The BarkerLetter

Not all acquisitions by major mining firms are good for the shareholders of the companies acquired.

The conventional thinking is that juniors get bought out by majors at a premium, and while that’s often the case in a bull market, it doesn’t necessarily mean the common shareholders are going to benefit.

It’s why you should examine the share structures of the juniors in your portfolio fairly carefully. In the past I’ve invested in deals with good projects which were bought out by major companies at a premium, but got left at the dock when I realized the buyout offer only applied to the preferred shareholders, or those holding a different series.

In some cases where the preferred holders have enough voting clout to approve a merger, a major may make them—and only them—an offer they can’t refuse. The common shares are then spun off into another vehicle along with the marginal or substandard properties in the portfolio, where they wither on the vine.

That’s not very nice.

Some companies have provisions against that; for example, Teck Cominco Ltd. (TCK.A.B.), which recently announced a buy back of its B series subordinate voting shares, has a provision which converts them to A shares if a takeover bid is made. The A shares have 100 votes each plus a dividend while the subordinate shares have one vote and no dividend; however, if only the A shares are purchased, or an offer is made to purchase them, the subordinate voting shares are automatically converted to class A shares with all the voting and dividend rights attached. This is affectionately known as a poison pill, and it protects both the company and the shareholders from exploitation.

Of course money changes everything. In a diminishing market, we often see a substantial reduction in the value of takeover offers being made. A company´s ability to accurately gauge the correct time and place to put itself on the block is crucial, which is why you should have a lot of faith in the guys running the show.

After all, the whole point of investing is to sell out at some point for the highest price possible.

I´m also a little leery of all-share buyouts in the current market. Frankly I´d rather sell on the hype than find myself holding shares of a larger but equally inflated company with rapidly diminishing share valuations.

Incidentally, it´s not a bad idea to buy Teck B shares on the dips leading up to May. It´s almost certain we´ll see a run up in stock prices before the split. But if you hold, be prepared to hang in there for several years as we could be in for lower metals prices (and lower share values) after next summer.