Developed Markets Bond
North American Bond
Durig Capital Fixed Income Review
Income from a Junior Gold Miner
After being impressed with the merits Brigus Gold (BRD)’s short term convertible debenture and then posting our first review of this profitable junior gold miner well over one year ago, we continued to believe that management had the Company headed in the right direction even though its stock and bond prices followed the price of gold, which was down. Consequently, we followed up our initial report with a second review and recommendation in March of 2013, and more recently, last month’s strongest and rather astonishing third review justifying the increase of an already overweighted position in what appeared to us to be extremely undervalued bonds.
Yesterday, it was announced that cash rich Primero Mining (PPP) would acquire Brigus Gold in a stock swap deal that resulted in Brigus Gold’s stock jumping over 33% to close the day at $.80. This is certainly not the first acquisition that the highly respected former IAMGOLD (IAG) president and CEO Joe Conway has been involved in. The former investment analyst built IAMGOLD’s output, through mergers and acquisitions, to almost a million onces a year when he shocked the mining world by leaving IAMGOLD on a high note in January of 2010 to “take a breather.” Less than nine months later, at the helm of newly founded Primero Mining, Conway successfully forged the $500 million purchase of the San Dimas silver and gold mine in Mexico from Goldcorp (GG). Primero’s $220-million, all-stock takeover of Brigus brings together two single-mine companies, and appears to have benefits for both sides.
Regardless of whether this ultimately proves to be a match made in heaven or a stock valuation for Brigus that will stick and only head north, the change of control mandates that the $50 million worth of Brigus convertible notes will be redeemed at par, giving bondholders a 30 day notification after the shareholders of both companies approve the deal. Goldcorp, which owns about 27% of the outstanding Primero common shares, has agreed to vote in favor of the proposed transaction. Furthermore, in the two days of trading since Monday morning’s pre-market announcement, over 12 million (or 24%) of the outstanding bonds have traded in a very narrow range a mere fraction over par (100). This appears to be a very strong vote of confidence from the bond market that there will be little resistance from shareholders to hinder the deal’s completion.
While we did not anticipate yesterday’s surprise announcement, we are very pleased that so many of our clients participated in such a big win. Even the lowest total gain from the bonds if they were to be redeemed this week would be over 17.6%, or 15.88% if annualized, from our first (and highest priced) purchase in November of 2012. Bonds acquired near the second review would be over 21% total gain, equaling over 30% when annualized, while bond that were more recently added (with our third review) would produce total gains over 19%, or over an astonishing 160% if annualized. We admit these are highly unusually gains that bondholders are seldom are able to experience, but we are very pleased that our efforts to identify and elucidate the fundamental soundness of Brigus Gold has been verified with the buyout offer from Primero Mining and that it is able to produce such a fantastic benefit to our clients.
Looking forward, it does not appear to us that there will be a very long wait for the complete redemption of all of the outstanding Brigus Convertibles. Considering that they carry a healthy 6.5% coupon and will continue to accrue interest up until the last day, we see little reason to sell the bonds for anything less than par and intend to hold these heavily overweighted positions until called from our Fixed-Income1.com and Fixed-Income2.com portfolios.
Thank you for your continued trust and confidence in our services and our ability to serve your needs. We are always “putting your interests first.”
NYSE: $0.78 12/17/2013
Maturity: 3/31/2016 (Change of control mandates redemption following 30 day notice)
Conversion Price: $ 2.45 (now irrelevant)
Yield to Maturity: ~6.5%
Disclosure: Some Durig Capital clients currently own Brigus Gold stock and/or its bonds.
Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. We welcome inquiries from other advisors that may also be interested in our work and the possibilities of achieving higher yields for retail clients.
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