Seeking Alpha
Gold & precious metals, macro, research analyst, deep value
Profile| Send Message|
( followers)

Summary

  • Mandalay Resources announced that over 99% of Elgin Mining Shareholders have agreed to the offer by Mandalay.
  • This was widely expected to happen, although I didn't anticipate this in my recommendations of either of these two companies.
  • I continue to like Mandalay Resources as a low cost producer but I'm not adding at the current valuation.

We just learned that Elgin Mining (OTC:ELGMF) shareholders agreed by an overwhelming majority to let the company be acquired by Mandalay Resources (OTC:MNDJF). This shouldn't surprise anybody, especially since those who had been acquiring the stock as of late were almost certainly arbitrageurs. According to the terms each shareholder of Elgin Mining is entitled to either C$0.37 or to 0.411 shares of Mandalay Resources. With Mandalay shares trading at C$1.08/$1, the latter is clearly the better deal.

Investors will recall that in January I recommended Mandalay shares as a speculative buy considering the company's history of low cost production and resource expansion. I did caution, however, that the company only had a few years' worth of resources left and that the total value of these resources was insufficient to support the (then current) valuation.

Investors will also recall that I recommended Elgin Mining about 7 weeks later on the premise that its Bjorkdal Mine was operating more efficiently and that if it could convert resources into reserves the stock was significantly undervalued on a DCF basis. It is also located in Sweden, which is one of the world's best mining jurisdictions.

I was long both names going into the initial merger announcement and decided to sell my Elgin shares not wanting to play the arbitrage game and not wanting more exposure to a name that I felt was speculative. I also felt that Elgin was a much better buy at $1,320/oz. gold and a $0.22/share price tag than at $1,260/oz. gold with a $0.31/share price tag. This turned out to be a mistake as Mandalay shares rose taking Elgin shares with it.

At the current valuation I would be hesitant to add to my Mandalay position as metal prices have been weak while the stock is 25% higher than where it was when the acquisition was first announced, and over 30% higher than my initial "buy" point. But I continue to believe that Mandalay is one of the better run gold mining companies, and I think that this acquisition was based largely on the fact that Mandalay's management saw dramatic room for improvement at the Bjorkdal Mine. With that being said I think Mandalay is an excellent stock to accumulate on weakness.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source: Update: Elgin Mining Shareholders Overwhelmingly Approve Of The Mandalay Acquisition