Current Price: C$1.31
Offer Price: C$1.53
Expected Closing: Q3 2021
Presentation and Press Release
On the 21st of June, Gold Royalty announced an acquisition of its peer Ely Gold Royalties in cash and stock. Assuming everyone ops for cash option total consideration will be C$0.42 incash + 0.1742 GROY shares. At current prices, this presents a 17% upside opportunity, while the closing is expected Q3. Approval from 2/3rds of ELY shares cast + majority of the votes cast by disinterested shareholders (ex. management) will be needed. Management owns 5%. The largest ELY shareholder – Eric Sprott (Canadian billionaire who specializes in precious metals investments) owns 22% of ELY and has agreed to vote in favor of the merger. The meeting is set for the 17th of August’21. 30k shortable shares for hedging are available on IB at 5% annual fee.
ELY has listings in Canada and U.S. – the Canadian listing is more liquid. The downside to pre-announcement price stands at 23%, so the risk-reward is fairly comparable, while the likelihood of successful close is significantly higher.
The buyer appears credible. GROY is a relatively new company – was spun-off from GOLD.TO in June’20 and IPO’ed in March’21 at $5 per unit. Apparently, the IPO was so successful that the company had to raise the financing limit twice – from $30m to $90m. The company is led by chair/CEO David Garofalo – former president and CEO of Goldcorp which was sold to Newmont for $10bn in 2019 – and former CEO of Hudbay Minerals ($2bn market cap). GROY is now focused purely on expanding its royalties portfolio through accretive acquisitions. With ELY they are getting large royalties/projects portfolio in low-risk locations, primarily Nevada and Quebec, while a substantial portion of GROY assets are in Latin America. Moreover, the buyer also gets instant exposure to ELY’s cash flow from 4 of ELY’s income-producing royalties (3 royalties generated $0.7m revenues in March’21), while a few more projects are in advanced stages of development already. GROY expects that the increased scale will provide easier access to capital markets to fund further growth, re-rating of the stock price, and increased interest from larger investors. Overall, I think the risk of the buyer walking away from this transaction is low.
ELY’s shareholder approval is a bit bigger risk. Just last month the company was arguing that its share price at 0.84x NAV is undervalued relative to peers at 1.3x+. The offer is now pricing the company just slightly above 1x NAV. ELY shareholders will own 45% of the combined company, even though ELY’s portfolio looks far larger than GROY’s and has already producing royalty streams. Ely’s CEO, who seems to be highly incentivized to close the deal has recently issued an open letter to shareholders agitating to approve the merger and stating that GROY assets are more “longer-term” and “well-endowed with gold and copper resources”. He also provides insightful comments on the general royalty market outlook:
The prices being paid for royalties today exceeds the value that the market currently places on ElyGold’s assets. Purchasing royalties at current prices has the effect of diluting the value of our current holdings, in most cases, for lower quality assets. Given these competitive market conditions, ElyGold’s board of directors elected to start a process to explore strategic alternatives in December 2020. […] The hidden story with this transaction is the coming consolidation in the royalty space. There are too many junior royalty companies and not enough good royalty deals to go around. In addition, the majors are competing for smaller transactions due to reduced deal flow.
The consents from management and Eric Sprott substantially increase the likelihood of approval. A more impressive pedigree of GROY management, scale benefits in the current royalty market, NYSE listing, and better chances of reaching index inclusions (both were the key ELY goals for 2021) could also incentivize shareholders to approve the transaction.
Merger consideration is presented as C$1.46/share in cash or 0.245 GROY shares subject to a maximum cash consideration cap at C$84m and a maximum 41.5m GROY shares to be issued. At the moment it’s not clear how the proration calculations will be carried out and the numbers for the scenario where all shareholders elect to receive cash have been taken from the PR. More information should be included in the upcoming management’s issuer circular (expected mid-July).
ELY comparison with peers (June pres.)
Potential re-rate forecast (merger presentation)
Royalty portfolios (merger presentation)
7 thoughts on “Ely Gold Royalties (ELY.V) – Merger Arbitrage – 17% Upside”
Shortable GROY shares are currently not available on IB.
borrow fee at 20% is eating into it.
8-12-21: Elect cash or stock, deadline. (company deadline, broker deadline probably earlier)
8-13-21: Vote by proxy, deadline.
8-23-21: Expected closing.
Cash = C$1.46 x .8 = U$ 1.17. Stock = GROY U$4.90 x 0.245 = U$ 1.20 (up or down on 8-23).
If cash oversubscribed, limited to about 29% cash + 71% stock.
ELYGF bid/ask now = U$ 1.04/1.05, or 13% spread. If 29% cash portion is deducted from U$1.04, GROY/ELYGF spread is about 20%, ie GROY can drop 20% for this arb to still break even. 20% is also to be the spread of the two new gold company merger arb deals posted by SSI today 8-5-21 under quick ideas, although the 3 deals are of very different market caps.
“Please also note that, in order to receive the consideration for your Ely Shares and to elect to receive
the Cash Consideration or the Share Consideration (subject to pro-ration and adjustment in
accordance with the Arrangement), you must submit the enclosed letter of transmittal and election
form, together with your share certificates, by the deadline provided, being 4:30 p.m. (Pacific Time)
on August 12, 2021 ….
Shareholders who do not make an election as to their preferred form of Consideration will be
deemed to have elected to receive the Share Consideration. “
Combination has been approved. Those who elected to receive cash will receive 0.099166 of GROY, plus C$0.869053.
It looks like there were not as many applicants for the cash alternative than expected, and for those who elected to receive cash, return on this trade will likely be higher than expected.
Pursuant to the Arrangement, GRC will acquire all of the issued and outstanding Ely Gold Shares. Based on the elections received from Ely Gold Shareholders and after pro-rationing and adjustments in accordance with the Arrangement, each Ely Gold Share is expected to be acquired by GRC in exchange for 0.2450 of a GRC Common Share, plus $0.0001 for Ely Shareholders who elected, or were deemed to have elected, the Share Alternative; and 0.099166 of a GRC Common Share, plus $0.869053 for Ely Shareholders who elected the Cash Alternative.
Merger approved by shareholders 8-17. About 50% of all shares voted, and almost 100% voted yes.
As expected, cash election is oversubscribed, but unexpectedly fewer cash election. Thus, cash electors will get approx C$86.9c, or U$69.5c, plus approx .0992 of GROY shares (trading about U$5 last week, now $4.60), total U$1.16 if GROY shares hold.
Stock electors, or non-electors, will get .245 of GROY shares, or U$1.13 at current prices.
So far, a successful arb. For cash electors, assuming ELYGF cost of U$1.05, GROY shares can drop to U$3.50 and still break even.
Expected merger completion is 8-23. Right now 8-18, about 10am, I think one can still buy ELYGF shares at U$1.00, and get GROY shares in 3 days or so, worth U$1.13. For a 13% gain if price holds. I think this arb exists until at least this week while ELYGF is still trading. (Not sure, please do your own diligence if interested.)
As GROY/ELY merger has now closed we are removing this arbitrage from active ideas with 19% gain in 1.5 months – the return is slightly higher than indicated the write-up’s heading as not all shareholders chose the cash option and cash allocation turned out to be 2x higher than expected initially.
Even more surprising was the existence of a double-digit spread after shareholder approval, as highlighted by Terence above.
In hindsight, the remaining spread after shareholder approval seemed justified, as it’s taken longer for ELY shareholders to receive their GROY shares, and the cost of borrow (for hedging) has been very high.
So far, those with accounts at IB haven’t received their GROY shares yet, and if unhedged have been bearing GROY price risk for more than a week.