Adrian Day - Mon, Jun 6, 2016

Reservoir Minerals: A Rare Opportunity

Adrian DayFund Manager Adrian Day has said that while Nevsun's acquisition of Reservoir Minerals would be a great deal for Nevsun and would create a new, well-financed mid-size base metals company, the offer undervalues Reservoir. Day discusses a rival proposal that has just come forth.

I have stated that I believe the Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.MKT) offer for Reservoir Minerals Inc. (RMC:TSX.V) undervalues the company and its assets, just as did the prior Lundin purchase of part of Freeport's interest in the joint venture. Now there is a twist in the saga and a rival proposal.

In an advertisement in the June 3rd Toronto Globe and Mail newspaper, Jing Bao, a Hong Kong-based investment group, discussed a proposal made by Xiangyuang Copper (XGC), which owns one of the largest and most modern smelters in the world. Both Jing Bao (9%) and XGC are long-term significant shareholders of Reservoir.

New suitor makes its case

The advertisement points investors to a website, www.abetterdealforreservoir.com, which makes several points:

  • Having exercised its right-of-first-offer—albeit with a loan from Nevsun—Reservoir now owns 100% of the upper portion of the deposit and (at present) a majority of the porphyry.
  • Reservoir's recent preliminary economic assessment values the upper portion of the deposit alone at US$1 billion at today's depressed copper price. (Reservoir is trading post-Nevsun bid at an ex-cash market cap at just half that, with no consideration for the porphyry and other assets).
  • XGC states it has submitted an alternative offer to Reservoir; the term sheet includes an US$80 million private placement underwritten by XGC and a $50 million loan; this would enable Reservoir to repay Nevsun's loan as well as provide funds for development of the project.
  • The website urges investors to vote "no" on Nevsun's offer. That would allow the XGC offer to proceed.

Such a vote would not, of course, mean the XGC's offer would necessarily be accepted. It is possible that Nevsun would sweeten its offer; after all, acquiring Reservoir would be a great deal for Nevsun, adding a second great mine to its portfolio and improving its political profile. (Eritrea is hardly flavor of the month.) It is possible that Lundin returns with a better offer. It would mean, however, that the original Nevsun offer would be rejected and others would have the opportunity to step forward.

Reservoir suggests it's worth more!

Although Reservoir accepted the Nevsun offer, the latest corporate presentation on its website supports the view that Nevsun's offer undervalues Reservoir (though it doesn't state that, of course), as does a very well-done video on the website (bottom of home page in middle, "The Cukaru Peki Deposit").

One analyst who has followed Reservoir for a while has a 12% discounted NAV of C$15 per share. . .and that's just for the upper deposit alone!

A rare opportunity that should be maximized

Deposits like this, and companies like Reservoir, come along only once in a while. For second and third-rate deposits owned by second and third-rate companies we would gladly and without hesitation accept a decent offer. With a Diamondfields . . . or a Virginia . . . and now with a Reservoir Minerals, realizing just how rare such discoveries, deposits and companies are, we want to maximize our returns.

This new twist offers us just that opportunity. Only if the Nevsun proposal is rejected can the XGC proposal proceed, or another offer, including perhaps a sweetened Nevsun offer, come forth. Scuttlebutt in Toronto suggests the XGC proposal buys time for another offer. The fat lady has not sung yet.

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."

Disclosure:
1) Adrian Day: I or my family own shares of the following companies mentioned in this article: Reservoir Minerals. I personally am or my family is 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. Clients of Adrian Day Asset Management own shares of the following companies mentioned in this article: Reservoir Minerals. Clients of Adrian Day Asset Management own over 5% of the shares outstanding of Reservoir Minerals. 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 the author and not of Streetwise Reports or its officers. The author is wholly responsible for the validity of the statements. The author 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 article 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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