What happened
Shares of precious metals miner Silvercorp Metals (NYSEMKT: SVMLF) were higher by 12.5% at 1 p.m. Wall Street time on June 4. Since April 27, when the company announced it had agreed to acquire Guyana Goldfields, the stock has been up nearly 40%. The funny thing is, the deal keeps hitting snags, and yet Silvercorp's stock keeps heading higher.
So what
On May 17, Silvercorp and Guyana amended their original agreement to increase the price that Silvercorp would pay because a third party had entered with a better offer. The change was significant, taking the per share consideration from the original CAD $0.60 to CAD $1.30, more than doubling the cost for Silvercorp.
When Silvercorp originally stepped in to buy Guyana Goldfield, it looked as if Silvercorp was getting at least a decent deal, if not a good one, because Guyana Goldfield's shares had fallen materially over the previous year. Silvercorp stock rose. But perhaps not surprisingly, the stock fell over 10% when it had to match the higher offer.
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And now Guyana has announced that it has received another bid that is higher than what Silvercorp is offering. This time, the per share consideration is CAD $1.85, an increase of about 40% over the previous offer and over three times Silvercorp's original proposal. The news has sent Silvercorp's shares sharply higher this time around. Silvercorp has five days to match the price. If the agreement between Silvercorp and Guyana Goldfields is terminated, Silvercorp would receive a CAD $3.65 million termination fee, according to the original agreement between the two companies.
Although it is impossible to predict what will happen from here, it seems likely that, this time around, investors believe Silvercorp will bow out and take the CAD $3.65 million in cash. Thus, the sizable stock price advance for Silvercorp today. Although Silvercorp's original plans of creating a more diversified miner would have been foiled, the current offer has materially diminished the long-term value of the transaction. Assuming investors are correct, it makes sense that the shares would move higher. The complication is that, at this point, Silvercorp's shares are up 40% since it started this journey and, if it does step aside, nothing will have really changed about the company.
Which brings up yet another possible twist: It's possible that investors think Silvercorp could find itself in play, too, if it doesn't end up acquiring Guyana Goldfields. That's purely speculation and not something to trade around, but not an unreasonable thought given that the price tag for Guyana Goldfields is now three times higher than it was less than two months ago. If Silvercorp does end up matching the new offer, however, it wouldn't be shocking to see its stock price fall as it did following the previous deal revision.
Now what
Most investors looking at the metals space would be better off sticking to larger, more established players as they seek to diversify their portfolios with a precious metals investment. The twists and turns in this on-again, off-again merger are a perfect example of why. Although the drama is, indeed, exciting, long-term investors should generally try to avoid complicated situations like these. There are simply too many other options to take on the uncertainty.
