Using Arbitrage to make a lot of Money - Jayant Bhandari
Published on August 30, 2017
00:00:08 My interest today is to talk about how you can use the tool of Arbitrage. Not only to make some extra money to make position yourself to make what could be a lot of money. What is Arbitrage? This photograph gives you a very good explanation. Of what Arbitrage is? Two gas stations across the road has gas price that is different by about 12 percent. Now gasses perhaps the most liquid commodity in the world. If you can have 12 percent arbitrage difference in gas.
00:01:01 You can imagine the kind of arbitrage difference that can exist in the very liquid illiquid junior mining industry. If I were here if I if I could I would buy gas here. I would be selling gas on the other side of the road. Now of course people don't do that. Of course there are people who go to the other side of the road to buy gas. I don't know why they do it? My job is to figuratively sell the gas to the other side of the road.
00:01:37 I'm going to focus on three aspects of Arbitrage Mergers and Acquisitions. I want to talk about, what happens? When the same company trades on more than one exchange I want to touch on rights offerings. Let's talk about one company in a bit of details this company does not exist anymore. This was a company called Sunridge Gold. On the 6th of November 2015 they came out with a news release saying that the company would be acquired by a Chinese entity. They give the number the figure for how much the company would be acquired for.
00:02:25 All you had to do was to do some primary school math. To figure out how much money it was worth for share. The company also did the news release saying that all the cash would be released back to the shareholders the company would be closed. The cash that you would have got would be would have been about 37 to 42 cent for share. When Sunridge opened for trading that day the share price was 624 cents which basically offered you a 58 percent Arbitrage upside in cash terms 58 percent.
00:03:16 Now can anyone guess how long would it take for this kind of Arbitrage to disappear? Anyone has any guess? This Arbitrage can carry on for months at a time this Arbitrage can actually increase with time. This is something which I find very funny very similar to what you see in those gas stations. Why people buy to the mall buy more expensive gas I don't really get it. This was the situation with the share price of Sunridge over the next three months. 40 days later it was still trading around the same price.
00:04:06 Two months later the Arbitrage upside was a still 41 percent a full three months later there was a still a 38 percent Arbitrage upside. Remember this was the cash that the company was going to return back to you. This is this was only a part of the story Sunridge was also also had warrants trading in the stock market. The company in the news release had said that they would pay two cent for each warrant of the company. You could pretty much buy the water set one half cents. Instead of trying to get your cash back you could have given a sell order at two cent for these warrants.
00:04:59 Now for a lot of investors there is not really much difference between one half cent two cents. Ladies, Gentlemen that's an Arbitrage upside of 33 percent. I personally did about four or five transactions round of transactions over a period of six months this continued for six months. The Sunridge story continues. This is I want to leave a glimpse of the opportunities that exist in the Arbitrage in Arbitrage in these companies. Sunridge was trading in OTC. Sunridge was delisted from the venture exchange.
00:05:48 That created some confusion for almost a week. Sanridge in the US was trading between five cents to ten cents. People I know that sandwich on OTC at five cents made about 500 percent on their investment over the next one week or. The story actually continues the company returned 35 cents to for each share to the investors. Basically if you did again primary school math you would have seen that there was a still four cent value left in the share.
00:06:33 It was a still trading on OTC. For seven months thereafter it traded for between one point five cent two point three cents when the value was four cent Canadian. Basically you were investing for an upside of between 35 percent to a hundred percent over that seven-month period. Why does Arbitrage exist? I don't really understand the same thing that we saw with two gas stations. One gas station manages to sell gas at a premium of 12 percent compared to the gas station next doors.
00:07:22 Efficient market hypothesis is a myth. Which believes that all information is built into the price it is completely wrong. Then as I have shown this Arbitrage can be much more exciting in the junior mining industry just because this is a very illiquid part of the market. Let me talk about very briefly a couple of more companies that's no longer exists. The Rico metals was to acquire a company called Kiska. All you had to do was to do some simple math to see that there was as much as 10 to 15 percent Arbitrage.
00:08:06 That continued to exist in owning Kiska Metals while the deal was going through its module. What you had to do was to do this one line math. Aurico was offering point zero six, six, seven share of or of Aurico to Kiska Metals. You had to multiply that with the share price. They were also offering a cash component. If you added that you would have seen that there was this Arbitrage of ten to fifteen percent in owning Kiska. This was another deal Treasury Metals was acquiring a company called Goldeye Exploration.
00:08:50 The math was extremely simple point one share of Treasury for each share of Goldeye when Treasury was selling for 65 cents Goldeye were often traded for five half cents. You had an Arbitrage upside of eighteen percent. This is a relatively risk-free trade ladies, gentlemen. This becomes much more exciting. Paramount Gold Nevada was trading on New York Stock Exchange it still does. It was acquiring a small jr. called Calico Resources which traded in the venture exchange.
