Crocodile may get a lowball offer

Luxor Capital Group, a New York-based investment company, intends to make a partial bid for Crocodile Gold (crk-t), which operates gold mines in Australia.

Luxor, which currently holds under 20% of the junior, plans to acquire another 215.4 million shares at US56¢ apiece, bringing its current stake to 85%.

The offer represents a 61% premium to the junior’s 20-day volume-weighted average price or a 65% premium to its Dec. 13 close of 34¢.

Despite that, the company’s president and CEO, Chantal Lavoie, believes the offer significantly undervalues Crocodile, which has been trading near its 52-week low of 31.5¢. The company reached a high of $1.60 last December.  

“It’s a very opportunistic bid,” says Lavoie in an interview. “We believe the value of the company is much higher.” He points out that analysts at Raymond James’ and Fraser Mackenzie’s have a price target of $1.30 and $1.50, respectively on the company. (Fraser Mackenzie is currently revising its $1.50 target.)

Lavoie adds the company is waiting for Luxor to table a formal bid.

Luxor announced its intentions on Dec.13, which sent Crocodile’s shares surging 43% the next day to 48.5¢ on 25.9 million shares traded.

Crocodile says it has appointed an advisory board to review the offer once it is in.

“If a bid is formally made [at the current price] I’ll consider it to be a stink bid,” says Fraser Mackenzie’s analyst Michael Starogiannis, explaining the offer represents at least a 50% discount to what the company’s peer group is trading at.

“The peer group of junior producers currently trade at enterprise values of US$85 per resource oz. and US$260 per reserve oz. (or US$372 depending on how you split the peer group),” he details in an email to The Northern Miner. In comparison, Luxor’s tentative offer values Crocodile Gold at US$24 and US$189 per oz. respectively. 

“On a cash flow basis the peers trade at between 6x and 8x operating cash flow versus the ‘intended’ bid which values Crocodile Gold at 3.5x 2012 estimated cash flow,” Starogiannis notes, adding he hopes shareholders reject the offer.

Similarly, Raymond James’ analyst Gary Baschuk told shareholders to hold onto their shares, saying the offer does not fully consider the value of Crocodile’s assets.  

While the company has several gold deposits in the Northern Territory of Australia, it is currently producing from the Mottrams and Princess Louise pits.

“We also have two mines in development: Cosmo Underground, which will be starting production in the next couple of weeks and International open pit, which will begin production sometime in 2012 once permitting is finalized,” says Rob Hopkins, the company’s manager of investor relations.    

Both analysts believe that the company’s Cosmo underground gold operation will enhance the company’s performance.

“We believe Cosmo offers a bright future,” says Baschuk in a Dec. 14 note. Cosmo boasts high grades of 3.79 grams per tonne (diluted) and once ramped up could provide a consistent supply of ore to the Union Reefs mill.

Baschuk expects the company with the addition of Cosmo to produce about 76,700 oz. gold in 2011 at cash costs of US$1,420 per oz., and 87,900 oz. gold at cash costs of US$886 per oz. in 2012.

“Going forward, full production from Cosmo is expected to carry production over 100,000 oz. per year at cash costs of approximately US$750 per oz. from 2013 to 2021,” he says.

Asked if another company will make a bid for Crocodile, Baschuk says given there are no other producers in the area, he doesn’t expect to see any “synergy bids” but adds another suitor may emerge.  

“With Cosmo within an estimated 6-9 months to [commercial] production and risk being decreased as underground development continues, we could see a small to mid-cap producer step in.”

Whereas, Starogiannis of Fraser Mackenzie believes another bidder surfacing in the current depressed market is unlikely.

“I do consider [Luxor’s potential offer to be] a stink bid. So will a stink bid in this kind of environment necessarily force another suitor or white knight to come out of the woodwork? I don’t think so.”