Adrian Day - Wed, Apr 27, 2016

Mining M&A Warming Up with Reservoir and Sunridge Deals

Adrian DayAdrian Day shares additional thoughts on Nevsun's deal to buy Reservoir Minerals. The investment conclusion—to hold—remains. And he has an update on Sunridge being acquired.

As mentioned in the last note, Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.MKT) is a strong company, and undervalued stock. Were its flagship Bisha mine not in Eritrea, the stock would be valued considerably higher. (When I mentioned that Nevsun was trading near four-year highs, I was looking at the Canadian chart. Looking at the New York stock in U.S. dollars, this is not the case.)

Operationally, it is a very strong company, having built Bisha, unusually, on schedule and under budget. So merging with Reservoir Minerals Inc. (RMC:TSX.V) and its exciting Timok property, by reducing political risk and diversifying the resource base, could see Nevsun's stock rerate. In any event, the combination will produce a solid midtier resource company. Ending up with some Nevsun shares is not a bad outcome.

Another offer?
However, as mentioned, I don't believe that Nevsun is exactly overpaying, and after the normal drop in the acquirer's share price that occurs in such deals, the premium is a more modest 24%. I believe there is a chance of another bid, after Reservoir, with Nevsun's cash, has exercised its right-of-first-offer to match Lundin Mining Corp.'s (LUN:TSX) bid for part of Freeport-McMoRan Copper & Gold Inc.'s (FCX:NYSE) interest in the project. We are holding for now, again watching the market and any developments; the downside risk is modest so the risk.

To clarify another comment in the last note: the combined company will have a minimum interest of 46% in the porphyry, assuming Freeport meets the spending hurdles to dilute its partner as much as it can.

Sunridge sale closes
Coincidentally, at the same time one Eritrea-active company is buying Reservoir, another one is selling its assets. After a delay from the deadline announced earlier this month, Sunridge Gold Corp. (SGC:TSX.V; SGCNF:OTCQX)0.34-0.345) has completed the sale of the company's assets to the Sichuan Road and Bridge Corp., and received payments totaling US$68.6 million.

The company's board will meet at the end of the week to determine a record date and, after settling outstanding liabilities, the proceeds will be distributed to shareholders and the stock de-listed. A second installment of US$7.33 million will be paid within six months, and those proceeds then distributed.

The company earlier stated that it expects the net proceeds to be "not less than" CA$0.35 per share. My estimate was a cent or two above that, though the strength in the Canadian dollar against the U.S. dollar reduces the Canadian distribution. We are holding for the distribution.

Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is "Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks."

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, Sunridge. 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 Streetwise Reports for this article. Streetwise Reports was not paid by the author to publish or syndicate this article.
2) The following companies mentioned in the article are sponsors of Streetwise Reports: None. The companies mentioned in this interview were not involved in any aspect of the article preparation or editing so the expert could comment independently about the sector. Streetwise Reports does not accept stock in exchange for its services. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
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