Africo Resources: A 2-Month Merger Arbitrage Yielding 7% Plus CVR

| About: Africo Res, (AFCRF)


Africo Resources is getting acquired by its majority shareholder.

Interests of buyer and sellers are properly aligned, predicting a high chance of the deal to complete.

The deal seems to be fully pre-cooked: Voting agreements eliminate the voting risk; financing risk is low.

This article has been published first as part of my premium research on Seeking Alpha.

Africo Resources (OTC:AFCRF) is a Canadian miner owning a 75% stake in a copper and cobalt asset in Congo. Though the company has a US ticker the main listing is in Canada under symbol ARL.

The copper project is undeveloped and next to a similar asset of its majority shareholder, Camrose Resources. Unfortunately Africo Resources does not have enough money to develop this copper mine on its own. Therefore, Africo Resources suggested to jointly develop its copper project together with Camrose Resources' adjacent Comide project. So far the discussions have not resulted in an agreement. The company was pessimistic on closing such a deal soon.

The merger proposal

Africo Resources caught my attention when the share price was around 0.38 CAD. Then it was trading below its current assets net of all liabilities also called net current asset value or NCAV. Since here the current assets were almost all cash, NCAV is a proxy for the liquidation value of Africo Resources. See also here for a recent balance sheet of Africo Resources.

That is what I do: buying grossly undervalued companies based on hard assets. Then I wait for unexpected events causing the share price to go up. Sometimes such an unexpected event does not happen, but the share price goes up anyway. That happened with Africo Resources last autumn. If I had set a limit order for a 50% profit I would have sold. Luckily I was not that smart then. But to my regret, I had to wait another 8 months or so before the price increased again.

Last week something happened indicating the non-current Congolese copper asset has substantial value too: Camrose Resources struck a deal with Africo Resources to buy the other shareholders out at 1 CAD per share. This buyout price translates to a P/B of about 1.2 for Africo Resources.

Shareholders will also receive a contingent payment of 0.27 USD (0.35 CAD) if certain transactions are completed within 14 months. We do not know much of these transactions yet. The company will publish more details by the end of this month.

Certain shareholders have already committed to the deal by signing voting agreements. As a result, the transaction is guaranteed to be approved in a shareholder meeting.

Lastly, the lenders of Camrose Resources' parent company can still block the deal. This is a risk with high impact. Shareholders risk going back to prices lower than before the announcement. At the moment the share price is 0.93 CAD. Before the announcement the share price was 0.45 CAD. I would not be surprised seeing a share price of 0.3 CAD if the deal falls through.

See also here for Africo Resources' press release.

Why the deal spread is so large

The deal is expected to complete in July. So the difference between 0.93 CAD and the buyout price of 1 CAD translates to an annualized return of 38%. I think the reason for the huge spread is that this small-cap is under the radar of most investors. BTW, here I assume the deal will complete at the end of July. This is a conservative assumption since the shareholder vote is already at the end of June.

Africo Resources is not listed in the US but in Canada. And mining stocks are not very popular now a days. It does not help that Africo Resources has only non-producing assets, in Congo, of all places. If that is not enough the name "Africo" already turns off investors.

Moreover it takes time for small-caps to react on events. That certain lenders can block the deal makes people think twice as well.

Has this deal a low probability of completing?

I think this deal is almost certain to complete for the following reasons:

  1. The interests of the sellers and the buyer (Camrose Resources) are very well aligned. The sellers get a good price compared to the cash on the balance sheet. Compared to the share price before the announcement, the buyout price is not just good but excellent. Camrose Resources gets the cash and the Congolese copper asset that is adjacent to another project of theirs.
  2. The contingency payment and the voting agreements indicate the deal has been well prepared. The deal is scheduled to complete very soon as well. Therefore, I suspect the lenders have already informally agreed.
  3. The extra risk for the lenders is not so high. After all Camrose Resources already owns 63.66% of the shares. For them the price is 26.6 million CAD. This buys about 20 million CAD of cash net of all liabilities. So their net purchase price is only 6.6 million CAD. The share options increase this to 7.7 million CAD.
  4. The contingency payment is another indication for substantial upside for Camrose. It is not just the cash they get. We can safely assume they earn much more on these future transactions than 0.27 USD per share. For their net price of 7.7 million CAD they get the copper project. The minority shareholders' share of the book value of the copper project is 9.4 million CAD. Probably this copper project is worth much more.


This is a very rare and safe merger arbitrage opportunity. Don't bet the farm on it, but a small position will most likely deliver great returns.

Disclosure: I am/we are long AFCRF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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.

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Tagged: , M&A, , Business Services, Canada
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