Quick Pitch: OreCorp (ORR:AX)

Merger Arbitrage/Potential Bidding War – 20%+ Upside

This idea was shared by Naman.

 

A potentially interesting situation is unfolding with OreCorp, an Australian-listed gold miner. The company is currently being acquired by its peer Silvercorp. However, another party, Perseus Mining accumulated a large stake in OreCorp and is blocking the merger. While it is far from clear if a bidding war will break out, there is a 20% spread to the SVM’s offer already in place and the downside seems to be minimal at current levels, making this a favorable risk/reward bet.

OreCorp (ORR) is a A$235m market cap company that owns a development-stage gold asset in Tanzania. Here’s a brief timeline of recent events explaining the setup:

  • August 6: ORR agreed to be acquired by the US-listed Chinese mining company Silvercorp. The merger consideration was A$0.15/share in cash + 0.0967 SVM shares. Concurrent with this merger agreement, Silvercorp invested A$28m at A$0.4/share in the company for a stake of 15%. Management (5%) and another shareholder (10%) agreed to vote in favor of the deal.
  • November 23: Silvercorp increased the cash portion of the consideration to A$0.19/share. The offer increase came shortly after the AFR reported that several of ORR’s equity holders were dissatisfied with SVM’s initial bid. After the price bump, the transaction also got support from one of the larger shareholders, Tim Goyder (5%), bringing the total in favor to approximately 20%. That’s 24% of all unaffiliated shares versus the 75% votes cast approval threshold.
  • November 27: Shortly after SVM’s bid increase, Australian-listed gold miner Perseus Mining accumulated a 20% stake in ORR (here and here, at an average price of A$0.525/share). PRU stated that it intends to vote against the sale to SVM while also pointing out that it does not intend to make its own buyout offer.
  • November 30: A couple of days later, ORR postponed shareholder meeting from December 8 to January 18 “to allow Silvercorp and OreCorp additional time for discussions”.

The spread to the revised SVM’s bid currently stands at 20%. The market is understandably skeptical about the prospects of any transaction materializing with both SVM and PRU effectively holding blocking stakes as well as PRU’s intention not to make its own offer. However, a solution to the seeming stalemate could still be found and investors do not pay much to wait another month or two to see how this plays out – why else would SVM/ORR delay a shareholder vote if not to find some kind of solution?

The downside to pre-announcement levels stands at 10%, but ORR is now clearly a coveted asset with two new large shareholders and fresh capital injection. Gold price is also up by 5% since the first bid. So in a no-deal scenario, I do not think the price will drop more than 10%.

I think the market could be underestimating the chances of an acquisition bid coming from PRU. Perseus Mining is a large (A$2.4bn market cap) and well-capitalized gold miner that operates three production-stage assets in West Africa (Ghana and Cote de Ivoire). The company has a proven track record of developing and operating large gold mines in Africa. PRU has completed several African gold asset acquisitions over recent years, and during the recent conference call, management stated that it is looking for ways to deploy its significant cash balance toward further M&A. I think PRU could potentially pursue a somewhat similar playbook here as it did with Orca Gold, a miner with a development-stage asset in Sudan acquired in 2022 for $155m. Back then, PRU made a takeover bid for Orca Gold less than a month after acquiring an initial 15% stake in the company. In contract to the current situation, at the time of the Orca’s stake acquisition, Perseus had indicated that they were engaged in discussions with Orca regarding a potential takeover. However, an important aspect here is that the current merger agreement between SVM and ORR precludes any engagement or granting of due diligence to other parties. 

The Agreement also contains customary deal protection mechanisms, including no talk and no due diligence provisions, (subject to a fiduciary out exception) and no shop, as well as notification and matching rights for Silvercorp in the event of a Competing Proposal. The transaction may incur a capital gains tax payable under Tanzanian legislation. A break fee of approximately A$2.8 million shall be payable by OreCorp to Silvercorp if the Agreement is terminated as a result of certain specified circumstances.

Despite this, PRU seems to be ready to talk and in the recent press release said:

Perseus would, however, welcome the opportunity to engage with OreCorp in order to determine an optimal and expedited pathway for the development of the Nyanzanga Gold Project.

There is also a chance that SVM might increase its bid. SVM seems to be highly committed to the transaction as it has already invested A$28m via private placement, has formed an integration committee, and has put up job listings for senior operational roles in Tanzania. While not necessarily comparable, back in 2020, SVM participated in a bidding war for another gold miner Guyana Goldfields, where SVM raised its acquisition bid from C$0.60/share to C$1.30/share before eventually walking away.

