Merger Arbitrage: 19% Upside (at C$0.425)
This is a merger arbitrage setup with a wide 19% spread and an expected closing in March 2026. The spread appears to exist due to rather vocal opposition from retail shareholders in online discussion forums. However, I think the market is overestimating the odds of rejection, and the deal is likely to close successfully in a few months. If I am wrong and the transaction gets cancelled or voted down, the losses on this arbitrage would be material.
Lithium South Development is a junior lithium explorer with a portfolio of mining concessions in Argentina. A definitive feasibility study is underway for its three most advanced assets, and the question of funding for construction had been looming for some time. After negotiations with multiple mining and financial groups, the company announced a sale to POSCO, the South Korean steel and battery metals giant. POSCO will acquire all operating assets of LIS for US$65m, after which management will return the proceeds to stockholders by redeeming all common shares at C$0.505. The remaining entity will be delisted and liquidated. LIS trades with a 19% spread to the announced redemption price. Trading liquidity is limited with C$140k daily volume.
Motivation for POSCO to complete this acquisition is quite evident. The buyer operates a large lithium mine adjacent to LIS’s assets. In addition, two of LIS’s 11 concessions (Norma Edith and Vía Monte) are already held in 50/50 operating partnerships with POSCO. The buyer expects meaningful synergies from leveraging its own existing infrastructure for LIS’ assets. POSCO initially offered US$62m, but after several months of due diligence, increased the offer to the current US$65m before signing the final agreement.
Regulatory issues are unlikely given the existing POSCO operation in the country as well as small size of the merger in relation to the Argentina’s total lithium production. LIS is expected to deliver 15.6k tonnes of lithium carbonate equivalent (LCE) annually. Argentina’s total lithium capacity is estimated at 186k tonnes of LCE this year and is expected to increase to 450kt. POSCO itself is projected to produce 50kt of LCE next year, rising to 100kt by the end of the decade. Several other players also operate large assets in the country, including Rio Tinto (50kt capacity) and Ganfeng (150kt).
As for the shareholder approval, the standard threshold in Canada is consent from two-thirds of votes cast. LIS has no large holders that could form anything close to a blocking stake. The buyout comes at an enormous premium to the pre-announcement prices of C$0.20/share. Even adjusting for the ~50%+ rally in lithium mining stocks (mostly due to increase in lithium prices) since the discussions were first announced on July 22, the implied premium offered for LIS is still large.
The takeover follows the reported funding/strategic discussions with multiple parties, suggesting this was likely the best option available for LIS. No other bidders have emerged publicly since POSCO’s offer. It’s hard to see why shareholders would vote against this transaction thereby risking a renewed search for funding partners and a materially lower share price.
So far this looks like a merger with a very serious buyer and a highly attractive spread/IRR. But there is one notable caveat. On Canadian retail shareholder forums (e.g. CEO.CA) some holders are calling the deal too cheap and vowing to vote against it. Retail investors bashing takeovers online is not unusual, and I’ve seen plenty of similar cases with vocal dissatisfaction in online investor forums that were ultimately approved. On its own, this would not be concerning.
However, what is unusual, is that during POSCO’s due diligence period in August, LIS issued a press release stating it is taking legal action seeking an order compelling CEO.CA to disclose the identities of three forum posters (“R1505”, “78Brooks” and “Amiga500”) over allegedly defamatory and misleading statements, with the intention of filing a lawsuit thereafter. No further details on the litigation have been disclosed so far. All three posters remain active and continue to agitate against the transaction.
Given these oddly aggressive steps by LIS, the opposition might be larger than it appears. It’s hard to tell how much voting power these commentators actually represent, but I just don’t see any serious risk of the deal being voted down. Also, the undervaluation arguments presented on investor forums largely boil down to four points, none of which strike me as compelling:
- One argument is that US$65m is far below the US$704m post-tax NPV10 cited in LIS preliminary feasibility study (released April 2024). This comparison is somewhat misleading. The study used lithium price of US$20,000/t, versus roughly US$14,000/t today even after the recent rally. It also used a 10% discount rate, which feels too low for mining assets in Argentina, a country that just issued 4-year government bonds, with cut-off yield of 9.26%. Inflation in Argentina is running north of 30%, meaning capital and operating costs by the time construction starts might be way above 2024 PEA estimates even in US dollar terms. I’m not in a position to calculate the actual NPV, but today it is certainly far lower than the figure from the preliminary feasibility study.
