The merger between Paramount and Coeur was completed last Friday without any issues. When I entered the trade I paid next to nothing for the spin-off that would occur simultaneously with the merger, and today I sold the shares of the SpinCo for $1.70/share. When measured against the value of the PZG leg the merger arb returned 8.1% in just a month. That’s an awesome result! At the same time, I could be penny wise and pound foolish by purely focusing on the merger arb, and not on the spin-off itself.
Spin-offs are known to outperform because people often sell them indiscriminately, and that’s exactly what I have done… SpinCo appears to be cheap at $1.70/share since it’s trading barely above its cash balance of $10 million while it also owns an undeveloped gold project that could be worth hundreds of millions if gold prices go up. So why sell? I have two reasons:
- I know next to nothing about mining
- I think exploration stage mining companies as a group are usually a terrible investment
Investing in something that you don’t know anything about doesn’t seem smart and if I didn’t already own SpinCo I wouldn’t have bought it, so I think it makes sense to sell if you get some shares as a by-product from another trade. It’s just that selling the position feels like a different decision that not buying it, although logically it’s equivalent.
No position in PZG and/or CDE anymore
My thoughts exactly.
Thanks for great article, again. Totally agree with the statement on the investments as a group being terrible.
Actually there are some great-looking chunks of of turbiditic terrigenous clastic rock near Winnemucca surrounded by older alluvial deposits. Looks promising. Maybe I should get back in.
Logical yes. But it’s also logical to sell a 20 pack of free lottery tickets for as near to $20 bucks as possible. However, when I’m given “free” presents I just scratch the tickets and once in awhile I get a multi-bagger return. I too got SpinCo for “free” and I have to decide if I want to scratch the tickets or sell them for near face value and forego the potential fun (even if I end up with likely losers). Heck, worst case it still a break even trade that had optionality.
To continue the lottery analogy: Given the fact that almost all lotteries have a negative expected value I would insta-sell free lottery tickets near face value. I actually suspect that the reason that exploration stage mining co’s perform so poorly as a group is that people love buying lottery tickets in their investment portfolio.
Classic case of endowment bias: “the fact that people often demand much more to give up an object than they would be willing to pay to acquire it.”. “I got it for free so I am going to gamble” is not a sound financial decision. But sure, if you want to trade ‘for fun’ then by all means hold the SpinCo. I personally rather trade for profit.
Your tax basis on some of these can prove to be important. If for example you get a spin off with 0 cost basis (usually not the case) and you can sell it for $1.00 today and you are in a high tax bracket your after tax gains may only be $0.50. Let’s say the EV of your holdings next year is $0.90 but you are now taxed at long term cap gain rates — your net after gains would be $0.63. So you actually increase your expected net after tax gains by 26%+ despite the expected decline in value of your holdings.
Glad that I don’t have to deal with the ST and LT cap gains bullshit in The Netherlands 🙂