Lithium X Energy (LIX.CVE) – Merger Arbitrage – 20% upside

Current Price – C$2.19

Buyout Offer - C$2.61

Upside – 20%

Expiration Date – March 8, 2018

This idea was shared by Vladimir.

 

Very time sensitive opportunity in mining sector: Chinese fund, NextView New Energy Lion HK, acquires lithium junior miner, Lithium-X (CVE:LIX) for a total consideration of $265m or cash offer of $2.61 per share.

Background here is pretty common for junior miners: LIX went public two years ago, acquired 80% of PLASE, which owns 100% in the lithium project, raised money to produce Technical report (Aug-16), updated Technical report (Feb-17) and then announced an acquisition by Nextview (Dec-17).

I wouldn’t argue a lot about attractiveness of the project, just state several things: LIX key project located in Argentina (produce lithium from brine – currently the most low cost production method), takeover price reflects 1% of in-ground resources value (which seems reasonable) for a project at this stage (no economic assessment has been done yet). LIX has also 20% share in PureEnergy (owner of the project in Nevada) and another project in Argentian, Salar de Arizaro.

More info on company can be found on its website or in NI 43-01 Technical report.

Why I think that the transaction is likely to close:

  • C$20m reverse break-fee, which is significantly higher than the market average fee (represents c. 6% of total transaction amount);
  • NextView LPs have funded their equity portion of cash consideration of $51m to the fund, currently NextView discusses only more favorable terms of market debt financing;
  • Chinese focus on EV (if you visit Shanghai for example you will see a lot of electric bikes), which probably should result in state banks wide support for such kind of transaction.

In the recent public statement Company indicated that it is not in possession of material info and management intend to purchase shares on the open market:

“In terms of completion of the Arrangement with Nextview, in a conference call Tuesday evening with NextView’s personnel, financial advisor and legal counsel, the Company was advised that NextView continues to finalize the debt facilities to provide the remainder of the cash consideration to complete the Arrangement and, if it is not finalized before the end of next week, it will draw-down on its funding commitment from Tibet Summit in order to fund the Arrangement no later than March 9, 2018.  NextView was incorporated under the laws of Hong Kong, S.A.R., with its head office located in Hong Kong. NextView was incorporated by Shanghai NextView Xiangjin Investment Partnership (Limited) (“Shanghai NextView”) and Tibet Summit as an acquisition vehicle to complete the Arrangement.

Key executives and other insiders of the Company have indicated that, since they are not currently in possession of any undisclosed material information, they intend to purchase the Company’s common shares on the open market if available at prices that they believe represent a significant discount to the consideration payable under the Arrangement.”

Why opportunities exists?

I believe that market overreacted on the news that debt financing delayed and will be provided after Chinese New Year and perceived it as a sign of the deal falling apart.

Risks:

  • In regards to Chinese counterparties it is always very hard to do KYC, so the risk of the deal falling apart is certainly exists;
  • Given it is small cap, some material non-public info maybe out there, which I don’t posses

11 COMMENTS

  1. dt

    The spread looks bizarre with only two days left till closing. Why is the market concerned about financing if Nextview has financing commitment from Tibet Summit? (or am I misreading the press release?)

    The company now trades close to pre-announcement levels.

  2. work 22

    There’s some concern the Chinese might re-negotiate the price, as the lithium market comes off its “bubble” overall. There could be some hardball tactics being used by the buyer to spook and then settle lower. Or they may really be having trouble getting financing. I don’t know, Chinese buyer deals like this one usually trade at a wider discount because of the cultural differences in regard to contracts and closings. So it may be fine, it may not. Be careful though, and check these links out:

    http://incakolanews.blogspot.com/2018/03/ok-so-heres-deal-with-that-lithium-x.html

    And also regarding the break fee: http://incakolanews.blogspot.com/2018/02/by-way-that-lithium-x-lixv-break-fee.html

    1. work 22

      also i personally am staying away from this one. The financing should have been lined up neatly already

  3. Nathan

    Don’t know if skepticism is warranted or not but the would-be buyer previously reneged on its offer to buy 20% stake in another cad miner – banacora minerals

    1. dt

      I think it is very relevant. No explanations were provided on why NextView failed on its previous commitment. And timing on the initial deal is very similar to LIX – might end up similarly as well.

      “The initial target date for completion of the Placing was the end of January 2018. The Company has fulfilled all of its obligations in respect of the Placing, however NextView has failed to forward the Placing proceeds to the Company, leaving it in default under the terms of the Placing Letter.

      In spite of the Company’s best efforts to ensure compliance, NextView has failed to complete the Placing as contemplated under the binding Placing Letter. In addition, discussions have not resulted in any alternative proposals that would, in the opinion of the board of Bacanora, be in the best interests of Bacanora and its shareholders. Accordingly, the Company is currently taking advice and has reserved its rights in respect of this default.”

      http://ir.euroinvestor.com/Tools/newsArticleHTML.aspx?solutionID=2482&customerKey=bacanoraminerals&storyID=13828886&language=en

      1. over2u

        Agree, though in case with Bacanora I didn’t find any reverse break up fee. NextView of course can be just incapable to do any M&A, but it is just very expensive way to show your interest in the asset. I think part of the reason for relatively high break up fee was the entity of the buyer.
        If they fail this one as well they not just lose money, but any credidability in eys of their own LPs and the market.

  4. FM W

    Is there any regulatory/legal concern in this case? Any approval needed by local governments?

    1. over2u

      No, the only outstanding item is debt financing facility for this transaction. As pointed in comments above, probably the main concern is an ability of NextView to close the deal (defaulted on similar and even smaller deal before).

  5. over2u

    Vancouver, BC – Lithium X Energy Corp. (“Lithium X” or the “Company”) (TSXV: LIX) (OTC: LIXXF) is providing an update on the expected completion of the previously announced plan of arrangement (the “Arrangement”) with NextView New Energy Lion Hong Kong Limited (“NextView”).
    The Company has been advised by NextView that it has completed its financing arrangements and has wired the funds required to complete the Arrangement to the depositary. All conditions to completion of the Arrangement capable of being satisfied prior to closing have been satisfied and, subject to the satisfaction of the remaining customary conditions to be satisfied at closing (the depositary’s receipt of funds, accuracy of representations and warranties, compliance with covenants, etc.) the Company expects the closing to occur on Friday March 9 and for the Effective Time of the Arrangement to be 12:01am on Saturday March 10.

  6. work 22

    wow. nice timing is right. surprising it was just that simple for them to get the financing straightened out– arguably quite bizarre that happened in the first place?

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