Current Price – C$3.00
Merger Consideration – C$3.22 (in stock)
Upside – 7.2%
Expiration Date – April 9, 2018
This idea was shared by Michael.
Kennady Diamonds (TSXV:KDI)(OTC:KDIAF) is a junior diamond explorer that has had some fairly material exploration success. The outcome of that success has been interest from bigger players. They have agreed to a takeover offer from Mountain Province Diamonds (TSX:MPVD), which owns an interest in a producing diamond mine, also in Canada. The deal is likely win-win, as Kennady would have a hard time raising money to build mines at their two significant diamond discoveries, while Mountain Province’s existing mine will eventually run out and MPVD doesn’t have any other significant assets. MPVD can raise the money to build the mines (including by using its significant cash flow). See here for more detailed outline of the benefits.
The offer is 0.975 MPVD for every KDI share. With MPVD at C$3.30 and KDI at C$3.00 that is a 7.2% spread. MPVD is shortable in both Canada and the US, although the cost of the short is relatively high (approximately 10% per year at Interactive Brokers). There could be a case for an unhedged long here, as MPVD is ramping up their mine and has been producing significant cash flow. Based on their reported mining results, their next few quarters should be quite good.
Friendly junior mining deals almost always close quickly, because there are relatively few regulatory barriers to contend with. In this case, the companies have the same major shareholder, as Dermot Desmond has a 24% stake in MPVD and a 28% stake in KDI. That alone makes it very likely the deal will gain shareholder approval, although I think the strategic rationale is sound as well. The votes of both companies are scheduled for April 9th , and I would expect the deal to close directly following. If the deal closes in a month or less, that is a net spread of over 6% on a relatively low risk short time frame deal that can be fully hedged, which I believe to be attractive. For some further colour on the deal see here.