Great Bear Resources (GBR.V) has entered into a binding agreement with Kinross Gold (KGC, K.TO) whereby the latter will acquire all outstanding shares of Great Bear for C$29 in cash and/or stock as well as a contingent value right.
Breaking down the value of the Kinross offer
The C$29 per share is ‘fixed’: no matter what happens to the project, the shareholders will have an option to elect to take C$29/share in cash or 3.8564 shares of Kinross per share of Great Bear or any mix of both. The catch is that there will be a pro-rata calculation as Kinross has earmarked a maximum cash amount of C$1.4B (75% of the consideration) and a maximum amount of shares representing 40% of the consideration. That’s the theory as the 95.8 million maximum Kinross shares that will be issued are including the 15 million Kinross options that will be issued to swap for the 3.9 million outstanding Great Bear options. So in reality, Kinross will only make 80.8 million shares available for Great Bear shareholders.
As long as 60-75% of the Great Bear shareholders elect to take the consideration in cash, every single shareholder will receive what he or she asks for. It’s a different story if for instance, 80% of the shareholders want the cash, as that means only 75/80th will be paid in cash with the remainder in shares which includes a risk related to the share price of Kinross Gold. If the share price of Kinross would be moving up, taking the Kinross stock would represent more than C$29 per share of Great Bear but this obviously also works vice versa: if the Kinross share price moves down before the deal closes, the share consideration will be lower than the C$29/share. In Great Bear’s case, we would elect cash over the share option.
The Contingent Value Right
Kinross Gold is also issuing a Contingent Value Right, a vehicle we often see in pharma deals. This basically means there will be an additional bonus payment upon meeting certain milestones. In Great Bear’s case, the owners of the CVR will be entitled to 0.133 shares of Kinross upon starting commercial production on a 8.5 million ounce resource in the measured and indicated categories. As commercial production is likely still about a decade away, this CVR contains a timing risk (if you’d discount the theoretical value of C$1 by 10% per year for, say, 8 years, the present value is C$0.43) but also an execution risk. If Kinross outlines 8.4 million ounces when it starts commercial production, the CVR will be worthless. So while C$1/share may be the theoretical value of the CVR, the real-life value will likely be a fraction of that.
As such, we consider the CVR to be of very little value, unless you’d consider it as a free call option on the Kinross share price. But in the greater scheme of things, the CVR seems to be designed to be able to promote the sale as a C$29 + C$1 = C$30 deal.
We are not selling our shares yet as a third party might emerge
This also means that if a third party would come along and offer C$30/share, the Great Bear board of directors would likely HAVE to consider a C$30 cash offer to be a superior bid. Additionally, the break fee of C$85 represents just under C$1.5 per share of Great Bear. This means that if another party shows up with a C$30 cash offer and the willingness to pay the break fee, there would easily be a superior offer on the table that would cost a third party only C$31.5/share, just to beat Kinross.
As such, we are not selling our shares yet and are waiting to see how things unfold. If there’s a third party keen on acquiring Great Bear, then this would be the right moment to step forward and we could see an old-fashioned bidding war. But of course, this strategy could backfire if our bluff gets called and the Kinross share price drops by 30% by the end of the tender deadline. In that theoretical case, the value per share (assuming a payout of 75% in cash and 25% in Kinross stock) would represent just under C$27.20. So the downside of holding out and taking on the Kinross share price risk is minimal.
The Kinross bid is a good offer
If no additional bidder emerges, we will tender the shares into the cash bid (because this IS a good agreement and kudos to the Great Bear management for being able to fetch C$1.8B for a pre-resource stage project). But odds are the Kinross bid could just be the first step in what could be a long-drawn chess match. Time will tell.
Disclosure: The author has a long position in Great Bear Resources. Great Bear is a sponsor of the website. Please read our disclaimer.
