Viva Gold (VAU.V) – Merger Arbitrage – 38% Upside

Current Price: C$0.285

Offer Price: C$0.392

Upside: 38%

Expected Closing: early May 2021

Information circular

This idea was hinted by Tom.

 

Yet another merger of junior mining companies. Golden Predator is acquiring Viva Gold at 1.6 GPY shares per each VAU share. Conditions include approval by 2/3rds of VAU shareholders. Target’s directors own 18% and will support the merger. The meeting is set for the 3rd of May and the merger is expected to close shortly after that.

Borrow availability for hedging is limited – IB shows 18k shortable shares available on Golden’s OTC listing at a 2% fee. Despite that, this trade seems viable even without hedging as VAU shares are currently trading around the historical lows with pre-announcement price at C$0.25/share. Thus, the downside seems to be rather limited, while the size of the upside and expected short-term closing is interesting.

Till recently, the spread used to hover around 10% and has steadily widened to the current levels during the last two weeks. Despite such price volatility, there has been no negative news regarding the merger or the companies involved. On the contrary, at the end of March, shareholders’ meeting date was announced indicating a rather short expected closing time.

 

Positive points

• Buyer’s management seems relatively credible. GPY’s CEO William Sheriff was a co-founder and chair of Energy Metals, which was sold for $1.6bn in 2007. The merger will expand GPY’s measured and indicated resources by 41% while diluting shareholders by 30%.
• Shareholder approval seems likely, given the support from Viva Gold management. Additionally, it was stated that during previous offers from GPY earlier this year (1.35 GPY per 1 VAU, later increased to 1.45 and then to the current ratio) management has consulted the largest shareholder and decided that the price has to be raised. It wasn’t stated who this largest shareholder is, however, if it is not affiliated with the management, the board’s agreement with the recent 1.6 exchange ratio would also indicate support from this particular shareholder.
• Another positive is that the current offer is a result of prolonged negotiations in which the buyer made multiple offers for VAU with the latest exchange ratio considerably above the initial offer of 1.35x. This adds some confidence to the firmness of GPY intentions.

 

Some concerns related to this merger

• The reason behind the recent widening of the spread is still unknown. It is possible that I am missing something important here.
• Although takeover interests in VAU had been expressed already in mid-2019 and the company has received numerous interests since then, including one from a “major gold producer with nearby assets”, no firm proposals have materialized except for the current one.
• The strategic rationale is not exactly clear here. Usually, junior miner mergers are done between two firms with nearby properties in order to reduce costs, etc. However, GPY and VAU properties are quite far away from each other – Tonopah (VAU) is in Nevada, US and Brewery Creek is in Yukon, CA. Although the companies claim that they expect certain cost synergies, with the assets being in different countries and thousands of miles away from each other, it’s likely that the impact won’t be meaningful.

 

Viva Gold

The company owns Tonopah Gold Project in Nevada. Preliminary economic assessment has been completed in mid-2020 and the project is currently in the pre-feasibility stage.

 

Golden Predator

GPY owns Brewery Creek project in Yukatan. Feasibility study is expected to be completed in Q3’21.