Description

Summary

Osino Resources (OSI.V), a Canadian gold exploration and development company focused on Namibia, presents a compelling short-term merger arbitrage opportunity. It has a signed acquisition agreement with Chinese-based Yintai Gold (000975.CN). The all-cash transaction, worth C$1.90 per share, is somewhat misunderstood by markets given its small size, convoluted background to the transaction, and perceived regulatory risk. 

This is a simple way to clip a relatively low-risk 7% return in approx. 4-6 weeks, and appropriate for smaller funds. 

Investment Thesis

1. Attractive Spread: As of the date of this post, OSI is trading at C$1.78, which represents a 7%% return to the transaction value of C$1.90 per share. Assuming a July 15, 2024 close, this is an annualized return of over 100%. 
   
   

2. Cover bid Presents Downside Support: Yintai Gold's offer represents a 32% premium to a previous offer from Dundee Precious Metals (DPM), which Osino terminated to pursue the Yintai deal. Given the recent rally in gold and based on DPM’s current price, their original share and cash bid is worth C$1.64 today, representing just 16% downside from OSI’s current price. 
   
   

3. Credible Acquirer: Yintai Gold is a leading Chinese gold producer with a market capitalization of US$6 billion and a track record of successful M&A activity (Eldorado Gold’s White Mountain and Tanjianshan mines). Yintai’s major shareholder (29% of shares O/S)  is Shandong Gold, a prominent player in the industry with a track record of M&A activity of its own (Ghana focused Cardinal Resources, Barrick Gold’s Veladero mine in Argentina). Yintai has US$610 million of cash on its balance with only $185 million of debt against it, meaning it has cash on hand to pay for the entirety of Osino Resources.
   
   As a further sign of support and investment in Osino, as part of its acquisition, Yintai made an immediate cash infusion of US$10 million for operations and working capital needs, and for full reimbursement of the termination fee paid to DPM.
   
   

4. Regulatory Risk Is De Minimis: As discussed below, this deal has higher perceived regulatory risk, but it has nearly all been fully addressed, with just a perfunctory Namibian approval remaining. 

Why Is the Spread Wide? 

1. Regulatory Risk: There is perceived regulatory/closing risk on the transaction that is generally summarized by jurisdiction as follows:
   
   Canadian Regulatory Risk
   In 2020, Shandong Gold bid for Canadian based TMAC Resources, and was rejected by the Canadian government on national security grounds. Instead, TMAC Resources went to Canada based Agnico Eagle Mines. The key differentiator here is that TMAC’s primary asset is the Hope Bay property, located in Nunavut. Thus, the asset was located near the sensitive Arctic circle, and also took place at a time when global tensions between Canada, China and the U.S. were peaking with the possible extradition of Huawei CFO Meng Wanzhou and the imprisonment of two Canadian citizens in China.
   
   To complicate the OSI transaction, the company owned a lithium exploration asset in Namibia called Omaruru. This is noteworthy as the Canadian government considers lithium to be a “critical mineral”. The Canadian federal government’s position is that critical minerals that receive foreign investment, particularly by foreign state-owned enterprises and foreign-influenced private investors, will be subject to close scrutiny and will only be approved on an exceptional basis – requiring that the transaction result in a net benefit to Canada. It is also worth noting that in November 2022, the federal government required three foreign investors in Canadian critical mineral companies to divest of their interests:
   
   

   1. Sinomine (Hong Kong) Rare Metals Resources Co., Limited is required to divest itself of its investment in Power Metals Corp.

   2. Chengze Lithium International Limited is required to divest itself of its investment in Lithium Chile Inc.

   3. Zangge Mining Investment (Chengdu) Co., Ltd. is required to divest itself of its investment in Ultra Lithium Inc.

When the Yintai transaction was first announced, the Omaruru lithium project caused many investors to be wary of the transaction and there was much discussion about it from the analyst community. However, if one read through the Arrangement Agreement, one would see that both Osino and Yintai had recognized the potential and/or perceived regulatory risk associated with Yintai’s acquisition of this ‘critical mineral’ asset and had therefore stipulated that as a covenant, Osino agrees to use commercially reasonable efforts to spin out or otherwise dispose of the asset.

On March 21, 2024 – Osino announced the divestment of Omaruru to Prospect Resources, for consideration of just US$75,000, to give a sense of the size and value of this ‘asset’. As such, OSI no longer owns any critical mineral rights, and the size of the transaction renders it below the threshold for Investment Canada Act regulatory approval requirements. Thus, no additional Canadian regulatory approvals are required.

Chinese Regulatory Risk
The Yintai Gold transaction required approval from three Chinese regulators. The merger arb community often perceives Chinese regulatory approval to effectively be a ‘free out’ (i.e. the acquirer or target can ask the Chinese government to block the deal if they change their minds for whatever reason). In this case, the risk is greatly defused as OSI has received all three approvals (SAFE, MOFCOM, and NDRC) as of May 31, 2024.

Namibia Regulatory Risk
This is the only regulatory risk remaining. The Namibian Competition Commission has published a Merger Guidelines (found here: https://www.nacc.com.na/cms_documents/820_merger_guidelinesapril16.pdf). If you read through the guidelines, and look at historical rulings, one can quickly see that the NCC is very pragmatic, focused on approving transactions that do not result in the prevention or substantial lessening of competition, does not result in the acquisition of a dominant position in the market, and does not raise public interest concerns. They also look to investment in the country and job creation, of which Yintai’s balance sheet and progression of the Twin Hills’ project will certainly bring. There is a good discussion of that at this article: https://theextractormagazine.com/2024/06/10/i-will-look-for-new-mining-opportunities-heye-daun/.

By reviewing their website and reading news articles, one can see that the NCC meets every 1-2 months to review and approve transactions, with their most recent meeting taking place in April 2024. It has also been reported that Yintai Gold officials including its president visited the Namibian Prime Minister in Windhoek in March, pledging to strictly adhere to Namibian laws and regulations,  creating value for all stakeholders. 

We believe the Namibian Competition Commission’s next meeting will take place later this month or early July, with an approval and transaction closing to follow shortly thereafter. Notably, OSI’s CEO, Heye Daun, is already on the lookout for his next opportunity in Namibia or elsewhere.

Conclusion

OSI offers investors a quick way to earn a reasonable 7% return over 4-6 weeks, with nearly all regulatory approvals in hand, shareholder approval received, Canadian court approval, no financing risk, and a credible and motivated buyer. We recommend purchasing shares. 

Catalyst

Namibian Competition Commission approval and transaction closing in the next 4-6 weeks.