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.
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."
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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 Streetwise Reports for this article. Streetwise Reports was not paid by the author to publish or syndicate this article.
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