Editorial by Eric Coffin. This is not a recommendation to buy or sell any security.
Dear HRA Free List Readers,
If you’ve been on the list for a while you would have seen two earlier emails about Sunridge Gold (SGC-V; SGCNF-OTCQX). The first was in April when the stock was trading at about 14 cents on the TSX. The second came in September after Sunridge received its mining licences for the Asmara project. As I stated in that note, receipt of the permits was bound to accelerate the re-rating process since it allowed management to get to work putting a financing package together.
In both those earlier comments I highlighted the potential for a takeover offer. There have been approaches in the past couple of years but nothing was finanlized. Until now. Last Friday, Sunridge announced it has received an offer for its 60% interest in the Asmara project. (Follow this link if you want to read the original news release from the company: Sunridge Agrees To Sell Its 60% Interest in Asmara Mining Share Company)
Below, I’ve reproduced the HRA Alert that went to Special Delivery subscribers just before trading resumed after the Sunridge buyout announcement. HRA Journal readers have now received an even longer update with more background. Sunridge is trading about 80% above its levels in April. As you’ll see below, I estimate the return from a successful closing of the Chinese offer to be $0.35 to $0.40 per share or about 50% above today’s level. I think the odds of the deal closing are good so the potential arbitrage profits from buying now and holding until the deal consumates are still quite large. Remember too that SGC still has the DSO mining plan as a back up. I am very comfortable management can finance that with or without the Chinese. The Chinese buyers know this which keeps the pressure on them to close the Asmara purchase. I think there are still gains to be had either way.
Sunridge is just one example of why it pays to be an HRA subscriber! Subscribe to HRA today for ONLY $9 FOR 3 MONTHS*! (discount link valid until Nov 14, 2015).
Oh, and for the record SGC is the second company on the HRA list that has seen a takeover offer in the past few months. The other, SilverCrest Mines, recently merged with a larger producer at a price 160% above where HRA initiated coverage. Even in a bear market there are profits to be had from discovery and resource growth but you have to be a HRA subscriber to hear about it first.
# 599 6 November 2015
Sunridge Buyout Offer
It’s been a horrible couple of weeks for commodities in general and gold in particular. I’ll go into all of that in the Journal this weekend but for now it’s nice to be able to relay some good news for a change.
Sunridge Gold (SGC-V; SGCNF-OTCQX, closed yesterday at $0.17 on V) is halted after the company announced it has received a formal buyout offer for its 60% interest in the Asmara project in Eritrea. The offer should net shareholders at least a double from yesterday’s closing price.
Sunridge received the offer from Sichuan Road and Bridge Mining Investment Development Corp. Ltd. (“SRBM”) a Chinese state owned enterprise based in Chengdu. SRBM already has extensive exposure to Eritrea, having been involved in large civil works there as well as interests in some exploration level projects in country. The Share Purchase Agreement signed today in Asmara calls for SRBM to pay US $65 million for SGC’s 60% interest and to guarantee the payment of the remaining US $13.33 million due from Sunridge’s partner ENAMCO for its purchase of 30% of the project. The agreement envisages closing in Q1 2016 after a Sunridge shareholder vote and a couple of regulatory approvals in Canada and China.
As you may recall I have made several references to a potential takeover offer from China. Management has made no secret of the fact there have been approaches over the past 3-4 years. Chinese SOEs are infamous for both being slow and for not quite getting to the finish line when it comes to M&A activity. Today’s news release states fairly emphatically that SRBM has completed all due diligence activities and that due diligence is not a requirement for closing. That tells me that Sunridge management, quite rightly, has held off signing or agreeing to anything until SRBM was ready to make a serious offer with few strings attached. It’s also clear from the news release that management intends to wind up the company and distribute the maximum amount of funds to shareholders as a return of capital payment on dissolution. This is a nice change of pace from similar deals in the past where management carried on for years looking for the next deal and burning through cash in the process. It’s been a long road but this is a very good deal in a very tough market. I think the management of Sunridge is to be commended for making it happen. They are a technically focused group that has done a great job at Asmara over the past ten years. I think they could capture a good chunk of the value offered by this deal with the DSO operation. SRBM and as importantly ENAMCO know this and I have no doubt the DSO could be financed. This will keep the pressure on SRBM to get the deal done and closed.
There will surely be shareholders that wanted to see SGC go it alone. I think management was more than willing to do that too but once the offer was derisked as much as possible it couldn’t be kept private. It has to be presented to shareholders and they will have their chance to vote for it. In a market that has treated so many so poorly I think it’s all but guaranteed to pass.
So how good IS the deal? There will be some accounting and tax issues to work through and costs involved in clearing all debts and winding up the company but, based on the price being paid and the 210 million shares currently outstanding I expect the net distribution per share to be at least twice the current share price. The issue is complicated a bit by options and broker warrants - I expect to be well in the money after trading opens but that only adds about 6% to the share total and 3% to the cash so it won’t change the payout per share much. There are 60 million tradable warrants with a 35 cent strike price. That price is close enough to the potential payout per share that even having all of them exercised wouldn’t alter the value per share very much either. Those could be popular with traders trying to arbitrage the payout amount and I expect most would not be exercised until very close to the last day of trading for the stock.
I expect the share price to jump, though I don’t know by how much. Every trader will have their opinion about the odds and exact timing of the distribution and its exact amount per share. I think it will be in the $0.35-40 range. If you feel comfortable the deal will close and its trading at much of a discount to 35 cents there is an arbitrage opportunity there for those willing to hold until closing and payout in Q1. The four year share chart below has the $0.35-0.40 range highlighted. Compare that to yesterday’s close and indeed to all the daily closes in the past three years and you should understand why I think the management and board of Sunridge deserves a round of applause and a round of drinks. This couldn’t have been an easy or quick negotiation.
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