Monthly Archives: January 2024

Latitude Uranium merger arbitrage

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As someone reminded me today on Twitter, my blog hasn’t been very active recently, so I thought I change that a little bit with a new merger arbitrage idea to start off the new year. Last month Atha Energy (CNSX:SASK) announced that it would combine in a three-way merger with Latitude Uranium (CNSX:LUR) and 92 Energy (ASX:92E) to “create a leading uranium exploration company” (not my words). While I’m not exactly a fan of exploration stage mining companies it’s a merger that piqued my interest. It is semi-complicated with three small companies combining of which two are listed on an obscure stock exchange in Canada and the third in Australia to add a cross-border element to the mix.

As of this moment of writing the spread between Atha Energy and Latitude Uranium stands at 30.90%, which I think is excessively high for a merger that should face no real hurdles in closing. Part of the reason for the large spread is presumably the fact that the stock is trading on the Canadian Securities Exchange, and is not tradable for many people. You probably need an account with a Canadian brokerage firm, and for US-based investors there might be additional complications since these companies could potentially be considered PFICs.

Interactive Brokers for example does not support opening positions, although you can sell (but not short) shares that are listed there. I initially wrote here that the listing location idea was supported by the 92 Energy merger having a lower spread, but a reader pointed out my bad math on that one. The spread on the 92 Energy merger is actually even bigger at 48%! The Latitude Uranium acquisition is expected to be completed in the first quarter of 2024 while 92 Energy is scheduled to close early in the second quarter. So if you have an unhedged long position you might see the share price of Atha Energy cratering once all the former Latitude Uranium shares hit the market. But the bigger spread might be enough compensation for that risk. Didn’t buy a position in this part of the deal, but might also be interesting.

So we get a big spread, but it is certainly not without risks. If you enter the trade unhedged you might be exposed to wild price swings given the underlying type of business, and the possible selling pressure when the deal is done might collapse the spread before you can exit. As of this moment my broker is quoting a borrow fee of 7.75% for Atha Energy, which is actually quite doable given the large spread and the short expected timeline to deal completion. But there are no guarantees that borrow will remain available or that the borrow rate doesn’t spike, and you will need a lot of margin space to set-up this trade. The latter is definitely a problem for me, so I decided to enter the position unhedged. I realize that the outcome of this trade might be all over the place, but hopefully the large spread is isolating me from negative outcomes.

Overview from the transaction presentation

Disclosure

Author is long Latitude Uranium

2023 end-of-year portfolio review

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My most popular post of the year is invariably the annual performance review. It is pointless to compare yourself to a random person on the internet, but I get it, curiosity also gets the best of me when someone else is sharing results. In 2023 the portfolio produced a return of 10.47% which in absolute sense is pretty good, but at the same time it is setting some negative records.  It’s a bit of a first-world problem when you can bitch about a double digit positive return, but besides being the lowest absolute return so far it is sadly also breaking my streak of beating the MSCI All County World Index every single year in a row. The key distinction between me and the index lies in my positive return the previous year, and if you don’t need to recover from a loss you start with a big head start. Taking 2022 as starting point the MSCI ACWI is up a meager 3.7% while my portfolio produced a 23.3% return. Like I said, first-world problems…

Year Return* Benchmark** Difference
2012 18.44% 15.01% 3.43%
2013 53.38% 18.11% 35.26%
2014 30.11% 19.23% 10.88%
2015 24.23% 9.34% 14.89%
2016 64.97% 11.73% 53.24%
2017 29.04% 9.47% 19.57%
2018 13.07% -4.34% 17.41%
2019 32.34% 28.93% 2.70%
2020 19.31% 7.18% 12.13%
2021 31.31% 28.08% 3.23%
2022 11.63% -12.58% 24.21%
2023 10.47% 18.65% -8.18%
Cumulative 1706.73% 282.47% 1424.26%
CAGR 27.27% 11.83% 15.45%

* Return in euro’s after transaction costs, net dividend withholding taxes and other expenses
** Benchmark is the MSCI ACWI (All Country World Index) gross total return index in euro’s

Long-time followers of the blog will see a familiar picture in the performance attribution graph below, with the special situations bucket being the driving force behind the portfolio. But I will admit that sometimes the lines are a bit blurry between which stock goes where. The number two position in the list is Garrett Motion, that I bought as a special situation when it entered bankruptcy proceedings, but was promoted to a long-term value pick after a successful restructuring. On the other hand, one of the major contributors in the special situation bucket is a stock that was spun-off after a successfully completed merger arbitrage, and it would certainly make sense to reclassify it to a long-term position. And sometimes the line is already blurry from the start. I think most investors would see investing in spin-offs as special situation investing, but how long can you hold it and still see it that way?

Also noteworthy is that during the year a meaningful contribution was made by interest income. Not only because interest rates went up a lot and you finally get paid something on your idle cash balance, but also because my cash balance was unusually high. We are looking to buy a house, and while that search is ongoing I want to keep my options open. That presumably incurred a significant opportunity cost, but investment results aren’t always the most important in life. Or maybe never? With that philosophical question I want to conclude this post, and wish my readers a happy, healthy and prosperous 2024.

Disclosure

Author is long most of the stuff mentioned in the performance attribution graph