November 28, 2013 - 6:01am EST by
2013 2014
Price: 2.75 EPS $0.00 $0.00
Shares Out. (in M): 118 P/E 0.0x 0.0x
Market Cap (in $M): 325 P/FCF 0.0x 0.0x
Net Debt (in $M): -52 EBIT 0 0
TEV ($): 273 TEV/EBIT 0.0x 0.0x

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  • Merger Arbitrage


Simple merger abbitrage idea.  Deal should close next week (effective date 6-Dec-13) and there is at least 6% gross spread (and up to 22% - see below) and essentially zero deal risk (note: the IRR is very high - >1,000% assuming 6% gross - but I think it's not especially meaningful given the short time capital will be deployed here).  Please also note, there is a Swiss listing for the stock which is currently trading at CHF2.35 (C$2.75 at current FX), which is a small discount to the Canadian line.  The shares are fungible, so I'd recommend the Swiss line for those interested in the trade (cash consideration for the deal is US$ denominated and IMZ's cash balance is US$ so the FX exposure you are really taking here is US$ regardless of whether you trade the CAD line or the CHF line).   
Simlistically, IMZ has three assets: 
  1. A producing silver mine and a silver development project in Peru.  IMZ is the minorty partner in both assets with a 40% shareholding.  Hochschild Mining (London listed) is the majority partner (and operator of the assets) with a 60% shareholding; 
  2. Two pre-production gold projects in Nevada; 
  3. Cash & Receivables (receivables comprised of consideration from another asset sale earlier this year). IMZ has no debt


Hochschild Mining (IMZ's partner in the Peruvian assets) launched a takeover bid for IMZ in early October.  The transaction is friendly.  Hochschild only wants the Peruvian assets and therefore the deal was structured such that IMZ shareholders will retain ownership in the Nevada gold projects and the Cash & Receivables.  The deal structure is that each IMZ share will receive:  

  1. US$2.38 cash (C$2.52 at current FX); and
  2. one Share in SpinCo (called Chaparral Gold).  Chaparral Gold will retain the Nevada Gold assets, IMZ's Cash & Receivables


3A. Chaparral Gold - SOTP

The real question is what is Chaparral Gold worth?  Chaparral has three assets: 

1. Cash: US$45m (C$0.40/share) 
  • Please note: this is pro-forma for transaction expenses and other seperation costs as disclosed by the company.  The actual cash number in the most recent financial statements is higher  
2. Receivables: US$13m (C$0.12/share) 
  • IMZ closed the sale of certain assets in Ecuador in June 2013
  • Total consideration for the sale was US$28m, payable as follows:  
    • At Closing (Jun'13): $10m (this payment has already been received)
    • No later than Dec'14: $5m
    • No later than Jun'15: $9m
    • Upon commencement of commercial production: $4m (note: this payment is uncertain and is not included in the $13m receivables)
  • The receivable of $13m represents the NPV of the Dec'14 and Jun'15 payment ($13m is the amount on the balance sheet)
  • The $4m payment is carried by the company as a non-current receivable ($2m value) but is not included in the $13m amount above
3. Gold Development Projects
  • This is the most uncertain part of Chaparral's value
  • The first project - Gemfield - had a feasibility study completed on it in June 2013.  The project had an NPV of $92m (@$1,350/oz gold)
  • The second project - Converse - is earlier stage.  It has 5.5 million ounces of Measured and Indicated Gold Resource but to date has no feasibility study
3B. Implied Value of Chaparral Based on Current Share Price
  • Current Share Price: C$2.75 
  • (-) Cash Consideration: C$2.52
  • (=) Implied Value of Chaparral: C$0.23
The implied value of Chaparral (C$0.23/sh) is currently trading at a 40% discount to cash backing of C$0.40/share (i.e. ascribing zero value to the Receivables and zero value to the Gold Development projects).
3C. Fairness Opnion Valuation
As part of the transaction IMZ commissioned a Fairness opinion.  The Fairness Opinion concluded that the fair value of Chaparral was C$0.58 to C$0.85/share.  
The ultimate return depends on the valuation of Chaparral (SpinCo).  The table below shows three scenarios.  I think the "Cash backing only" scenario (i.e. Chaparral trades at the value of the cash on its balance sheet) should be conservative.  The other two scenarios are the low and high valuation in the Fairness Opinion respectively (please note: the Low valuation in the fairness opinion is only modestly above Cash + Receivables): 
1. Cash
Backing Only
2. Fairness Opinion
3. Fairness Opinion 
Cash Consideration C$2.52 C$2.52 C$2.52 Cash consideration to be received from Hochschild
Value of Chaparral C$0.40 C$0.58 C$0.85 Cash backing only for the first scenario.  Low and High Fairness Opinion Valuation for case 2 and case 3 respectively
Total Consideration C$2.92 C$3.10 C$3.37  
Current Share Price C$2.75 C$2.75 C$2.75  
Gross Return 6% 13% 22%  

  • IMZ shareholder Vote: 26-Nov => deal was approved (>99% of votes in favour)
  • Hochschild Shareholder Vote: 28-Nov => this is a formality.  Eduardo Hochschild, the major shareholder with >50% shareholding, has entered into a voting agreement to support the transaction
  • Court Approval: 2-Dec
  • Effective Date: 6-Dec

The risks to completion of the transactions should be very low.  Hochschild knows the assets it is looking to acquire very well (it is currently operator of the assets) and there are synergies available to Hochschild once it completes the transaction (predominantly, the ability to consolidate certain other assets with tax losses which will shield taxable income from the producing mine as well as certain other G&A savings).  The remaining mechanics of the transaction should be a formality - Eduardo Hochschild has signed an agreement to support the deal (and contributed additional equity as part of an equity raising Hochschild has already done as part of the transaction) and there are no issues that should result in the court not approving the transaction.  

The main risk I think is a material fall in the silver price, which could result in Hochschild walking away from the transaction or trying to renegotiate price.  I think the risk of this is very low given the timetable, namely the Hochschild EGM is tomorrow and the court date is Monday.  

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.


Deal closes - expected 6 December 2013.  
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