- Some forum posters point to US$/tonne metrics, noting that POSCO is paying roughly US$41 per tonne of estimated reserves, compared with some historical lithium deals at US$200+/tonne. This is a very blunt metric that ignores underlying economics entirely. Reserves can be large but difficult/expensive to extract, or slow to develop. More importantly, most of the cited transactions occurred in 2022–2023, when the lithium market was booming with metal prices at roughly five times current levels.
- Another argument seen on Canadian investor forums is that C$0.505/share merely reflects net sale proceeds after tax, transaction costs, and purchase option payments for 2 concessions. However, on top of proceeds from POSCO, LIS will also receive C$10m+ in cash from the exercise of in-the-money warrants and options. Some posters argue this cash should also be returned to shareholders. However, that argument overlooks the expenses for severance of LIS executives as well as wind-down, and liquidation costs. After these costs (likely to be in the range of C$5 – 10m) there may be room for a couple of cents in shareholder distributions, but that hardly justifies rejecting the deal and risking a 50% downside.
- POSCO was initially considering a US$62m offer in July. Lithium peers are up ~50% since then, and yet the offer price for LIS was raised by only 5%. I think this is the most valid undervaluation argument, but you have to take into account that the initial US$62m most probably already reflected a certain level of normalization/increase in Lithium prices over longer term.
Ultimately, I view the odds of outright rejection as fairly low. Even if opposition gains traction, it would not be surprising to see POSCO return with a sweetened offer, given the clear strategic fit of the acquisition and their willingness to raise the price once already.
The retail shareholders can easily derail the process.
If voter participation is very low (e.g. 20m shares), then the dissent shareholders need to gather just 6.6m shares to vote down the proposal. I would expect that the “against votes” are much more likely to vote.
It’s also not clear whether the company’s estimated net proceeds are based on the more favorable official Fx rate or the more expensive Fx rate implied by a “blue chip swap” maneuver.
If the former, there’s possibility that they are not able to secure it in a timely fashion and have to resort to the latter.
20m shares would be extremely low participation. Seems unlikely, although I haven’t been able to find historical turnout for prior shareholder meetings. Looks like the company doesn’t disclose that. Overall, any available details are quite limited. Hope they file the takeover circular soon.
15-25% is the historical norm for junior miners with mostly retail shareholder base.
We don’t have data for LIS, but the voting data of Standard Lithium (SLI), Critical Elements (CRE), Lithium Bank (LBNK) support this expectation.
This coming vote will be much heated, so turnout may go up to 30-35%, but I expect the against votes rallied by the dissent shareholders will contribute to most of the incremental turnout.
Proxy is out, shareholder meeting will be held on February 19. Spread is at 15%.
“Subject to obtaining the required approvals of the Securityholders, the Court and the TSXV, it is likely that the Transactions will be completed on or about March 16, 2026”
https://www.sedarplus.ca/csa-party/records/document.html?id=b6ec066eeaaf8f390a86776d1e0de5e99cfd5ad8bdc24e5449e5caca861b705a
Has anyone received voting instruction from Interactive Brokers?
These came in today at IB.
Management sent out a new reminder for the February 19 shareholder meeting date. 2 interesting tidbits from the quote below: 1) management implies there would be “considerable execution risk and significant Shareholder dilution to attract capital given prevailing market conditions.” if the deal fails; 2) noted that “To date, no competing offers have been received.”
“Since acquiring the HMN Project in 2017, the Company has advanced the asset through exploration and development despite significant market fluctuations. The HMN Project is currently at the Preliminary Economic Assessment (PEA) stage and advancing it to a full Feasibility Study and construction-ready status would require substantial additional capital; an option the Board determined would entail considerable execution risk and significant Shareholder dilution to attract capital given prevailing market conditions.
The Board, after careful consideration of all available alternatives, including continued project development and further financing, unanimously concluded that the negotiated transaction with POSCO represents the most attractive and certain path to maximize Shareholder value. The Sale of Subsidiary provides immediate liquidity and value certainty at an attractive valuation, avoids the risks and dilution associated with further development financing, and reflects the culmination of a thorough, multi-year strategic review process. To date, no competing offers have been received.
