Strategy
Events Trades
Australia

Event Trade: Cardinal Resources Ltd (CDV:ASX)

27 Oct 2020
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Cardinal Resources Limited operates as a mineral exploration and development company. The Company develops multiple projects through expansion drilling programs, pre-feasibility studies, and metallurgical test work. Cardinal Resources serves customers in Australia, Canada, and West Africa.

Current advice: Sell no lower than $1.01

Recommendation update – 27 October 2020, 12:00pm

There have been a few events worth discussing since our exit of the stock – we are aware some members have yet to sell so the new information will be useful – that have brought the bidding war to a swift end. We exited the stock after Nord Gold raised its bid to only $1.00, thus ending Shandong’s ability to increase its own offer after declaring its best and final in the absence of a higher competing bid. The stock remained a little above that $1.00 but it’s hard to know why; perhaps some investors were expecting Shandong to try to raise its bid and fight any objections Nord Gold would take to the Takeovers Panel (which it has now done).

Since then, Nord Gold has declared its bid final as well which is a little surprising in my view as it now leaves its bid as no more superior than the Shandong offer. At least the possibility of an increase rendered it superior, but that is now gone. And not surprisingly, Shandong has combatted that by suggesting that it will increase its bid to $1.05 if a higher bid emerges. Nord can no longer increase its bid so that increase is meaningless, but it does make its bid technically more attractive.

I can easily now see this company ending up with two major shareholders, but Shandong should emerge with a majority with board support behind it. But any upside above $1.00 is now almost impossible, so the fact that the stock is trading at $1.015 is an anomaly that remaining shareholders should take advantage of.

We will now cease coverage of CDV and record it to the track record. This investment is a perfect example of why we need to buy into even the stocks that seem unlikely to be the subject of a bidding war, and ultimately, we saw five new bids after our entry at $0.61. All up, members banked a profit of roughly 70% on a holding of only four months which is a brilliant result.

To view the rest of our current Event Trades, please click here.

Recommendation update – 21 October 2020, 10:00am

We have had an interesting twenty-four hours with respect to our investment in CDV. With very little action over the past month or so, yesterday lead bidder Shandong Gold declared its bid best and final in the absence of a ‘higher competing offer’. That effectively locks Shandong into its price unless Nord were to offer above $1.00.

This morning, the next move in the chess game appeared as Nord improved its unconditional offer to $1.00 which is identical to Shandong’s offer and, as Nord has rightly claimed, means Shandong cannot increase its offer yet. Nord holds 28% of the company versus roughly 12% for Shandong, so this looks a smart strategic move for Nord. The problem is that no bidder looks set to exceed 50% acceptances and without control it is no guarantee the other bidder will walk. My best guess is that Nord will continue extending until Shandong’s bid is behind it and then throw a little more cash at shareholders to get the acceptances it needs.

Today’s developments likely mean the big gains in this investment are now behind us. Both of these offers are at an acceptable price for the board and likely all shareholders, so even if Nord’s plan goes perfectly to script it’s probably unnecessary for an increase of more than one cent to separate itself from Shandong. With this in mind, if we can get a better price than $1.00 today, we think it is worth doing. The stock closed at $1.05 yesterday and looks to open around that level today. We therefore recommend members sell CDV at around the current price and no lower than $1.01.

Recommendation update – 13 October 2020, 11:00am

As expected, Shandong Gold left it till late to extend its offer and has now done that yesterday afternoon. The offer is now extended until 23 October which is just after the current expiry date of Nord’s offer of 22 October. Shandong doesn’t stand to increase its shareholding until Nord ends its chase for CDV, so for now we’re in a holding pattern hoping Nord has a bit more up its sleeve.

The good news is that we can continue to hold for the moment without any risk, and we will update members closer to the bid expiry (in the absence of new bids).

Recommendation update – 9 October 2020, 11:30am

Things have gone quiet in the war for CDV, although underbidder Nord Gold continues to extend its inferior offer which suggests it hasn’t thrown in the towel just yet. Until Nord does walk away, it’s unlikely Shandong will get anywhere with its desired acceptances, so the situation is a bit stagnant for now.

It’s important to keep on top of the closing dates for both offers, and Shandong’s offer currently looks set to close on 13 October (we can’t find any extension of its offer in any supplementary documentation) whereas Nord’s offer is set to close on 22 October. With the high bid and only roughly 10% acceptances, it’s highly likely Shandong extends the offer further and no action will be needed next week. If the unexpected comes to fruition however – that is, that Shandong keeps its offer close date to urge shareholders to accept in a hurry – we will be forced to sell early next week.

