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.

 

7 COMMENTS

  1. Terence

    US otc listings bid/ask: seller Viva Gold VAUCF 22.8c-26.2c, buyer Golden Predator 18.2c-19.5c. Illiquid and huge spreads. Merger price at 1.6sh x buyer shares. Using worst possible trades: 18.2 x 1.6 over 26.2 = 11% upside. Best possible trades: 19.5 x 1.6 over 22.8 = 37% upside. Midpoint 24%.

    Vancouver exchange probably more liquid.

  2. Terence

    Sometimes in the US otc market, right after you place an order, an automatic competing order with a 1c or 0.1 or 0.01c better price will pop up.

  3. N-A-IC

    Just for ease of future lookups, Viva Gold is VAUCF, Golden Predator is NTGSF.

    If you own US OTC stock, will you be given US OTC stock in return post merger for this kind of thing? Or will you be given GPY.V stock? (Sorry, new to this.)

  4. Tomuk

    Junior mining mergers are always risky due to their size, overall lack of visibility, and sometimes questionable strategic rationale. However, a lot of them are closing successfully lately and this one seemed quite interesting given those positive aspects, limited risk and high spread. I’m not sure what do you mean by “a defensive tactic like that” – 2/3rds requirement is completely normal in Canadian mergers and, moreover, this one didn’t even include a condition of consent from majority disinterested shareholders (which are also quite common in similar mergers), whereas 18% support from directors was already guaranteed. Probably the biggest red flags here were the lack of strategic sense and the fact that other buyers, including some “major producer with nearby assets” refused to buy Viva. In the end, I’m not really sure why it fell apart, however, as I expected, the prices did not move much and I have closed my position (hedged) with around 1% gain. Unhedged position would have resulted in a modest 9% loss.

    3

Leave a Reply to Tomuk Cancel reply