A little bit of background on OreCorp. The key gold asset is the underground/open pit Nyanzaga God Project in Tanzania. A definitive feasibility study for the asset was completed last year. The projected NPV stands at $618m (at $1750/oz gold price) while the mine life has been estimated at 10.7 years. Total pre-production capital cost is estimated at $474m (vs A$23m in ORR’s net cash). First production is targeted in 2025. Tanzanian government holds a 16% free-carried interest in ORR’s subsidiary that holds the special mining license.

The valuation of ORR is complex due to the nature of its key asset—a development-stage gold mine in Tanzania. However, a significant increase in the price above the current bid levels appears unlikely given that SVM’s recent price bump was insignificant. Moreover, the fact that a substantial portion of ORR’s equity holders supports SVM’s increased bid suggests that there may not be much room for a materially higher offer.

 

11 Comments

11 thoughts on “Quick Pitch: OreCorp (ORR:AX)”

  1. I do understand the skepticism, especially given the number of blocking shareholders that have prevented mergers in general coupled with the fact that ORR would struggle to raise development capital on a standalone basis.

    From Perseus’ perspective – with reference to their 2nd last slide on the corp. deck – ORR’s asset fits directly into their M&A playbook. Their most recent investment in Sudan had to be reassessed before CAPEX spend due to ongoing conflict, they are likely to generate more cash flow in the 3-4 months it takes for a deal to close here than the implied consideration and they have too much cash, if that ever was a problem with a risk of a decreasing production profile. Perseus also has about 350 koz of gold hedged at US$2,030/oz and hedge 25% of production.

    Although there are other targets in Cote’d Ivoire where they do operate (specifically Montage Gold and Tietto Minerals), they seem open to operating in new jurisdictions within Africa. The government of Tanzania was very supportive of Silvercorp – The Chinese government talking with the Tanzanian government behind the scenes would make this interesting, I wonder what the diplomatic channels between the two are like.

    Chinese investment in Tanzania has grown (in their own words) remarkably large, providing enormous funds for such industries as manufacturing and agriculture, as well as mining.

    It makes it look like the Chinese government, and/or the Party, might have been behind encouraging SVM to bid for a mine in Tanzania as part of this international country agreement. China’s investment in Tanzania has now reached $4 billion per year, and the Chinese are being encouraged to invest there.

    My guess is the following  – Silvercorp increases the cash component of the offer (they recently filed an NCIB and did start some buyback). I would guess they would increase to a max of A$0.25 cash with a total implied value of A$0.65. Perseus will then come in with a A$0.70 cash offer or walk with a small gain.

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  2. Silvercorp (SVM) has pivoted approach to ORR acquisition. Initiated a bid implementation deed (BID) with A$0.19 cash and 0.0967 SVM shares. BID essentially is an off market takeover offer which means only 50.1% of votes needed to tender. SVM needs 30.1% to get maximum 50.1% (board committing 3.94% and SVM owning the rest). Shares were last trading at A$0.57 which is the implied offer price.

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    • Thanks for the update. I think this increases the chances of a bid from PRU – otherwise, they would be stuck in an entity that is controlled by the Chinese.

      With shares trading at the implied offer price, I think the risk is minimal to wait a couple of weeks to see if Perseus will make a move.

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  3. OreCorp issued a press release today stating it has become aware of a media report in Tanzania that senior Australian representatives from Perseus have recently held discussions in Tanzania with representatives from the Tanzania Ministry of Minerals regarding Perseus’ investment in OreCorp’s Nyanzaga Gold Project. The media report advises that several matters have been discussed, including taxes, royalties and import duties.

    Perseus currently holds 19.9% of OreCorp’s share capital. Perseus previously advised
    OreCorp confidentially of its proposal to travel to Tanzania to introduce Perseus, as
    OreCorp’s largest shareholder to the Minister responsible for mining in Tanzania and
    other government officials. Previously, Perseus also confidentially expressed its interest
    in exploring potential funding structures with OreCorp to support the development of
    Nyanzaga, but did not provide any further details on the form such funding may take.
    OreCorp confirms that it has not participated in any discussions between Perseus and
    any Tanzanian government officials.

