Luxor turns Crocodile hunter

Luxor Capital Group, a New York-based investment company, has launched a partial bid for Crocodile Gold (CRK-T), which operates gold mines in Australia.

Luxor holds almost 20% of the junior but looks to buy another 215.4 million shares at US56¢ apiece, bringing its stake to 85%.

The offer is a 61% premium to the junior’s 20-day volume-weighted average price, or a 65% premium to its Dec. 13 close of 34¢.

Despite that premium, Crocodile president and CEO Chantal Lavoie argues that the offer undervalues Crocodile, which had been trading near its 52-week low of 31.5¢. The company reached a high of $1.49 last January. 

“It’s a very opportunistic bid,” Lavoie said in an early December interview. “We believe the value of the company is much higher.” He points out that analysts at Raymond James and Fraser Mackenzie have a price target of $1.30 and $1.50, respectively, on the company’s shares. Fraser Mackenzie is revising its $1.50 target.

Crocodile urges shareholders to wait for the board’s formal recommendation before reacting. 

Luxor proposed that it may launch a hostile bid for the junior on Dec. 13, which sent Crocodile’s shares surging 43% the next day to 48.5¢ on 25.9 million shares traded. It then tabled a formal bid on Dec. 27, which had little effect on Crocodile’s shares. 

Crocodile has appointed an advisory board to review the offer.

“If a bid is formally made [at the current price], I’ll consider it to be a stink bid,” Fraser Mackenzie’s analyst Michael Starogiannis said in December, explaining that the offer represents at least a 50% discount to what the company’s peer group trades at.

“The peer group of junior producers currently trade at enterprise values of eighty-five [U.S.] dollars per resource ounce and two hundred sixty [U.S.] dollars per reserve ounce [or three hundred seventy-two U.S. dollars, depending on how you split the peer group],” he detailed in an email to The Northern Miner. 

In comparison, Luxor’s tentative offer values Crocodile Gold at US$24 and US$189 per oz., respectively. 

“On a cash-flow basis the peers trade at between six times and eight times operating cash flow, versus the intended bid, which values Crocodile Gold at three-and-a-half times 2012 estimated cash flow,” Starogiannis notes, adding that he hopes shareholders reject the offer.

Similarly, Raymond James analyst Gary Baschuk told shareholders to hold their shares, saying the offer does not fully consider the value of Crocodile’s assets. 

While the company has several gold deposits in the Northern Territory of Australia, it is producing gold from the Mottrams and Princess Louise pits.

“We also have two mines in development: Cosmo Underground, which will be starting production in the next couple of weeks, and International open pit, which will begin production sometime in 2012 once permitting is finalized,” says Rob Hopkins, the company’s manager of investor relations. 

Both analysts believe that the company’s Cosmo underground gold operation will enhance the company’s performance. 

“We believe Cosmo offers a bright future,” Baschuk said in a Dec. 14 note. Cosmo boasts grades of 3.79 grams per tonne diluted, and once ramped up could provide a consistent ore supply to the Union Reefs mill.

With the addition of Cosmo, Baschuk expects the company to have produced 76,700 oz. gold in 2011 at cash costs of US$1,420 per oz., and 87,900 oz. gold this year at cash costs of US$886 per oz.

“Going forward, full production from Cosmo is expected to carry production over one hundred thousand ounces per year, at cash costs of approximately seven hundred fifty [U.S.] dollars per ounce from 2013 to 2021,” he says.

Asked if another company could make a bid for Crocodile, Baschuk says that because there are no other producers in the area he doesn’t expect to see “synergy bids,” but adds that another suitor may emerge. 

“With Cosmo within an estimated six to nine months to [commercial] production, and risk being decreased as underground development continues, we could see a small- to mid-cap producer step in.”

Starogiannis of Fraser Mackenzie believes another bidder surfacing in the current depressed market is unlikely.

“I do consider [Luxor’s offer] a stink bid. So will a stink bid in this kind of environment necessarily force another suitor or white knight to come out of the woodwork? I don’t think so.”