Analyst comments In response to its friendly $1.1-billion takeover offer from Fortuna Silver Mines Inc. (FVI-T), Canaccord Genuity analyst Carey MacRury lowered Roxgold Inc. (ROXG-T) to “hold” from a “buy” recommendation, seeing few obstacles to approval.
On Monday, Vancouver-based Fortuna announced it intends to pay 0.283 of its shares, and 0.1 cent in cash, for each Roxgold share, a 41-per-cent premium to Roxgold’s closing price on Friday.
“While there are benefits to a larger, diversified company, we believe that some ROXG investors are likely to be disappointed that the announced 42-per-cent premium dropped to 14 per cent based on [Monday’s] closing share prices,” said Mr. MacRury. “That said, we expect the transaction to be approved. ROXG is the best performing stock in our coverage universe year-to-date, up 37 per cent.”
“Notwithstanding the level of recent consolidation in West Africa, we think a competing bid is possible but unlikely given: 1) the $40-million break fee, 2) the potential implied premium valuation that would be required to top Fortuna’s offer relative to Roxgold’s West African peers, and 3) no obvious regional synergy opportunities around ROXG’s assets.”
The analyst cut his target for Roxgold shares to $2.40 from $2.75 to reflect the offer. The average on the Street is currently $2.61.
Concurrently, Canaccord’s Dalton Baretto cut his target for Fortuna shares to $8.25 from $9, which sits below the $10.68 average, with a “hold” rating.
“We view this transaction as an opportunistic bid by FVI to acquire a suite of assets that meets its primary investment criteria: precious metals focused, strong margins and exploration potential. While we see no obvious synergies and the jurisdiction is new, FVI is attempting to mitigate this risk by retaining ROXG’s entire operating team,” said Mr. Baretto.
We are not surprised by the timing of the bid, given that Lindero is largely complete, the $30 million ruling at San Jose is getting more likely to be maintained, and political risk in Latin America is rising. In addition, we are not surprised by the all-share bid given that FVI was trading at 1.89 times NAV on Friday (vs. ROXG at 0.58 times) and the company’s balance sheet was stretched following the construction of Lindero. We note that the 40-per-cent premium to the 20-day VWAP implied at the announcement of the transaction has declined to 16% following the 18-per-cent decline in FVI’s share price over the course of trading on Monday.”
Elsewhere, CIBC’s Cosmos Chiu cut his Fortuna Silver Mines target to $9.50 from $11.25, keeping a “neutral” recommendation.