deposit with a
royalty.
Under the terms of the deal, Reservoir would have to raise only $135M by
closing, with another $20M first-year commitment to spend on the porphyry and
perhaps an equal amount (though at its discretion) on the upper epithermal.
The next payment, of $45M, would not come until a production decision had
been made.
This would give Reservoir 100% of the epithermal, and 60.4% of the
porphyry (with the porphyry interest declining when Freeport earns in). The
important point is that Reservoir would initially have a majority interest in
the deposit that would put it in more control of the deposit and its destiny.
A major hurdle remains
There is one important caveat, however. Freeport cleverly limited the
amount of money to be spent on the porphyry in its agreement with Lundin, and
Reservoir, in exercising its right of first offer, must match the terms in
that agreement. It is unclear whether Reservoir, owning a majority of the
deposit, could advance that timetable. Most likely we think that once
Reservoir has control of the project, it would eventually bring in a major
partner who would offer Freeport some cash and perhaps a free carry (for a
lower interest) and to advance the project, or some similar arrangement.
Worst case is not so bad!
And here's the nice part of the story: worst case is that Reservoir
does not match the offer, and Lundin owns 55% of the epithermal. There are
far worse companies to have as partners! The company in fact has already
stated that it now regards Cukaru Peki as its "priority project,"
ahead even of other developments projects it already owned.
How much is Reservoir worth?
Lundin's purchase gives us a basis to put a value on Reservoir's interest.
Reservoir can be diluted down to 25%, but is free carried through
feasibility. Right now, Reservoir is selling ex-cash only little more than
Lundin paid for the epithermal. This ignores most of Reservoir's 45% interest
in the porphyry; its joint venture with Rio Tinto; and all its other projects
in Serbia, Southeast Europe, and West Africa. One analyst has an NAV at a
rather higher 12% discount rate, at CA$8.56-without giving any credit for
the porphyry. In the long-term, the porphyry is the big prize.
At a market cap of CA$315M, Reservoir, with $33M in cash, has room to move
much higher, and after a breather-or on some new development-we expect to see
it move again. This is a good level to add to positions if you are
under-invested.
Disclosure:
1) Adrian Day: I own, or my family owns, shares of the following companies
mentioned in this interview: Reservoir Minerals Inc. and Freeport-McMoRan
Copper & Gold Inc. 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
Minerals Inc. and Freeport McMoRan Copper & Gold Inc. Please note: Adrian
Day Asset Management has voting control of over 5% of the stock of Reservoir
Minerals and is an SEC-filer to that effect.
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