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).   

 

1. IMZ ASSETS:

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

2. DEAL STRUCTURE:

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

3. WHAT'S THE FAIR VALUE OF TOTAL DEAL CONSIDERATION?

3A. Chaparral Gold - SOTP

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

• 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

• Current Share Price: C$2.75 
• (-) Cash Consideration: C$2.52
• (=) Implied Value of Chaparral: C$0.23

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.  

Deal closes - expected 6 December 2013.