IDM Mining (IDM.V) – Merger Arbitrage – 13% Upside

Current Price – C$0.06

Merger Consideration – C$0.068

Upside – 13%

Expected Closing – March 2019 (shareholder vote on the 8th of Feb)

This idea was shared by Ilja.

 

All stock nano cap merger between two Canadian junior gold mining projects.

IDM Mining is being acquired by Ascot Resources in an all stock transaction for 0.0675 AOT/share. The deal is conditioned on approval by two thirds of the target company’s shareholders and no more than 10% exercising their dissent rights. So far the agreement with shareholders (management and the largest holder Osisko Gold) that hold 19% has been signed.

The deal comes with the risks usual to junior miners with no-producing assets and only paper plans about the bright future lying ahead. I consider IDM shareholder approval very likely which leaves us with the risk that Ascot will walk away for one reason or another.

Shareholder meeting is set for the 8th of February. Borrow is at 20% and IB at the moment has shares available on both Canadian and pink sheets listing of Ascot. As IDM is trading at increments of C$0.005, the bid/ask spread is wide (C$0.06 is the ask price at the time of writing).

 

IDM Mining

IDM Mining (previously Revolution Resources) is tiny (MC = C$30m) exploration company with only one mining asset – Red Mountain project. Since the IPO in 2010 the company has not done anything much other than acquiring a few projects, drilling here and there and later dropping them while constantly raising equity financing and diluting existing shareholders. Share price declined by 98% since then.

• In 2009 acquired StorGold with the main asset being an option to acquire 65% of Nuurkfjord in Greenland. In 2013 the company has elected not to participate in the project further on.

• In 2010 acquired 90% of Champion Hills in North Carolina. In 2015 IDM elected not to purchase or extend the lease periods on these properties.

• In 2011 acquired 60% of Montane de Oro in Mexico and in 2012 bought three additional concessions in the area. In 2013, the company has elected to abandon all of the properties.

• In 2016 has acquired Yukon Properties from Osisko (currently largest shareholder) and sold the project in 2017.

And even the current Red Mountain project, for which the option agreement was signed in 2014 and exercised in May 2017, is not moving forward very reliably at all. The feasibility study has been done back in 2017, then also some additional drilling was conducted in 2018, but in the most recent M&A has stated that their current plan is to update the study done in 2017. In almost 2 years there has been almost no progress with the project.

A big head-scratcher for me here is why would Ascot be interested in buying IDM (at C$35m in stock) where the main asset (Red Mountain) was acquired for c. C$3m in cash and stock and which still carries potential C$5.5 royalty liability if development is successful. Any investments in Red Mountain to date can probably considered a waste, as feasibility study needs to be updated again and there have not been any parties interested to develop the project further after the last 2017 feasibility study. But I am not a junior miner expert, so maybe there is something very attractive in the Red Mountain or any other smaller assets that IDM owns.

 

Shareholder approval very likely

Two major shareholders are Osisko Gold (owns 18.2%) and Ruffer (12.8%) and Osiko has already agreed to vote in favor of the deal even though their cost basis is well above current merger consideration. All the dillutive equity raises over the last years have been made at a significant premium to current acquisition price. Shareholders are likely fed up with the managements’ incompetency and value destruction over the 7 years and are willing to get out. So overall it’s hard to imagine why IDM’s shareholders might not willing to participate in the merger.

On top of that, Ascot has also agreed to provide C$3.5m bridge loan to IDM in order to provide liquidity till the deal closes. If the deal breaks, the loan (with an interest rate of CDOR + 9% per annum) will become payable within 30 days or six months of termination, depending on the circumstances. IDM likely has no way to repay this – cash balance was only C$4m as of July 2018 and company was burning C$2.5m+ per quarter. Thus in the absence of merger IDM shareholders will face another dillutive equity raise or bankruptcy. Seems like voting in favour of the merger is a better option.

 

Ascot Resources

Ascot Resources is a junior exploration company focusing on re-starting the past producing historic Premier gold mine  located in British Columbia’s Golden Triangle. It has some other assets in the portfolio, however no operations have been started yet.

Ascot management’s track record is also quite spotty, but as Ascot share price shows shareholder value was not destroyed as much as at IDM. Most of the management comes from Quadra FNX – large copper miner, which was acquired by the Polish peer KGHM in 2012. Reportedly, C$3bn transaction was was met with disappointment by many analysts and investors, surprised that the company is selling when its stock is mired at such a low level.  One of the shareholders has commented: “This would be one of the most heavily discounted deals I’ve come across in recent history”.

Similarly to IDM the company is struggling to advance with its projects. The main asset Premier for which the company has signed the option agreement in 2009 and fully acquired in 2018 does not seem to be moving anywhere so far.

Ascot has recently raised C$10m convertible notes (with C$1.5 exercise price) part of which was used for IDM bridge loan.