Guyana Goldfields (GUY.TO) – Merger Arbitrage – 7% Upside With Considerable IRR

Current Price: C$1.73

Offer Price: C$1.85

Upside: 7%

Expected Close: August 2020

Press Release

This idea was shared by Brian.

 

Guyana Goldfields, a small gold miner incorporated in Canada (listed on TSX), is getting acquired by a Chinese mining giant Zijin Mining for C$1.85/share in cash (C$320m in total). Conditions include 2/3rds of shareholder approval as well as regulator approvals from China and Canada. The shareholder meeting will take place on the 31st of July. This acquisition is tiny to the buyer, while financing is not a problem – consideration will be paid from the current cash balance of Zijin ($1.2bn at Dec’21). Regulatory approval won’t be an issue, while given operational struggles and huge shareholder value deterioration in the last several years, it seems fair to assume that most shareholders will be prone to cash out at 2.6x pre-COVID price. More or less this seems like a done deal and given quick expected closing (August), provides an interesting opportunity with attractive IRR.

Since Jan 2016 GUY produces gold in its flagship Aurora mine located in Guyana, South America.

Zijin ($17bn market cap) has already made a similar acquisition this year – in March it closed the acquisition of Continental Gold for C$1.3bn. The proposal was structured very similarly (all cash + liquidity investment) and required the same regulatory approvals (PRC + Investment Canada Act). Continental was also a Canada-incorporated gold miner with its primary asset in Colombia, South Africa (set to start production in 2020). The transaction closed in 4 months. In 2018 Zijin made another acquisition in Canada – Nevsun Resources (copper-gold project in Serbia, zinc-copper in Africa) for C$1.8bn.

So overall, Zijin seems like a credible buyer that is employing an aggressive expansion through acquisition strategy (is also currently targeting a 50.1% stake in a certain Tibetan miner for $550m) and has a track record of completing its transactions. Given that a definitive agreement has been signed already the chances of Zijin walking away are low.

I believe receiving the approvals should not be a problem – regulatory requirements are the same as in the Continental Gold acquisition (which was 4x larger transaction) and the mine is located outside of Canada (thus unlike to face issues similar to TMAC transaction here).

The only major shareholder is Sentry Investment Management (owns 11.6%), while management holds only 0.2% of the target company. Shareholder approval seems likely given the proposal is priced at 2.6x pre-COVID trading price of GUY and 35% premium to Silvercorp’s cash/share bid (refused to provide a matching proposal to Zijin’s). However, it should be noted that before 2019 the company used to trade materially higher:

The fall to current share prices has been a result of several operational problems (workforce strike, cuts on production guidance, higher than expected costs, the decline in reserves, proxy fight with the founder, etc.). In 2019 Aurora mine struggled with its largest mining pit Rory Knoll that failed to provide a steady and sufficient supply of high-grade ore. This resulted “in low-grade ore being added from stockpiles and ore being mined from the satellite orebodies to feed the plant” and, in turn, lower efficiency. Moreover, the company is now in a transition from the open-pit mining to underground mining and in order to prepare for the next phase, it has suspended (mid-June) the operations for 1-2 quarters, which will further impact the financial performance of the company (expects to have c. C$80m cash flow deficiency in 2020, so if the deal breaks, financing raise will be needed).

So taking into account the recent operational struggles, and projected cash burn, it seems that shareholders should be incentivized to approve the offer.