Yellowhead Mining (YMI.V) – Merger Arbitrage – 8% Upside

Current Price – C$0.81

Acquisition Price – C$0.87 (in stock)

Upside – 8%

Expiration Date – Q1 2019

Acquisition Announcement

This idea was shared by Ilja.

 

This is a very straightforward C$15m mining merger between two Canadian copper miners. Shareholder approval seems to be guaranteed so I expect the transaction to close shortly. The spread is likely caused  by the nano size nature of the deal. Each Yellowhead Mining share will be converted into 1.1481 Taseko shares and current spread stands at 8%. Taseko borrow is available on IB at 3.2%.

 

Shareholder Approval is Guaranteed

Transaction is conditioned on:

• Approval from the Supreme Court of British Columbia;

• Approval by two thirds of the Yellowhead’s shareholders;

• Approval by majority of Yellowhead’s shareholders excluding  Taseko (owns 21%).

The largest shareholder Matco Investments (holding 45.5%) and one of the directors (holding 7.2%) have entered into agreement to support the transaction. On top of that Taseko also owns 21% of Yellowhead. This means, that shareholder approvals are guaranteed  with 73.7% and 52.7% of the votes already in the bag. So only the consent from the court is left which I understand is just bureaucratic requirement.

 

Previous Taseko Acquisition

The only previous Taseko acquisition that I’ve found was the merger with Curis back in 2014. Except for being larger ($73m) it was a very similar deal in a sense that Taseko owned 17% of the Curis prior to the merger and conditions were the same. It was closed within 2 months and I expect this deal to be closed similarly fast.

 

Mining Assets

All except one of Taseko copper mines are located in British Columbia, Canada. Yellowhead’s only asset ‘Harper Creek’ is in relatively close proximity to Taseko’s ‘Gilbraltar’ and ‘Prosperity’. ‘Harper Creek’ seems to have promising copper depositis,  as stated by Taseko:

The Yellowhead 2014 Feasibility Studyproposed a 70,000 tonne per day concentrator with total pre-production capital costs of roughly C$1 billion and an average operating cost of US$1.46 per pound of copper. Using US$3.00 per pound copper, a foreign exchange rate of C$/US$ 0.80, and an 8% discount rate results in a pre-tax net present value of C$1.1 billion.

Thus, in the eyes of Taseko Yellowhead’s acquisition appears like an option, that would allow it to pursue further development of ‘Harper Creek’ by investing additional C$1bn. At it seems to be a relatively cheap option keeping in mind potential upside.

Note: Taseko is listed in both U.S. and Canada. I can find borrow availability for the U.S. listing only, however both listings are similarly liquid and trade at only tiny spread to each other.