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QCS: Dalradian Resources (DNA.TO)—Anatomy of a Takeover

by Lobo Tiggre
Thursday, June 21, 01:13pm, UTC, 2018

Quick Case Study: Dalradian Resources (DNA.TO), a gold stock I recommended back in my Casey days, just received a takeover offer. Is it a good deal? What would I do?

This is an educational opportunity, and I’m aware that my previous employers do not provide company updates on a daily basis the way I do, so I will comment.

Key facts:

  • I recommended the stock a couple years ago at C$0.80.
  • This is a cash offer for C$1.47 per share.
  • The stock was trading at C$1.78 a year ago.
  • The mine is not yet permitted.

This is obviously a big win for those who bought on my initial recommendation, or any of the numerous times I reiterated my buy recommendation below C$1.00. If that’s you, congratulations.

Takeover Basics

After the pricing of an offer, the most critical factor is whether the offer is for cash or shares.

If it’s for cash, it means that as soon as the deal goes through, it’s the end of the story for those shareholders who get bought out. They may get more cash now than what their shares were selling for yesterday, but they don’t retain any exposure to the upside left in future discoveries or when mines get built, etc.

If the offer is for shares of the buying company, shareholders would become shareholders in that company and could still enjoy growth in value as new discoveries are made, the mine gets built, or whenever the buyer does anything else that adds value.

Which is better? It depends:

  • If I paid a lot less than the current offer, it’s a great win that gives me an easy exit, if I want it.
  • If the buying company is a great company I’d want to own anyway and I believe the asset(s) in question have untapped value, I definitely want shares in the buyer.
  • If I had paid more for my shares than the price of the takeover offer and I believe the asset(s) in question have untapped value, I’d want shares in the buyer—unless I was convinced that the buyer was a bad company and would likely fail to add value.
  • If I thought the buyer was likely to fail to add value, even if I believe in the asset(s), I’d likely prefer a cash offer.
  • If I had come to doubt that the asset(s) have untapped value, or that the country the asset(s) are in had become a bad place to do business, I’d likely prefer a cash offer.

In short, if I see a lot of likely additional value in the future, I’d prefer shares that give me a piece of that action.

If I’m worried about the project or don’t like the buyer, I’ll likely take the money and run—unless I have a realistic hope for a better offer.

What to Do?

We don’t get to pick what kind of offer we’re going to get. In Dalradian’s case, it’s for cash. Take it or leave it.

It’s interesting to me that certain major shareholders have effectively exempted themselves from the deal. They will not be forced to sell if the deal is approved, but will retain their ownership. They clearly see more upside in the Dalradian story and don’t want it capped by today’s offer.

If I was a shareholder and certain that Dalradian will get the permits it needs to build its Curraghinalt gold mine in Northern Ireland, I might oppose this offer on this basis. If the smart money wants to stay long, so would I.

However, the permitting has taken far longer than I expected or hoped. There is a risk that the mine will never get built. How great a risk, I can’t say. Before this offer was made, going back to Northern Ireland to assess that risk was on my To Do list. As is, the risk makes the current big win over my entry point very appealing.

This is, objectively, a fair offer.

If I was greatly concerned about Dalradian’s future, I would definitely favor  the offer—but I’d likely hit the bid and cash out today, because the offer might fail.

That’s an important point for those in at higher prices. If this cash offer locked me in at a loss, I might be tempted to hold on and hope the offer fails—or that a better competing bid comes along.

Large gold producers that have been watching Dalradian but felt no hurry to act might now be forced off the fence and offer a better deal. For an asset with the size, grade and potential that Curraghinalt has, that’s certainly possible. But it’s not a sure thing. The lack of final permits is a significant stumbling block. If those permits are denied, this cash offer might be the last, best exit point.

If I had bought on my initial recommendation at 80 cents, I’d be up 81.3% today. Given the uncertainty, and that this is a cash offer that has the support of major shareholders, I would probably sell on this news today, and chalk it up as a win.

All investors must, of course, make their own decisions according to their own cost basis and outlook.

For more analysis of past picks and detailed write-ups on what I’m putting my own money into now, please subscribe to The Independent Speculator.

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