After BHP Billiton announced it had taken a 6% interest in SolGold because of the enormous potential of copper/gold discovery in Ecuador, last month, it was announced yesterday that the world’s largest miner has almost doubled its position. Noteworthy is that last month’s transaction was executed at a share price of 26.5p, and now, a little over a month later, BHP is prepared to add at 45p. This is also almost 30% higher than the price of yesterday’s close. With this transaction, the major BHP corporation voluntarily subjects itself to a number of fairly stringent provisions drawn up by the much smaller SolGold. For example, BHP may not expand its share in SolGold without permission, and can therefore only make a takeover bid if SolGold management agrees.
On the one hand, this unfortunately makes a bidding war more unlikely, whilst on the other hand making a future takeover (at a higher price) much more of a certainty. We have calculated that CEO Nick Mather controls 55% of SolGold, either directly or indirectly. We find it very unlikely that he will consider the current valuation of the company a proper reflection of the true value of what is in the ground, given the size and strategic importance of the deposit, and especially given the potential for further expansion.
At 45p, BHP is putting strong support under the share price, diluting the largest single block of shares over which Mather has no control from approx. 22.5% to approx. 20.5% (the direct and indirect interest of Cornerstone). With the expansion of shares by BHP, it is becoming increasingly difficult for a third party to make a hostile takeover. This would certainly have to be with the cooperation of Cornerstone, but even then you would not get enough shares without Mather’s consent. He is in control of SolGold’s destiny, confirming once again to be a good chess player.
Why would BHP not take over SolGold outright? SolGold will probably be much more expensive at a later date as the project is further developed. BHP is a financial heavyweight, and is likely to have much more interest in a project that has been largely de-risked. With the forthcoming update of the resource estimate (size of the deposit), SolGold expects a strong expansion. The PEA (economic study) expected later this year will also provide a first insight into the feasibility of the copper/gold project. These are valuable risk-controlling milestones for the major producers. And given the concessions that BHP had to make to acquire these latest shares, the urge to get a position in one of the most significant new copper projects is much greater than any additional costs that would be incurred with making a bid at a later time.