Current Price: C$10.85
Offer Price: C$13.88
Upside: 28%
Expected Closing: Q4 2021
Presentation and press release
Less than two weeks after we successfully closed the Ely Gold merger arbitrage case, Gold Royalty announced two more similar acquisitions – Abitibi Royalties and Golden Valley Mines. Both transactions are a “package deal” as Abitibi is a 2011 spin-off of Golden Valley and the parent still owns a 45% stake in Abitibi. Quick idea on Abitibi’s takeover is posted here.
On the 6th of September, Gold Royalty announced a definitive acquisition of Golden Valley in an all-stock transaction coming in at 2.1417 GROY shares for each share of Golden Valley. GROY seems like a credible buyer with an accelerating acquisition spree to grow its royalties’ portfolio and is unlikely to withdraw the offer. Conditions include consent from 2/3rds of Abitibi shareholders and also approval from the majority of the target’s minority shareholders. Management owns 29% and so far it’s not clear if any of these shares will be excluded from the minority vote. More information will be detailed in the upcoming circular. Nonetheless, given the initial support and all-time high price, I expect that shareholder approval to pass easily. The meeting date is set for the 29th of October. The downside to the pre-announcement price is 34%. Borrow for hedging is available at 24% but is limited. Closing is estimated in Q4’21 (likely early November), so even with these borrow costs ample upside on the trade remains.
The remaining 44% stake in Abitibi is the most valuable asset of Golden Valley due to Abitibi’s exposure to several Canadian Malartic Mine’s (largest open-pit mine in Canada with an annual production of 700k oz and AISC of C$800-C$900/oz) royalties. The key royalty Odyssey is already in the construction phase and is expected to have at least 18 years of mine life. Overall, GROY should be highly incentivized to add these assets to its portfolio amidst the consolidating gold royalties industry. On top of that, Golden Valley also has smaller stakes in two junior miners Val-d’Or Mining (38%), International Prospect Ventures (11%), both of which were also spun-out from the company, and a few NSR’s in early-stage projects.
Some more info on GROY and its targets can be found on Abitibi Royalties merger arbitrage write-up.
Gold royalties market is consolidating and as put by ELY.V CEO (previous GROY acquisition) it is getting substantially more difficult, even for larger players, to find quality assets. Hence, GROY is highly incentivized to get their hands on Abitibi’s core assets – royalties in Canadian Malartic Mine, which it says “will become a significant cash flow generator for the combined company” (PR):
The acquisition of Golden Valley and Abitibi Royalties represents a very compelling extension of our strategy by adding royalties over the world class Canadian Malartic mine – a generational asset that will continue to deliver gold production for decades to come.
The Canadian Malartic Mine is a pure-play on gold with an annual production of ~700k oz and ASIC (all-in sustaining costs) well below the industry average ($800-$900/oz). The key royalty is a 3% NSR (net smelting return) over the Odyssey Underground project, which is already in the construction phase. The Odyssey mine is expected to become Canada’s largest underground mine with an 18-year mine life with the potential of beyond that. As confirmed in the recent update, the construction seems to be ahead of schedule and below budget.
A full list of royalties/projects/properties for sale can be viewed on the company’s website.
GROY
The company has started the acquisition spree after its IPO in March and aims to re-rate with the increased scale. Worth noting that unlike most micro-cap royalty players the company seems to have a heavyweight management team – GROY’s CEO is the former CEO of Goldcorp ($10bn market cap) and Hudbay Minerals ($2bn market cap).
The combined company (including both Golden Valley and Abitibi Royalties) will have 191 royalties including in 6 cash flowing and 7 near-term cash flow and 14 development stage projects.
Very interested in hearing other opinions on why the spreads are so large on RZZ and GZZ deals, when ELY/GROY just closed successfully
Is this just a matter of gold mining Canadian small-caps listed on Venture exchange and cross-border all-stock mergers with expensive borrow for hedging or are we missing something else here?
(when I wrote this down, it looks like plenty of caveats already, however, ELY case was quite similar)
Looking at the smaller spread in the RZZ (18%) deal vs GZZ (28%) , I speculate that target shareholder approval risk and whether management shares will be excluded from the minority vote might explain the wide spreads in both deals.
The spread for RZZ is smaller because the risks mentioned above are relatively smaller, with 65% of shareholders already supporting the deal.
My view is that management shares will not be excluded in the minority vote. So I think the release of Circular can be an catalyst for spread narrowing.
Actually I believe these risks are the same for the two deals because approval of both deals is a condition precedent for each of them.
The spread for GZZ is higher mostly because there is a lot more downside if the deal fail. GZZ traded at a large discount to RZZ before the merger announcement.
Borrow cost on GROY exploded higher towards the end of the ELY deal. Got up to around 80 or 90% as I recall. I managed to make money, but after that experience I am not rushing into these deals. Of course these Canadian mining stocks don’t seem like the kind of thing I would like to be unhedged on.
