Mega Uranium – Here’s a Way To Buy Mega at a Discount

by JDH on January 25, 2007

Special thanks to Buy High Sell Higher Forum member purepaloma for pointing out a great way to get 5 year MGA.TO – Mega Uranium Ltd. warrants for what appears to be a pretty good value. (You can read purepaloma‘s post here in the Mega section of the Forum).

On October 31, 2006 Twenty Seven Capital Inc (TSC.V) issued a press release announcing that they were being bought out by Mega Uranium. For every 6 shares of TSC owned by TSC shareholders they will get two shares of Mega Uranium, plus a warrant allowing them to purchase a share of Mega for $6. The warrant is good for five years.

Here’s the math, as of the close on January 24, 2007:

6 shares of TSC at a closing price of $2.55 are worth $15.30;

2 shares of Mega at $6.59 are worth $13.18, but you also get a warrant (which is the right to buy one share of Mega for $6).

Therefore, if you buy 6 shares of TSC for $15.30, you get two shares of Mega worth $13.18, so you are paying the difference, or $2.12, for the warrant.

The warrant has an exercise price of $6, and one share of Mega is worth $6.59, so the warrant is already 59 cents “in the money”, meaning you are paying $2.12 for something that is worth (ignoring the time value of money) 59 cents, so you are paying a time premium of $1.53. (Of course as purepaloma later pointed out on the Mega Uranium Forum – Mega Uranium Ltd., you could use the Black Scholes Model to value these warrants; purepaloma concludes by doing this deal you are buying Mega at a 15% discount).

So here’s the question: should I pay $1.53 over the strike price for the right to buy one share of Mega Uranium Ltd. at any time in the next five years?

Well, five years ago (on January 25, 2002) Mega (which was then called Maple Minerals) was trading on an adjusted basis for 6 cents. It has gone up $6.53 in the last five years. That’s 10,883%. If that happens again, your $1.53 investment will be worth a huge amount of money.

In the last twelve months Mega has gone from $2.37 (on January 25, 2006) to $6.59 today, for an increase of 177%. If that performance repeats itself (and we know that history never repeats itself exactly), that means that a year from today Mega will be worth $18.25, and the warrant will be worth at least $12.25. That’s a return of $10.72 or 700% on our $1.53 investment.

You gotta love leverage. The stock goes up 177%, but the warrants go up 700%.

(Of course if the price of the stock falls by 60 cents, or around 10%, the warrants are notionally worthless. Leverage is less fun going the other way).

So do we buy now? This transaction was announced in October, and January is almost over? How long will it take to complete?

I have been accused in the past of not doing any individual research, so to get the answer, I did some research. I went to Twenty-Seven Capital’s web site, found the name of their Investor Relations guy (Graham Downs), and I sent him an e-mail asking when the transaction will close. He responded about 5 minutes later (great job, Graham!) and said this:

“Our special meeting is scheduled for February 7, 2007. Anyone holding shares by that date will receive the appropriate amount of Mega shares and warrants.” Therefore if you want in, do it soon.

So, is this a good deal? I think so, for one obvious reason: MGA.TO – Mega Uranium Ltd. is a good company. It has had huge growth in the past, has a great presence in Australia, and now, for the first time, has assets in the ground in Canada. (Detractors will say that Mega is part of the PNP.TO – Pinetree Capital Corp. family, whose chairman is currently under investigation for insider trading (although not insider training in Pinetree or Mega); you can read some of readers comments on that on the Mega Forum Board as well).

I’m buying Twenty-seven Capital, and I look forward to holding even more shares in Mega (and the warrants) later in February. In fact, depending on how the price moves today, I may even sell some Mega and put the proceeds into Twenty-seven Capital, since it’s never a bad idea to buy stocks at a discount (until everyone else catches on and the premium evaporates).