LeadFX (LFX.TO) – Going Private – 7% Upside

Current Price – C$0.94

Cash-out Price – C$1.00

Upside – 7%

Expiration Date – Oct 2018

Going Private Announcement

This idea was shared by Neo.

 

Background

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.

 

Risks

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.

 

19 COMMENTS

  1. Alex15

    Can the bidder lower the price? Is there a legal requirement to offer a certain price or can the 90% owners simply determine the price?

  2. dt

    From Dec 3rd press release:

    “The Company also advises that it is progressing the funding for the closing of the Plan of Arrangement approved by shareholders on October 3, 2018 and expects the cash consideration to be remitted to LeadFX’s depositary, Computershare Investor Services Inc., in December. Further details will be communicated by the Company at such time.”

    https://www.sedar.com/GetFile.do?lang=EN&docClass=8&issuerNo=00014867&issuerType=03&projectNo=02853698&docId=4433158

  3. Thinley w

    From Dec 5th press release:

    “Closing will conclude today, December 5, 2018, with the payment of $1 million to LeadFX less agreed due diligence expenses of $75,000. The sum of $2 million is now due on February 28, 2019 (unless extended 60 days), net of any increase to reclamation bonds on the Chief mineral properties funded by the new owners to a maximum of $360,000. The balance of $1.5 million will continue to be due 12 months from today”

    1. dt

      You are mixing it up. The closing referred in this PR relates to:

      “On July 30, 2018 LeadFX announced it had agreed to sell its Chief Interests to Ruby Hollow LLC and 321888 LLC, unrelated special purpose companies associated with Riverfield Capital, for $4.5 million. Closing will conclude today, December 5, 2018″

      This is unrelated to going private transaction – which seems to take very long to finalize for undisclosed reasons.

  4. dt

    Still no announcement from LeadFX, even though earlier press release kind of promised further communication by the end of December. This is quite worrying.

  5. Neo

    January 11, 2019 – LeadFX Inc. (“LeadFX” or the “Company”) (TSX: LFX) advises that it continues to progress the funding for the closing of the Plan of Arrangement approved by shareholders on October 3, 2018. As previously disclosed, funding will be undertaken by InCoR Energy Materials Ltd., one of the Company’s controlling shareholders. The Company will continue to update investors as funding arrangements are finalized.

  6. financialwhiz

    IBKR is showing a corporate action notice of a reverse split date of March 15th. Looks like this is close to a finish.

    1. dt

      I can see the notice as well, but cannot find any other announcements that would relate to this notice.
      So is the share price run-up based on this notice alone?

      There is still 10% spread, but without any further info on what’s happening hard to take larger position.

        1. Writser

          Not today though. I managed to sell a decent amount of shares at $0.97. Probably holding on to the rest to see what happens. Was a small position anyway.

          Very interesting though. No news at all, only an ‘anticipated reverse split’, not confirmed by the company yet shares are up 35% in a few days. Will be interesting to see who is the sucker here.

  7. dt

    Shares up 25% to C$0.9 but I am unable to find any announcement anywhere yet.

  8. nostradamus

    My corporate action provider (subscription based so no link) reports the depository agent (which is Computershare) has informed them of the following: anticipated effective date 15th of March, anticipated paydate 20th of March.

    not definitive, and these notices can be bogus (like with PGLC recently) but market seems convinced this is a done deal, so this might actually be true. weird the company doesn’t put out a PR though.

    1. nostradamus

      company now says in a PR they are not aware of any material change and no definitive announcement of a closing date can be estimated.

      sounds like someone somewhere made a big mistake.

  9. Writser

    After the company received ~C$1.5m yesterday the buyer finally transferred enough money to the depositary. Looks like the deal is now really really completed.. Turned out great, spread was ridiculous but for sure this deal was a bit risky / sketchy.

    1. dt

      wow. I stopped following LeadFX last month when it seemed to be a done deal. I did not notice the spread had widened again to 30%+.

      This arbitrage situation offered multiple trading opportunities.

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