Quick Pitch: Osino Resources (OSI:V)

Merger Arbitrage – 9% Upside

This is a merger arb with 9% spread and 2-3 months timeline till closing. I had a pitch drafted on this setup back in March when the transaction was announced. However, the spread quickly narrowed and I had to postpone it. Now the spread is back again to earlier levels, whereas the risks are lower, so I think it is quite a timely opportunity.

Osino Resources (market cap of C$300m) owns a construction-ready gold project in Namibia. The company is in process of getting acquired by the Chinese gold mining giant Yintai Gold at C$1.9/share in cash. The stock currently trades at C$1.75/share. The transaction has already been approved by Osino’s equity holders, and the necessary regulatory approvals in China and Canada have also been secured. The only remaining condition is approval from the Namibian Competition Commission, which is expected to clear the transaction shortly. Merger is set to close sometime in August / early September.

Yintai Gold is a serious buyer with US$6bn market cap and a track record of large gold asset acquisitions. The most notable one was $600m acquisition of Canada-listed Eldorado Gold in 2016. Yintai Gold is backed by China’s state-owned second-largest gold producer Shandong Gold ($7bn in annual revenues). The risk of the buyer walking away seems minimal.

Last week, Osino issued an update on the status of transaction. The only outstanding approval is from Namibian Competition Commission and management notified that the regulator had requested additional information before issuing any decision:

After receiving the third of 3 Chinese regulatory approvals on May 28, 2024, competition law clearance from the NCC remains the only outstanding approval to conclude the Arrangement.

In connection with that review, the NCC has recently sent additional clarifying questions to the Company and Yintai, which additional questions are part of the NCC’s ongoing analysis of the Arrangement. Pending conclusion of the NCC’s review, the NCC will make its recommendation to the NCC Board for a final decision on the transaction.

It is expected that the transaction will be considered for determination at the next sitting of the NCC Board, which is anticipated to occur in late July or early August. The NCC’s final decision with respect to the Arrangement is thus expected by early August, or at the very latest by the end of the statutory review period, i.e. early September, 2024

While the market apparently sees some risk with Namibia’s antitrust approval, I find it difficult to justify this concern for several reasons:

• Yintai Gold currently does not own any assets in Africa. Its backer Shandong Gold doesn’t own any assets in Namibia. Any pure competition-related concerns are automatically out of the question.
• China and Namibia have a robust economic and political partnership. China is Namibia’s second-largest trading partner and comprises the majority of Namibia’s total foreign direct investment inflows (42% in 2021). Blocking this relatively smallish deal on political grounds also seems highly unlikely.
• Regulators have previously approved Chinese investments even in much more strategically sensitive sectors. China National Uranium Corporation acquired 69% stake in a Namibian uranium mine from Rio Tinto in 2018. Yahua Industrial bought majority stakes in four Namibian lithium mines for $145m in 2022.
• The only notable blocked merger over the recent years was West China’s acquisition of Ohorongo Cement in 2020 (at least that is the only I have managed to find). However, the transaction was blocked because West China held a stake in one of Ohorongo Cement’s competitor, whereas Yintai Gold owns no assets in Africa.

The availability of precedent transactions where NCC had asked for additional information is somewhat limited. But it doesn’t look like such requests are something unusual or indicative of potential objection:

• One reference point is this fresh “Mergers Under Investigations” document (June 24) from the Namibian Competition Commission. It outlines that including OSI there were 5 transactions filed with the regulatory agency a month or more ago. Regulatory decision has to be made in 30 days after filing the application – as it takes already longer than a month to see a verdict, all of these other 4 transaction have also likely received requests for additional information.
• Another notable example is the acquisition of Namibia Breweries by Heineken International. The merger was highly scrutinized by the antitrust watchdog. At the time, Heineken already owned 49.99% stake in Namibia Breweries and also had significant presence in Africa through its Heineken South Africa subsidiary. The review took months and the regulator even decided to host a stakeholders conference in 2022. The deal was eventually approved, albeit with conditions, including “no retrenchments of employees below management level for five years, products consumed in Namibia must be manufactured or at least bottled in Namibia, and the creation of an MSME Development Fund.”
• The aforementioned deal between China National Uranium Corporation and Rio Tinto in 2018 also had a prolonged review. It was eventually approved, but with the following comments:

The commission said the proposed transaction was “unlikely” to impede competition, but it “does give rise to significant public interest concerns”, including employment, the bundling of tenders for outsourced service, goods and/or products, transfer pricing, and the dominance of the local uranium sector.

The pending takeover of Osino Gold appears to be much more straightforward than the aforementioned transactions. My current view is that the regulator simply wants to clarify some public interest related details or maybe just do some posturing for the public eyes before giving the approval.

 

A few more details

• Osino Gold trades on TSX Venture exchange, with somewhat limited trading liquidity.
• Downside could be substantial (30%+), especially if the deal falls through due to any unforeseen regulatory wildcard. However, this seems very unlikely at this point.
• OSI operates four gold projects in Namibia located in the 8000km2 territory owned by the company. The key asset is the Twin Hills Gold Project, which is ready for construction. Definitive feasibility study was published in Jun’23 and permitting process for the asset has been virtually completed. Project’s NPV at 10% discount rate and $2000 gold price was estimated at C$670m (US$492m) versus the buyout price tag of C$368m. The discount rate used for the NPV is too aggressive, but gold price is almost 20% higher now.