Crosby Capital Partners yesterday announced that it was teaming up with an unnamed group of investors to make an off-market bid for all the shares and options of Tethyan Copper Company. The bid is priced at A$0.64 a share, a 32% premium to Monday's closing price, giving it a full valuation of A$101 million ($76 million).
The bid comes at an interesting time for Tethyan and for its Reko Diq project in Pakistan. According to Crosby, the project is at a very early stage of development, not having even completed a bankable feasibility study.
Moreover, Crosby says that moving the project to development would require an investment many times the size of the company's market cap.
Crosby also says that its offer is fairly valued given the long-term trend of high copper prices. It claims that copper prices are trading at a 39% premium to the three-year average price and a 52% premium to the four-year average price, suggesting that now is a good time to sell. However, according to the London Metal Exchange, copper prices are falling and are expected to keep falling. In early March, the cash price for a tonne of copper on the LME was $3,379. Today that price is $3,160 and the 27-month forward price is $2,535.
Warming to its theme of persuading Tethyan's shareholders to sell their shares, Crosby attests that the project itself faces difficulties. In its bid submission, Crosby says that project financing for the project would be difficult given where it is located; a location which also makes for high geopolitical risks for the existing shareholders of Tethyan.
"Tethyan may not be able to operate its mines smoothly in the event of hostilities or terrorist actions in the Pakistan/Afghanistan/Iran region," says the Crosby statement. "Moreover, Tethyan's assets are not located in an easily accessible area of Pakistan."
Despite these difficulties, sources suggest that the potential of the combined gold and copper porphyry project is huge and that Tethyan is making progress in developing it. Since being spun put of Mincor in 2003 at A$0.30 a share, Tethyan's share price most recently moved up to A$0.69 a share in March of this year, before trending down to the current price of around A$0.50 following the downward trend of copper prices in the last few months. Nevertheless, it is still up by 10% on the year to date and by 18% since this time last year.
The bid is the latest such deal that Crosby has launched, acting as both a principal investor and adviser to the transaction, in what it calls a merchant banking model. The triple play of advisory fees, success fees and equity interests make for a profitable business model, if the deals are successful.
Explaining why it feels it is able to find value in a company where the market cannot, Crosby's statement reads: "The Crosby Group is able to offer a premium to Tethyan's shareholders primarily because of Crosby's ability to leverage its financial expertise, fund raising capabilities and experience in the emerging markets of Asia."
