Nzuri Copper merger arbitrage

A merger that I have had a small position in for some time, and recently bought more of, is Nzuri Copper Limited (ASX:NZC). The company is being acquired by Chengtun Group (SHA:600711) for A$0.37 in cash while it is currently trading at A$0.31 for 19.4% spread. That’s a big spread, but when we are talking about an Australian listed company that has a mine in Congo and that is being acquired by a Chinese company I think it’s clear why many investors aren’t trilled to get involved. While the spread has always been quite big since the deal became public news, it got bigger again when the company announced last week that Chengtun is expecting delays in receiving regulatory approvals in China.

I simply don’t think that those approvals represent a huge risk. China has a long history of acquiring natural resources in Africa, and this acquisition fits perfectly in their long-running strategy. In the press release Chengtun Group also seems pretty optimistic about the regulatory approvals. They expect them to get them at the end of August, which is just a one month delay, and they state that they have no reason to believe that the approvals will not be provided:

“Chengtun Group has submitted all of the applications and ancillary documentation required to obtain the PRC Regulatory Approvals, and has attended to all further requests for information in relation to those applications received to date.

Chengtun Group understands that its applications for the PRC Regulatory Approvals are being processed, and as at the date of this announcement, Chengtun Group has no reason to believe that the PRC Regulatory Approvals will not be provided.

Of course, this requires a bit of trust in what a Chinese company is saying. I don’t see any reason to really doubt this, but at the same time, you never know for sure what is going on in China. But given the very big spread I think you are compensated more than enough for some risk, and I think the other aspects of the deal shouldn’t pose any problems. Chengtun can pay the acquisition in cash, they got regulatory approval in Congo already and shareholder approval should be a formality. At the same time the stock is also not trading a big amount above the pre-deal price, so downside risk in case of the deal breaking should be acceptable. I’m not betting the farm on this deal, but I think it’s pretty attractive.

Location of Nzuri's Kalongwe Project in Congo


Author is long Nzuri Copper

25 thoughts on “Nzuri Copper merger arbitrage

  1. pogonific

    Interesting find. I’d be curious to know how you came across it?

    I guess the bit I’d worry about is the mention of the need for additional funding for Nzuri even if they meed the mid-September deal deadline (“Additional Loan Funding” in July 1st Adjournment Notice). If the acquirer is providing that maybe the terms eat into some of the discount?

    1. Alpha Vulture Post author

      I think that it only shows that Chengtun is committed in completing the deal, although it’s of course not a positive sign how healthy Nzuri is as a business.

      1. Jim

        Sorry, I didn’t;t word it correctly. I mean this section from the press realize: “In light of the delays to the Scheme, resulting from delays in receipt of the PRC Regulatory Approvals, Nzuri will require additional funding.”

  2. Paul

    Many, many thanks for sharing this and all the ideas on your outstanding investing blog!

    Personally, I’m not worried about the required funding since Nzuri is still a mining project in development. Tembo Capital has commited further funding (that had not been drawn due to the Chengtun funding/deal).

    More critical, in my view, might be approval from the two major shareholders Tembo Capital (48.9%) and Huayon Cobalt (14.8%). Anyone an opinion or information whether Tembo (a financial investor) and Huayon Cobalt (strategic investor !!) are opposed or in favor of the transaction?

    I’m not familiar with the Australian terms but my understanding is that the Scheme Meeting (= shareholder vote on the transaction?) will be hold after Court proceedings on July 19th. I’m inlcined to wait until sharehoder approve the deal but that may also diminuish the spread / upside potential. What do you think?

        1. Alpha Vulture Post author

          Thanks, found it. Seems a somewhat questionable mine if the official valuation in the fairness opinion of the going private transaction is zero. But still, they look pretty serieus in pushing the deal forward, so might be a nice opportunity.

      1. DG

        I think he means Atlatsa Resources Corp.

        With regard to NZC – it looks like it ran from ~16c to 26c before the bid was announced. You mentioned “At the same time the stock is also not trading a big amount above the pre-deal price, so downside risk in case of the deal breaking should be acceptable.” Are you using 26c as your pre-bid price? Do you think it’s realistically possible it could trade closer to 16c under a failed scenario?