In anticipation of a positive outcome at the Meeting, the Company is working with Posco Argentina SAU, on certain closing documents to expedite closing of the Sale of Subsidiary to ensure that Securityholders will receive their respective consideration pursuant to the Going Private Arrangement as quickly as possible after the Meeting.
If the Sale of Subsidiary and the Going Private Arrangement are not approved at the Meeting, the Company will be required to complete a corporate restructuring which may include a share consolidation and/or further shareholder dilution in the form of private placement or debt offering to fund the project to the next level of development.”
https://www.lithiumsouth.com/posts/lithium-south-provides-update-on-annual-and-special-meeting-of-securityholders-on-february-19-2026/
I cannot found the news from Sedarplus so I copy paste from stockwatch :
Looks like the vote failed if we read this part correctly “all of the securityholders of the Company which includes the shareholders, the holders of incentive stock options and holders of common share purchase warrants collectively voted 48.10% in favour of the Going Private Arrangement.”
——-
Lithium South shareholders approve all matters at AGSM
2026-02-20 12:40 ET – News Release
Subject: LIS News Release Word Document
File: ‘\\swfile\EmailIn\20260220 091831 Attachment LIS AGSM Results.docx’
Lithium South Announces Results of its
Annual and Special Meeting of Securityholders
February 20, 2026 / Vancouver, BC / Lithium South Development Corporation (the “Company” or “Lithium South”) (TSX-V: LIS) (OTCQB: LISMF) (Frankfurt: OGPQ) is pleased to announce the results of its annual general and special meeting (the “Meeting”) of securityholders held on February 19, 2026.
The shareholders voted in favour of all items of business presented at the Meeting, including: (i) the arm’s length sale by the Company of all of the issued and outstanding shares of its wholly-owned subsidiary, NRG Metals Argentina S.A., which holds a 100% ownership interest in the Company’s Hombre Muerto North Lithium property located in Salta Province, Argentina (the “Sale of Subsidiary”), (ii) the plan of arrangement (the “Going Private Arrangement”), (iii) the election of directors, (iv) the appointment of Davidson & Company LLP, Chartered Professional Accountants auditor, and (v) the re-approval of the option plan.
Shareholders voted 74.47% in favour of the Sale of Subsidiary and 87.74% in favour of the Going Private Arrangement. In addition, all of the securityholders of the Company which includes the shareholders, the holders of incentive stock options and holders of common share purchase warrants collectively voted 48.10% in favour of the Going Private Arrangement.
A total of 64,932,858 votes were cast by holders of common shares representing 51% of the total issued and outstanding Shares as of January 5, 2026, the record date for the Meeting.
Director Nominees
Votes For
% of Votes Cast
Adrian Hobkirk
53,277,588
87.48%
Christopher P. Cherry
45,372,431
74.50%
Gordon Neal
45,887,669
75.34%
Adrian Hobkirk, President and CEO of the Company, states: l
The Company expects to receive the final order from the Supreme Court of British Columbia shortly regarding the Going Private Arrangement. The closing date of the Sale of Subsidiary and the effective date of the Going Private Arrangement will be scheduled in March 2026, including the payout of the cash consideration pursuant to the Plan of Arrangement, and will be announced in a further news release, subject to the final approval of the TSX Venture Exchange.
On behalf of the Board of Directors
Adrian F. C. Hobkirk
President and Chief Executive Officer
Investors / Shareholders call 855-415-8100 / website: http://www.lithiumsouth.com
Incorrect. The previous sentence to the one you quoted says 74.5% in favor of the sale and 87.75% in favor of going private. The headline of the article says all matters were approved.
I couldn’t edit my message, I had misread the paragraph, sorry.
74.47% and 87.74% refer to % of votes casts.
48.10% refers to % of all of the securityholders of the Company which includes the shareholders, the holders of incentive stock options and holders of common share purchase warrants.
Still 6.3% spread. Any reason not to hold this to completion?
FX remittance from Argentina could be a risk.
The closing date has been set for April 7, and the spread has now fully closed.
https://www.accessnewswire.com/newsroom/en/metals-and-mining/lithium-south-announces-closing-date-of-april-7-2026-1154047