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  4. PRU has just made a competing all-cash offer for ORR at A$0.55/share, only 4% above SVM’s current offer. ORR’s board has unanimously determined that the PRU’s proposal is not superior to SVM’s. ORR is now trading at A$0.55/share.

    This is a bit disappointing – at least I was expecting a larger premium from PRU. It will be interesting to see how the situation develops further. We now have a firm share price floor set by the two largest shareholders, both of whom have expressed a strong interest in ORR and its mining assets.

    At current terms, it does not appear that either bid is truly “full” or will be able to secure the necessary majority acceptance. I would anticipate at least one or two offer bumps over the next few weeks. SVM is clearly in a weaker position (smaller company, limited cash, and a slightly lower stake), but I find it hard to believe that PRU went through all the trouble of acquiring a 20% stake near current levels, performing due diligence, and making the offer only to end up in a stalemate.

    However, a no-deal scenario is a big risk at this point if neither of the parties bids higher nor supports the offer by the other. Moreover, given the bidding dynamics so far, incremental bumps are likely to be minimal. That probably explains why the market is not too excited either.

    PRU’s offer is substantially similar to SVM’s and also has a 50.1% acceptance threshold. The Bidder’s Statement will be sent out at the end of the month, after which the offer will be launched.

    SVM’s stock-and-cash offer currently stands at A$0.53/share, which is below the initial value of A$0.589/share due to a decline in SVM’s share price.

    Naman, interested in any additional insights you might have on the situation.

    PRU’s offer – https://orecorp.com.au/upload/documents/investor/asx/240122032403_240122Perseusannouncementregardingintentiontomaketakeoverbid.pdf
    ORR’s response – https://orecorp.com.au/upload/documents/investor/asx/240122032620_240122-ResponsetoPerseusannouncement.pdf

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    • Hey dt, spot on! ORR has a funny table showing premiums of 1.9% to 4.0% to SVM’s implied offer, emphasizing that their offer is in cash and is liquid.

      The board has rightly informed Perseus that the offer is not superior. Perseus reported Quarterly financials today (stock is up over 5%) reporting US$642M cash + US$60M in investments. Almost half of their closing CAD market cap with strong cash flow

      The transaction makes strategic sense. ORR traded with significant volume at A$0.57 most of yesterday and today. The expectation is that Perseus will increase the offer but I see it as being between A$0.57-A$0.60 given their capital discipline. I believe SVM also lack the financial capability to bid higher.

      With a minimal spread left, I have chosen to exit at this point and would recommend closing the idea. The strategic rationale and the long term value add remains in a pro-forma Perseus.

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  5. SVM has recently reported that around 4.3% more shareholders have accepted its bid, increasing the Chinese buyer’s stake in ORR to 20%. These acceptances are quite surprising given that SVM’s offer now stands at A$0.525/share, below PRU’s all-cash offer at A$0.55/share and ORR’s current price of A$0.57/share. SVM has also received approval from Tanzanian regulators, which was the last regulatory hurdle remaining. Moreover, two days ago SVM added a new board member specializing in cross-border financing and M&A transactions.

    While the Chinese buyer is solidifying its position in this bidding war, I’m a bit surprised that we haven’t seen another raise from PRU in an attempt to win the board’s approval. With the additional shareholder acceptance of SVM’s offer, the chances of PRU making a move a diminishing. With ORR shares still materially above SVM’s cash+stock offer, the risk/reward is no longer attractive.

    Naman’s (author of this idea) recommendation on Jan 24 to exit this trade, seems to have been spot on.

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  6. Perseus has now offered A$0.575 per share in cash. Perseus owns 22% of the company and has received statements of intent from two shareholders holding 15.6%. If Silvercorp is not able to match the offer or increase it, Orecorp board will recommend the latest Perseus offer as the best option for shareholders.

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  7. Not sure if anyone is still tracking this, but the conclusion to the ORR saga has been rather unsurprising. Silvercorp has withdrawn from the takeover battle and lowered the stake in ORR from 21% to 16%, after it failed to cross the required 50% minimum participation threshold. In turn, ORR’s management has terminated the merger with SVM and recommended equity holders to accept PRU’s improved off-market takeover bid at A$0.575/share. PRU has so far accumulated a 48% stake in ORR (vs the 50% minimum acceptance condition). PRU’s tender offer expires on April 19. ORR shares trading just below PRU’s offer levels.

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