As part of my first impressions on Anaconda's proposed acquisition of Orex here, I considered the terms of the acquisition. The key facts are that Anaconda plans to issue 0.85 shares for each unit of Orex, so that “Anaconda and Orex shareholders will own approximately 54.9% and 45.1% of the combined company, respectively, on a non-diluted basis". What can we say about this conversion ratio?

One perspective is that the cost of acquiring a company should, generally, have something to do with the value of combined entity. A model for cash flow of the combined entity is important to check that the combination actually makes sense, but that is a bit beyond me and I am not convinced that such a fundamental valuation is even the right question for this friendly, all-share deal between two junior mining companies

I see Orex and Anaconda as a merger of equals, with very different characters. I say "equals" because the share prices and share counts are similar. Anaconda has a bit of debt, approximately $550K from generous Government lending programs, but both companies have been funded with equity, as is typical for juniors. 

I say the companies have different "characters" because of their assets. Anaconda has an operating mine that allows the company to bootstrap exploration and development at other sites nearby. They have a nice pipeline of projects at different stages of exploration and development. In contrast, Orex has a flagship property called the Goldboro Project, which has a long history of mining and exploration. Orex has prepared several technical reports on Goldboro and even produced a PEA in 2014, which is useful for estimating some costs the combined company may face to develop the project.  

Shares in both companies have traded close to each other over the last few years. The Orex shares bumped along at a penny over the last few years, while Anaconda shares traded down to a nickel. Shares for both companies clearly suffered from the extended bear market in resource markets. They rallied together in H1 2016, but then started to diverge in H2 2016 as Anaconda retraced the rally and Orex continued upwards. People on CEO.CA seemed to suggest there was some promotion going on for Orex, but I don’t know about that. The recent high tick at 8C for Orex marks a substantial run for the shares. 

During December, Anaconda shares traded around 5C while Orex shares traded around 4C. There is some wiggle room in those numbers, but I would point out that Orex shares were 80% of the value of Anaconda shares at that time. This may figure into the acquisition terms. It is generally inappropriate to compare share prices alone, but it may be simple enough to work here because both companies had similar share counts at same time.

Anaconda reported 209M shares out in November while Orex reported 202M in December. The 0.85 conversion ratio implies 171M new Anaconda shares will be issued to Orex shareholders in the acquisition, which provides the 45% stake that Orex shareholders will have in the combined company.

In January 2017, Orex shares traded around 6.5C for a market cap of $13M and Anaconda shares traded around 7.5C for a market cap of $15M. The ratio of those market caps is 0.85, which suggests that the Anaconda acquisition price was set “at the market”.  

Although the acquisition did not have a premium at the time, I would point out that Orex shares had run substantially prior to that. A comparison of the two prices shows that Orex shares had broken their close historical relationship to Anaconda shares in H2 2016, which may suggest that there is some sort of premium baked into Orex’s share price. I don’t think it is a deal breaker from Anaconda’s perspective, but I am cautious that Orex shares may continue to run and lead shareholders to reject Anaconda’s initial offer as that could derail a good opportunity for a friendly merger of two companies that fit together nicely.

Another way to see the rally in Orex shares is by comparing the price per share to established gold resources per share. At the end of December 2016, Orex had a market cap of approximately $8.5M (200M shares at 4C). The Goldboro project has approximately 425,000 ounces of gold (Measured and Indicated at 2.5g/t cutoff), which translates to a ratio of $20/ounce of gold. With OX at 6.5C per share, that ratio increases to $30/ounce of gold. That is still a cheap way for Anaconda to acquire ounces of gold in the ground, but I would be curious to see how it compares to other possible acquisitions that Anaconda looked at. Did Anaconda look for the cheapest ounces, or was there something else driving their decisions?

Based on all of this, the proposed acquisition looks reasonable. Anaconda is not paying a large premium to the market, but Orex shareholders still benefit from the run in prices prior to the offer. In fact, the run in Orex shares seems to coincide with news from the company in December that they established a special committee review all options open to the company. Orex seems to have an audience in equity markets who listen and act on their news. I look forward to the time when they shift their attention to Anaconda following the proposed all-share acquisition.