GROY was up 20%+ on very heavy volume two days after the announcement and has stayed up. This had the effect of widening the spread further. GROY/GZZ has traded at a wider spread than GROY/RZZ announced at the same time. I have/had short $2.50 January calls on GROY that have been getting assigned to me. I can’t see what could be missing but the spread and stock behaviour does seem atypical.
The spread isnt as large as it appears IMO. The stock has gone up since the write up. It’s about a 7% spread for RZZ (after adjusting for borrowing costs, which is 6% if we assume this transaction closes in 3 months and its 15-17% for GZZ likewise after adjusting for costs and depending on when it closes.)
The trade I like best here is long GZZ short RZZ in a ratio of 2.15 GZZ to each share of RZZ. Borrowing cost for RZZ is under 1% and I believe is less likely to blow out and destroy your economics than hedging with GROY. Ive been getting about a 7% spread. If the deal fails then of course there is farther to fall for GZZ based on the pre-deal prices.
I like this trade a lot as I think GZZ and RZZ both have very trustworthy management a very good sense of what their shareholders are going to vote.
In general though, I’m doubting whether it makes a lot of sense to hedge these kind of mergers. Mainly because adding a short leg:
1. Increases the margin requirement at least 2x, basiscally reducing your IRR by at least half.
2. Adds borrowing costs of currently 20%-30% annually
3. Creates a risk of higher borrowing cost near the closure of the deal
4. Creates a risk of being closed out (forced) of your short if there aren’t enough shares available
Are these disadvantages really worth it to reduce volatlity? Does it add alpha on average? I mean does the short leg on average create a profit? I think it’s an interesting discussion, would welcome any thoughts on it.
14% spread remains on GZZ / GROY merger – part of it will be eaten by the expensive borrow. Recent update release confirms that GROY is serious about this and is putting effort to persuade both GZZ and RZZ shareholders to support the transactions.
https://gvmroyalties.com/2021/09/27/gold-royalty-abitibi-royalties-golden-valley-update-exploration-mine-development-driving-business-forward/
Here is a recent interview with both CEOs on the merger: http://www.metalsnews.com/t1377951i
Quote on the shareholder vote and timing:
“Dr. Allen Alper: Well, that sounds excellent. David, could you tell us a little bit about the timing?
David Garofalo: There will be a circular mailed, in the coming couple of weeks, to the shareholders of Golden Valley and Abitibi. There will be a shareholder vote, called by both companies, and that’s expected to happen in either late October or very early November. This is a plan of arrangement, so we expect it to close, within a couple of days of the shareholders meeting. I should add that we have tremendous support from the shareholders of both companies, 65% of Abitibi shareholders have signed support agreements and 38% of Golden Valley’s key shareholders signed support agreements as well. We feel like we’re going to have tremendous support at the meetings when they do take place.”
The circular is out. 38% of shareholders support the deal. Only 7.4% will be excluded from the minority vote, so 33% of minority votes are already guaranteed. The meeting will take place on the 29th of October.
15% spread remains.
https://www.sedar.com/GetFile.do?lang=EN&docClass=10&issuerNo=00015953&issuerType=03&projectNo=03286791&docId=5056844
GZZ/GROY spread has narrowed down to 4.6% and we are closing this idea with a solid 19% return in 1.5 months after borrow fees. While it is likely that shareholders will vote in favor of this deal, it might take another month before Canadian shares get converted into GROY stock. Due to expensive GROY borrow it no longer pays off to keep the position open.
@Vinn’s quote of David Garofalo (see above) indicated that the deal would close “within a couple of days of the shareholders meeting”.
For the conversion of Canadian shares to GROY, I believe that in the Ely Gold case it took much less than a month.
And I think we may be able to accelerate the process even further, by proactively requesting Interactive Brokers to do the conversion to GROY immediately after we receive the Canadian (unlisted) stocks in our accounts.
By default, IB waits until they find out (after random amount of time) that the Canadian stocks would not get a listing in Canada, and then mandatorily do the conversion for us.
I don’t think it will take another month. In my comment above I cited the CEO saying: “ This is a plan of arrangement, so we expect it to close, within a couple of days of the shareholders meeting.”
GZZ and RZZ are expected to be delisted today.
“The shares of each of Golden Valley and Abitibi Royalties are expected to be delisted from the TSX Venture Exchange effective as of the close of market on November 5, 2021.”
https://www.goldroyalty.com/news/news-releases/gold-royalty-abitibi-royalties-and-golden-valley-complete-combination
%3 spread existed until the close. At 30% borrow anxious to get my GROY shares and close this one.
I think the conversion will be processed quite fast on IB, they already changed the symbol to a temporary placeholder for the new shares (in the correct amount).