So, while we anticipate no action next week please be aware that the situation could change. We will make the call on the afternoon of Monday (12 October) or the morning of the Tuesday (13 October).

Recommendation update – 7 September 2020, 10:30am

Just when we thought the action might be over in the bidding war for CDV, Shandong Gold announced that it was increasing its (still conditional) offer to $1.00 per share which is an increase of just over 10% from the improved Nord Gold offer of $0.90. This is just another pleasant surprise in what has been an astoundingly successful takeover investment, and it’s pretty clear the long-term view of gold prices held by these two big gold giants is very positive and is supporting purchase prices well above its prior trading level.

The ball is back in Nord Gold’s court and there certainly remains a chance that Nord has more up its sleeve. This investment alone is vindication of the rule Rivkin has to never sell until the war is officially over (usually marked by any counterbidders walking away), even if that means leaving a little cash on the table. CDV was trading at around $0.73 (versus the top bid of $0.70 at the time) for a sustained period when it looked like Nord might walk away, and we now have a bid that is 37% above that level. Members are now up roughly 64% from our entry price (assuming $1.00 is the final offer), and we remain happy to hold until either of Nord or Shandong walk away.

Recommendation update – 2 September 2020, 10:00am

There has been an incredible development with CDV this morning as underbidder Nord Gold increased its unconditional offer this morning from $0.66 to $0.90!!! This is an increase of 28.6% on the offer from Shandong Gold and, assuming Shandong was at least close to the limit on what it was willing to pay, should prove an end to the bidding war.

Nord has organised the purchase of stock from some large shareholders already and has, for the moment, kept its offer open only until 10 September, but this will likely be extended if acceptances don’t flow in quickly enough. Interestingly, Nord didn’t declare its bid final so theoretically there could be more upside if Shandong sees more value in the company. With that in mind, there’s no downside to holding until the action ends so the advice for now is to hold firm but we will provide regular updates before 10 September.

Assuming $0.90 is the final price we see, this will result in a profit of roughly 50% on an investment that came with very little risk so we are ecstatic with how this investment has gone for members.

Recommendation update – 26 August 2020, 11:00am

Events have gone eerily quiet of late in the battle for CDV. Lead bidder Shandong sent out its Bidder’s Statement on 14 August, and the bid is currently due to expire in early October. Our best hope for further profits from these levels is to see original bidder Nord Gold increase its $0.66 offer, but momentum has stalled. Before losing hope, however, it was reassuring to see North Gold extend its offer by a further two weeks last week. At the very least, this extension suggests the company is exploring whether it can increase its offer price and there has been surprisingly large buying on-market at above the $0.70 offer price by Shandong.

While our original buy price was around $0.61, we have been comfortable buying as high as $0.72 after Shandong bid at $0.70, and the stock remains at $0.725 today. Despite the noise dying down, until Nord Gold walks away, we remain hopeful of more action and are happy for members to continue to hold the stock at these levels. We will update members once we hear further from Nord Gold.

Recommendation update – 23 July 2020, 9:30am

As hoped for, CDV announced this morning that it had received a revised offer from Shandong Gold for $0.70 per share, a 6% premium to the unconditional $0.66 per share offer from Nord Gold. This is great news and keeps the bidding war alive, with the ball now back in Nord’s corner. It should be noted that Shandong’s offer remains subject to regulatory approvals, but we’re not anticipating any problems in that regard.

All members should have had ample opportunity to buy CDV when we first bought the stock, but for those yet to do so we will now raise our buy price to factor in the new offer price. CDV has continually traded well above the $0.66 per share level since Nord pitched its bid so we’re not expecting it to trade near the $0.70 level this morning, but if the opportunity arises, we are happy for members to pay up to $0.72 on the hope of further action. The stock remains a hold for those members who already own it.

Recommendation update – 15 July 2020, 10:00am

We woke up to terrific news regarding our investment in CDV, as Nord Gold – the company that started the auction for CDV with an informal offer of $0.46 per share – announced that it was launching an unconditional takeover bid at $0.66 per share. This is a 10% premium to the offer price from Shandong Gold and is a massive 43% premium to Nord’s original offer price.