        1. Alpha Vulture Post author

          Maybe, you never know of course, but that drop to 16c was just a few days. The stock had been trading around 25c before that drop, and then again before the deal was announced. So very possible that it will end up at that price again if the deal breaks I think.

        2. pogonific

          On Atlasta,
          It looks like there’s a good chance it completes given 89% shareholder support. But if it doesn’t it’s a zero as the thing looks bankrupt. But the key question is the tax on the dividend – I read p.62 of the scheme document several times and it’s not obviously clear to me that my broker won’t just withhold 25% Canadian withholding tax which will eat all of the deal arbitrage and then some. And I’m not sure I fancy my chances at explaining to the broker (IB in my case) as to why they shouldn’t have done that. Has anyone else gotten comfortable the tax aspect of the transaction?

          1. pietje

            The buyback consideration will only be a deemed a taxable dividend if the market value of the price paid exceeds the paid up capital of the company. Given that the company is a money losing train wreck that has ~$311m in initial share capital, huge amounts of accumulated losses and is taken over at a ~C$50m valuation I’m pretty there won’t be any taxes.

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  4. Phil

    Two more merger arb situations on the TSX:

    TIM.V (bid 0.06/0.065 ask) being acquired by ATY.V (0.29/0.295) – exchange ratio 0.24897, 10% spread

    ECS.TO (0.255/0.26) being acquired by JRV.V ( – exchange ratio 1.65, 2% spread, but closing tomorrow 24 July. What really beats me here is that JRV.AX (primary listing) trades at an FX-adjusted 25% premium to JRV.V, which may be due to the recency of the TSXV listing (resulting from another acquisition), but if anything, this should soon disappear

    Disclosure: Long TIM.V, ATY.V, ECS.TO

  5. Kim

    Spread seems to be increasing even more without any new information besides that the approval from shareholders? If I got my information right, the PRC will still decide on or aorund 31 August?
    27.5% spread with just two weeks left.

    1. Alpha Vulture Post author

      Yeah, it’s curious what the price is doing. The company said this week at the EGM that they think everything is still on track for a deal close on September 5, but it seems like some market participants have potentially other information. It could be a great deal at this price, but I’m a bit worried that there is something that I don’t know that other people do…

      1. Kim

        Still no approval from PRC, altough Nzuri state in the latest update that ” substantial progress has been made”.

        Nzuri also states they will request to postpone the Approval hearing at the supreme court (confirmation and later date will be announced shortly).

        Ofcourse not great news but not terrible either. The deal will not close on September 5 but from what Nzuri presents the deal atleast keeps mowing forward.
        The price on Nzuri is moving to a point of where the market seems to feel different.

        1. pietje

          “Not great, not terrible either”. Famous quote from Chernobyl 😛 . I hope this works out slightly better.

    1. Alpha Vulture Post author

      I don’t know. I think an extension is most likely, but there is always a risk that one of the two parties will see it as an opportunity to get away from the deal if they don’t like it anymore for whatever reason.

  6. Thomas

    A scheme update was released on December, 13th 2019:

    Conditions for the deal to go through are:

    • the Scheme remains subject to Xuchen receiving regulatory approval from the State Administration of
    Foreign Exchange of China, or ‘SAFE’ in the People’s Republic of China (PRC);
    • for commercial reasons, Xuchen’s preference is to fund (or part-fund) the Scheme consideration by way of a third-party loan, which remains subject to the receipt of certain PRC provincial government approvals (the receipt of these approvals is not a condition precedent to the Scheme);
    • Nzuri and Xuchen have agreed to delay the ‘End Date’ of the Scheme to 31 March 2020; and
    • Nzuri and Xuchen have agreed to amendments to the existing secured loan facility agreement, pursuant to which, amongst other things, Xuchen has agreed to advance up to an additional $3.5 million of loan funding to Nzuri.

    Also, a meeting could be necessary to ratify the Scheme Meeting held on 19 August 2019.

    32% spread currently but definitely some important uncertainties.


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