Orecorp (ASX: ORR) (OTCPK: ORECF) shares are up 10% today. ORR should, in theory, be up much more than this because there’s a bid on the table from Silvercorp (TSE: SVM). That bid, in theory at least, values Orecorp at 60 cents a share. But ORR shares are still below 50 cents - so, a useful conclusion is that the market doesn’t really think this bid is going to go through. Or, another alternative, that the Silvercorp share price is going to decline substantially when Canada (or the NYSE, there’s also the listing (NYSE: SVM)) opens. Now, whether it’s going to be possible to trade this gap is another thing.
The standard actions in such a situation are to sell the shares of the bidder (here, Silvercorp) and buy those of the biddee - Orecorp. For the deal is: “ For each OreCorp Share held, OreCorp shareholders to receive A$0.15 in cash and 0.0967 of a Silvercorp
common share valued at A$0.45 for a total implied consideration of A$0.60 per OreCorp Share” The majority of the bid value is in scrip. Therefore the value of the bid depends, very heavily, on the continued value of that scrip. It’s usual for the stock price of a bidding company to fall on the announcement of a bid - just as it’s usual for the value of the company being bid for to rise.
Thus, if it’s possible, sell the bidder at the pre-bid price, buy the biddee at the pre-bid price and lock in the two price movements. Obviously it’s too late to do that here. But there’s still that price gap. There’s some 12 cents there - the bid is supposedly valued at 60 cents, the stock is 48 cents, that’s the 12 cent gap.
Orecorp share price from Google Finance
Now, this sort of arbitrage in takeover bids is not to everyone’s taste. But it is clearly something that exists here, this price gap between the bid price and the market price. The market clearly does not believe that he deal is going to go through on these current terms. Why? One option is simply that they don’t think it will go through. That would be a bit odd as why wouldn’t an agreed bid go through? The other is that the market is assuming that the Silvercorp price will drop at open and therefore, given the scrip element, the bid will be worth less than the current headline number. But if that’s true then going short Sivercorp captures that - as does going long Orecorp capture the other alternative.
There is an arbitrage here if it’s possible to get the stock dealing in right at open before market prices start to adjust. It’s even possible to do it all on the New York markets. Short Silvercorp, long Orecorp. That’s the situation now, before New York opens at least. It also depends upon the willingness to speculate upon such bids among junior miners. But the price gap is there at our pixel time.
