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Two Stunning Sell-offs

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We all know Mr. Market can be a madman. This is a good thing. If he were cool as a cucumber, we'd never get to buy great businesses at hefty discounts.

In case we needed any additional reminders of the ol' chap's mercurial nature, this morning we saw two extreme sell-offs that left this Fool scratching his head.

Pre-wedding day jitters?
First was the plunge in shares of Grey Wolf (AMEX: GW  ) . You remember the M&A madness surrounding this onshore driller, don't you? The firm was doggedly pursuing a puzzling pairing with Basic Energy Services (NYSE: BAS  ) , despite a superior and more strategic takeover offer by Precision Drilling Trust (NYSE: PDS  ) .

The decision was put to shareholders, who rejected the Basic deal. Precision was then free to land its prey. The Canadian drilling dynamo is poised to merge with Grey Wolf after a shareholder vote tomorrow. There is zero indication of institutional opposition to this deal. So what the heck is Grey Wolf doing down over 50% today?

Precision called the situation "very strange" earlier today, and shares were temporarily halted.

Since I began writing, shares resumed trading, and Grey Wolf announced that the cash portion of the merger consideration was oversubscribed. Naturally, everybody scrambled for the cash, and there's not enough to go around. Those receiving only shares will receive 0.4225 shares of Precision for each Grey Wolf share. At the moment, that would be worth around $3.

So there you have it. A lot of these Grey Wolf shares are suddenly worth a whole lot less than many folks had assumed. And of course, Mr. Market is overdoing it by valuing all the Grey Wolf shares as if they'll only receive the least valuable all-share consideration.

Amazingly enough, this 50% drop does not represent a buying opportunity. There's no chance today's purchasers will see any cash from the deal. If you elected cash in a timely fashion however, sit tight! You'll only be locking in the worst-case scenario.

Fire sale on uranium, Aisle 7
Fronteer Development Group (AMEX: FRG  ) is a mineral exploration outfit whose CEO gave us an intriguing interview back in September. The firm has some interesting gold and copper projects in partnership with Newmont Mining (NYSE: NEM  ) , Teck Cominco (NYSE: TCK  ) , and other partners, but its real claim to fame has to be the unlocking of a world-class uranium deposit up in Labrador. At 67.4 million pounds of measured and indicated resources, the Michelin deposit is the 10th largest primary uranium deposit in the world.

Fronteer spun off the uranium business -- now separately traded as Aurora Energy Resources -- in 2006, while retaining a significant ownership stake. Uranium stocks were soaring at the time, and everything was going great until uranium's uninterrupted ascent finally cracked. Worse yet, Labrador's government slapped a three-year moratorium on uranium mining and production on Inuit lands. Shares have languished ever since.

In fact, Aurora has sagged to such a degree that it has been trading well below cash on hand, which is sizeable at over C$100 million. It's far from the only resource player to trade below cash, but for the market to give away such a stunning deposit for free is pretty unique.

Fronteer has, of course, recognized the disconnect, and today announced a takeover bid for the 58% or so of the Aurora shares it does not already own. This is a no-brainer, and will add tremendous value if accepted by Aurora shareholders. Investors are punishing Fronteer for the move -- and severely so.

This is an all-share offer, by the way, thus preserving the robust cash pile of both parties. What could these Fronteer folks possibly have against the deal? Is the idea of a uranium investment so radioactive that it's repellent even if purchased for pennies per pound?

I know you guys like your gold leverage, but look at the big picture. Nuclear plants are sprouting up around the world, Cameco's (NYSE: CCJ  ) production woes are no picnic, and exploration capital has evaporated. The world needs this uranium, and a couple years' delay does not eliminate the deposit's substantial value.

OK, forget about the uranium. Look at this pile of cash you're getting. Fronteer is free to allocate that money as it pleases. You'll get a beefed up balance sheet with which to tackle those gold projects, without any need for equity financing for years. You think Fronteer could raise this kind of money today, without issuing a flood of warrants to purchase cheap stock in the future?

Well, I'm done castigating. For those of you who aren't Fronteer shareholders, this share price is quite seductive. If I weren't already waist-deep in the shares of one of the firm's exploration partners, I would probably be jumping on board today.

Precision Drilling is a Motley Fool Global Gains selection. Dig into any of our Foolish newsletters free for 30 days.

Fool contributor Toby Shute doesn't have a position in any company mentioned. The Motley Fool never puts a moratorium on its disclosure policy.

Read/Post Comments (3) | Recommend This Article (18)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 22, 2008, at 11:26 PM, Berzon wrote:

    I have difficulty understanding your point on GW stock: "Mr. Market is overdoing it by valuing all the Grey Wolf shares as if they'll only receive the least valuable all-share consideration."

    Mr. Market is only valuing those shares that are changing hands, as he properly should and those shares are worth under $3, for very obvious reasons!

    I wrote extensively about PDS / GW just this past Thursday in my blog on . The story is also available on

  • Report this Comment On December 23, 2008, at 12:05 PM, XMFSmashy wrote:

    Fair point, Jake. The price only should reflect the shares not tendered, and thus only worth .4225 of a Precision Drilling share.

    The merger was approved today. On to the next chapter..

  • Report this Comment On December 29, 2008, at 7:56 AM, SDMS wrote:

    It looks like the market does not have much confidence in Labrador ever letting these projects get started again.

    Maybe Fronteer will use some of that cash to take out a few of Teck-Cominco's assets that are up for sale.

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