The EAR Event trade was first recommended as a buy on 06 September 2019. Below are each of the updates related to this trade in chronological order.
Current advice: This trade is now over.
Update – 16 October 2019, 09:05am
It seems that the market is starting to factor in a chance that Northern Star Resources (NST) could throw a little more at shareholders to achieve the 90% level, as the stock is now trading at 33.5c bid. We have to admit we are slightly surprised as the likelihood now that NST has achieved control is that remaining shareholders will concede defeat.
With the landscape having changed since we bought the stock, we feel the small profit we are now sitting on is too tempting to ignore. Realistically, we feel that if NST increases its bid it will be marginal (perhaps 1-2c) and the odds of doing so are probably no more than 10%, so the risk/reward on holding at this level doesn’t stack up.
We are therefore recommending members sell EAR at no lower than 33.5c to lock in a small arbitrage profit.
Post Script 9:07am: NST has just declared its bid best and final so members will now have to either accept the bid or sell on market at $0.33.
Update – 15 October 2019, 09:53am
As expected, Northern Star Resources (NST) extended its takeover bid for EAR by a further week, with a new expiry date of 28 October. Given the bid is now unconditional, we’re somewhat surprised acceptances haven’t come in faster with acceptances only sitting at 43.4%. This is actually good news for us as it implies that the $0.33 offer may not be as appealing to shareholders as the directors think it is and suggests that NST may need to increase its offer if it wants to gain full control of the company.
For the moment we are therefore happy holding the stock and will keep a close eye on acceptances. We will update members closer to the 28 October deadline.
Update – 23 September 2019, 11:15am
EAR has this morning announced that bidder Northern Star Resources (NST) has declared its bid unconditional which changes the playing field for members in a few ways worthy of discussion.
Primarily, this is good news as it eliminates any potential downside for members. Members bought the stock at $0.33 and the worst-case outcome is going to be $0.33. Additionally, this is good news as it implies there were concerns from NST that it would be able to reach 90% acceptances with its offer and suggests that to get to full ownership it may need to increase its offer.
The final takeaway from the change is that ultimately NST may simply take the acceptances it gets, although there is clear logic in at least going for 50.1% acceptances and control. The stock is now trading at $0.33 bid, and we recommend members continue to hold the stock while we await further developments.
Original Recommendation – 06 September 2019, 10:21am
We currently have some exposure to gold stocks through the Momentum Strategy, but a rallying $AUD gold price has meant an increase in corporate activity in the sector as well and we are making an Event strategy recommendation today that will hopefully profit from this theme.
EAR is a mid-tier gold miner that counts Northern Star Resources (NST) as its 21.7% shareholder. Late last month, EAR announced that it had signed a Bid Implementation Agreement (BIA) with NST which would see EAR shareholders paid $0.33 in cash to sell their shares to NST. With a solid premium to recent trading prices, the offer had the support of the board and the limited conditionality of the bid made the odds of the deal succeeding pretty high.
While the odds of the deal succeeding are high, there are some reasons why we feel EAR might ultimately yield a higher offer than $0.33. Firstly, there are some shareholders who argue that the offer price is light in the context of a higher $AUD gold price that has made the economics of its major project that much more appealing. NST’s bid will be conditional on 90% acceptances and if it feels that the deal might not reach that threshold then it could either change that acceptance condition to a lower level or, if it wants to wholly own EAR which would be preferable given EAR’s future need for capital, it could increase its offer.
Secondly, while NST has a 21.7% stake that does not make a counterbid impossible. An alternative suitor could bid for 50.1%+ of the company, take control and then NST would be in an uncomfortable position and possibly sell.
EAR is currently trading at $0.325 bid, $0.33 offered. There are too many shares queued in at $0.325 to bother bidding at that price, so we are going to recommend members buy EAR at up to $0.33 in order to get set. For members who wish to be cute in getting set, opening and closing rotation has seen some stock trade at $0.325 and one can smartly jump the queue by putting in an order above $0.325 only during opening and closing rotation. This will require diligence to ensure the ’match price’ is $0.325 and would save you 1.5% if successfully executed.
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