This was the hope we had when we bought into CDV as gold prices have soared in the pandemic environment and gold stocks have rallied hard. Nord could easily have decided to take a profit on its 18.71% stake but decided there was more value in buying the company and developing its project in Ghana.

So, where to from here? As the bid is unconditional, we effectively have no risk of our payment falling below $0.66. Nord will begin buying stock on-market from today at $0.66 so the stock will likely trade above that price on the hope that Shandong comes back with a new offer. Considering the strength of the gold sector, the chances of a new bid are quite high, so we remain very comfortable holding the stock above $0.66. All members should have had ample opportunity to buy CDV at between $0.615 and even as low as $0.56, but for those yet to buy the stock we are happy for members to do so at up to $0.675 which translates to a 2.2% worst-case downside.

Recommendation update – 09 July 2020, 10:00am

CDV saw some selling yesterday as the company announced that it had placed 26 million shares to bidder Shandong Gold at a price of $0.46 per share. This step is actually part of the signed bid implementation agreement (BIA) with Shandong so doesn’t come as a surprise, but as this would theoretically make any competing bid for CDV above $0.60 more expensive the implication is that a competing bidder would have bid already rather than wait for this share issue to occur.

While we tend to agree that the longer it takes to see a competing bid, the less likely we do indeed see a new bid, this step alone isn’t much of an impediment at all. Assuming a bid of 5% above Shandong’s $0.60, the extra cost to Nord or some other bidder is roughly 1.5% more overall which is certainly not a hindrance to a bullish buyer.

Importantly, the gold price and gold stocks continue to rally and arguably CDV wouldn’t be trading much below where the Shandong bid is set in the absence of a takeover bid, so the bid continues to look cheap from a ‘premium for control’ perspective. The stock closed at $0.59 yesterday, and we remain happy for members to buy the stock at these levels.

Recommendation update – 29 June 2020, 10:00 am

CDV has remained very difficult to get set in and volumes have died down a little since last week. There is a lot of stock at and below our buy price of $0.605 and the stock has consistently traded above that level since we recommended it last week. It looks like raising the buy price to $0.615 may get us set, and only increases our downside to only 2.4% which is tolerable given the dynamics of the bid surrounding CDV. We therefore recommend members increase their buy price on CDV to $0.615 per share.

To view the rest of our current Event Trades, please click here.

Original Recommendation- 23 June 2020, 10:00 am

CDV is a gold explorer which is in the early stages of developing a major gold project in Ghana. On the 16 March, just as global markets were plummeting, CDV announced that it had received a non-binding indicative proposal from a company called Nord Gold which would see Nord buy CDV at a price of $0.458 per share. Additionally, Nord had acquired 19.9% of CDV and was in a terrific negotiating position, so CDV engaged with Nord with a view of progressing the talks towards a binding offer.

CDV shareholders got great news this week as the company announced that it had instead signed a binding bid implementation agreement with Hong Kong-based Shandong Gold which would see Shandong buy CDV at a price of $0.60 per share. This offer comes with far fewer conditions than the Nord offer and importantly has a minimum acceptance condition of only 50.1% which means that Nord’s shareholding cannot block the deal.

Considering the premium being paid by Shandong, it seems likely that Nord will take the profit on its investment and walk away, but the offer price needs to be seen in the context of the incredible volatility gold stocks have endured since the coronavirus pandemic began rolling over markets. While gold prices are at or near record highs in Australian dollars, CDV traded as low as $0.25 in March. Gold giants Newcrest (NCM) and Evolution Mining (EVN) are up 43% and 59% since Nord’s proposal was announced, so arguably the pre-bid levels being referenced when considering Shandong’s offer are opportunistic.

It, therefore, might be premature to assume that Nord, or some other party perhaps, can’t make the numbers stack up on a higher offer for CDV than the $0.60 currently proposed. Given the conditions attached to that offer, we think buying at around $0.60 on the chances of a higher offer makes sense with a high likelihood the current offer proceeds in the absence of a superior offer.

We, therefore, recommend members buy CDV at up to $0.605 for a short-term, low-risk investment on the hope of a competing bid. The stock has opened strongly this morning so patience may be required, but please stick to the $0.605 price for now.

SHOW COMMENTS / QUESTIONS (2)

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Monika & Wayne S.

What chance FIRB knocks this on the head.

Shannon Rivkin

Hi Monika and Wayne,

FIRB rejecting this deal is highly unlikely as CDV’s main asset is in Ghana.

Regards,
Shannon Rivkin

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