00:09:33 Now again you had to do the simple math point zero seven share of Paramount is what you were going to get. You had to multiply that with the shape rights of Paramount multiply it again with the exchange rate. For three to four months there was an Arbitrage upside of between 25 to 40 percent in owning Calico Resources. More over because Paramount was trading in New York Stock Exchange if you did not know the value of paramount. You could have even short sold your shares of Paramount to book 36 percent profit in the deal it doesn't get much better than that.
00:10:30 Now these are not just isolated cases. I have as many companies I could fit in one sheet. I have put here all these transactions happened in the last one year. This is the Arbitrage upside I made in investing in that quarry companies. Gryphon Metal Minerals offered you a forty seven percent upside while the module with Teranga was happening. There are many other deals here I have left out many other companies that I did not believe. In whose underlying value was not something I felt good about.
00:11:16 They are not even listed. Here again this is something very exciting for the retail investors because big institutional investors can not really invest for Arbitrage. You can only invest ten or twenty thousand dollars on a daily basis in these companies at best. Big money has no interest in such investments. That is where retail investors if they keep track of the news releases can make a lot of money. This is where I found Arbitrage to be the best a very liquid big company acquires a small illiquid company that's when you see the best arbitrage opportunities.
00:12:05 All when this small venture company has very tired share holders. That's when they sell for a small premium leaving a lot of money on the table for anyone who can do basic mathematics. Even better the best opportunities I have seen are when one companies in Canada another company is in Australia. That's when you get the best Arbitrage opportunity. The reason is that most a lot of people who own shares in Canada don't really have access to the Australian market vice-versa.
00:12: 48 They dump their ownership. Let me finish talking about Arbitrage with two modules that are currently in process. I'm not going to go into details into this math that is on the screen. Sandstorm is in the process of acquiring Mariana Resources. The Arbitrage is only three percent right now. The reason is that there is huge volume of Mariana she is currently trading in the market. My experience is that as volume dries up the Arbitrage tends to increase.
00:13:32 I typically look for at least 20 percent Arbitrage upside before I invest. This is another opportunity in the market right now. Eldorado Gold is acquiring Integra. Depending on how you do the calculation because there are two of two ways in how the shareholders will get their money. The upside is between one to ten percent. If you use the weighted average it comes to around three to four percent again.
00:14:09 The good thing is that the volume is huge right now in Integra once this volume dries up my guesses Arbitrage will increase. Which time offering you an opportunity to make low risk high reward money. Let's let me move on to something else very briefly before I close the stock. Rights Offerings have recently started in the Canadian market. What happens when Right's offering a company that's rights offering is that the right is start trading on the in the Canadian market.
00:14:53 The picker is usually the ticker of the company dot RT. Now I don't buy a lot of rights I just buy a minimal number of rights. I invest maybe five or $10 to buy some rights. The good thing with rights is that once you have a minimal number of rights. You also have the right to apply for over allocation of shares. Let me use an example to explain this Kaizen discovery early last year was going through arrived suffering. You needed three rights to own one share by paying an exercise price.
00:15:41 Now you could have bought the right for half a cent. Three rights would have cost you one a half cents. You would have exercised the right for 10 half cents which meant that for twelve, twelve cents you would have owned the share when the share was trading at twelve half cents. Now that really isn't much of an upside that was about 4 percent upside. This is the fun thing you could have applied for over-allocation. Now an exercise price of ten and half cents compare it with Share price of twelve half cent.
00:16:28 This was a profit of nineteen percent. Now why does your over-allocation gets allotted to you. The reason is very simple a lot of investors forget or they are too lazy to apply to exercise their rights. I have never not had my over allocation request not allotted. It's as simple as that I invested probably about $10 in the rights exercise. I got a lot of over allocation in this company. There's another aspect to rights offerings I don't really know how this pricing works.
00:17:11 When a company does Rights Offerings it usually does their offering at a substantial discount to the share price which means that when the rights offering is closed the share price has a tendency to shoot up. By the time I got my allocation the share price was 17 cent it kept on going up after that. There was a possibility to make a 62 percent profit participating in this right offerings in my view arbitrage offers you a fabulous opportunity to make money in the junior mining industry.
00:17:59 You have to remember that you have to still understand the underline value because if you don't really understand the underline value you can make a lot of mistakes. This provides you a tool not only to make low-risk high-reward money an opportunity to make a lot of money in cases as I showed in Sunridge Gold. Ladies, gentlemen thank you very much for your time.