Latitude Uranium merger arbitrage

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

5 thoughts on “Latitude Uranium merger arbitrage

  1. Ananymous

    Thanks for the idea! How do you come up with these – like Google Alerts or reading all smallcap US/CA filings?

    Reply
    1. Alpha Vulture Post author

      I use multiple approaches, but Google alerts are certainly one of them. Set an alert on a key word like “definitive arrangement” and you probably would get this one.

      Reply
  2. writser

    Note that Latitude is also tradable OTC in the US as LURAF (same ISIN). Only ~1/3 of the volume of the CNSX listing, but still not extremely illiquid. I think most US or overseas investors can buy it there (though there’s still the PFIC caveat) with a ‘normal’ broker, IB or Schwab or whatever. I’m personally not that convinced the big spread is caused by the CNSX listing. Though the spread is large enough to warrant a small gamble!

    Reply
  3. Mike

    The risk of only considering a long position in the other companies is that the price of Atha Energy could fall. This would eliminate the discounts. Unfortunately, I have no idea what Atha Energy might be worth and whether the stock is over- or undervalued. I could not find any reports covering the stock. The company provides a peer analysis which would suggest that the stock is cheap.

    Reply

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