Current Price – C$0.94
Cash-out Price – C$1.00
Upside – 7%
Expiration Date – Oct 2018
This idea was shared by Neo.
LeadFX is junior miner in Australia with Toronto listing and no assets currently in operation. Its history is a rather standard case of junior miners – big promises from management, operational disappointments, debtors throwing more and more good money after bad money and shareholders getting continuously diluted, with the company eventually ending in the hands of original lenders (for more detailed picture see first few pages of the Annual Information Form).
Company’s main asset (Paroo Station lead mine) was put under care and maintenance in Jan 2015 after it was clear that operations are no longer economical. However, in mid 2017 LeadFX largest/controlling shareholder (previous largest lender) Sentient entered into agreement with InCor to undertake feasibility study for development of a Hydrometallurgical Facility using InCor’s proprietary technology. The study proved to be successful (project NPV of C$191m -C$303m, vs current EV of C$93m) and InCor was awarded large pile of equity (23m shares) becoming the second largest shareholder. Both Sentient and InCor continued to support LeadFX operations through numerous private placements resulting in joined ownership of more than 90%.
Going Private Offer
On May 10, 2018, a special committee of independent directors was appointed by the board of directors to consider and evaluate a potential “go-private” transaction. On Jul 23, 2018, LeadFX the transaction was announced through a 5m to 1 reverse split, cashing out shareholders at C$1/share (compared to C$0.84 before the announcement). This would cash out everyone except Sentient and InCor.
Going private will be financed by InCor – 13.3m shares at C$1 each, which is an investment of C$13.3m. This compares to C$5.9m InCor has already invested in the company through private placements and warrants exercise – on average it paid C$0.74 per share. After the reverse split InCor will own >50% of LeadFX shares.
Keeping in mind InCor has already piled comparable sums of cash into LeadFX, it is unlikely to simply walk away. InCor is cashing out minority shareholders at valuation that is 2x or 3x lower than the estimated NPV of the new facility. So if InCor believes in its own feasibility study, then this going private transaction sounds like a good deal from them.
Minority shareholder approval is not required as controlling shareholders own more than 90%. Other conditions (which are quite standard) are likely to be met.
Shareholder meeting is planed for the 3rd of October and I would expect the transaction to close shortly afterwards.
Liquidity is very low, with only few thousand shares traded on daily basis.
The largest minority shareholder of the company has taken to the press, upset about not having the chance to vote against the going private transaction. This is due to management issuing equity to themselves to get above the threshold for requiring approval from minority shareholders. So if the regulators were to step in, it might either cause the deal to be derailed or push InCor to raise the price tag. I do not see much merit in Pearson’s arguments as without InCor LeadFX would already be bankrupt and shareholders would get exactly zero.
Precedent of regulator involvement is quoted in article. In Sep 2016 Frontier Rare Earths tried to go for a 9m to 1 reverse split. Shareholders complained to Ontario Securities Commission (OSC), OSC stepped in and meeting got postponed for 2 weeks and subsequently got cancelled. Roughly 6 months later, company tried to go for the same proposal again, offering same terms and shareholders once again complained to OSC. But this time it seems like OSC didn’t intervene and the reverse split got through.