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CHRONIC INVESTOR BLOG

Our light-hearted take on the world of investing

Rogue trader bids for deep-sea miner

By Matthew Allan , 22 January 2013

A rogue trader from Canada says he is prepared to pay C$270m (£170m) to take aspiring deep-sea-floor miner Nautilus Minerals (NUS) private. Disgruntled with the performance of Nautilus these past few years - the shares have slipped from a high of 230p in 2011 to a low of 18p in December - the trader thinks he can run the complicated underwater venture better himself. At nearly 70p a share in cash, the offer represents a generous 162 per cent premium to Nautilus's previous day closing price. Sounds nice, but will he go through with the bid? We suspect not. But his motives warrant further investigation.

Enter Michael Bailey, a minority shareholder in Nautilus who describes himself as an "experienced investor" and "algorithmic trader" residing in Ottawa, Canada's quaint capital city. Mr Bailey made a name for himself in 2008 by shorting Citigroup with a collection of "high-frequency proprietary traders" calling themselves "The Band of Scoundrels". The group, who claim to have made profits of over C$130m from the trade, now mainly invest in local technology start-ups. (They modelled the name after a Silicon Valley group of angel investors called the Band of Angels.)

Yet it is Mr Bailey's more recent activities that help shed light on his generous bid for Nautilus. You see, he has made similar out-of-the-blue hostile takeover approaches before. In 2010, Mr Bailey said he would make an offer for a Canadian diamond miner, Vaaldiam Resources, at double its then share price.

Hostile tactics

The offer was treated with suspicion by Vaaldiam's management, apparently for good reason. When the formal offer arrived, it turned out to be more of a hostile investment proposal than a takeover bid. Mr Bailey proposed investing C$10m in Vaaldiam at a 5 per cent discount - rather than the 100 per cent premium - but only on the condition that 10 of Vaaldiam's largest shareholders agreed to sell 100m of their shares to him at a 6 per cent discount. Even more absurdly, he wanted those shareholders to then loan the money they received for their shares back to Vaaldiam.

Needless to say, none of the parties were impressed by the proposal and rejected it unanimously. Vaaldiam's management then publicly denounced Mr Bailey's offer and alleged the private investor had played similar tricks before. They said a company co-founded by Mr Bailey, Dunn Capital Partners, issued a news release in 2009 "containing false or misleading information" regarding a financing of Emgold Mining that never happened.

Drowning Nautilus thrown a lifeline?

For its part, Nautilus has tried to distance itself from Mr Bailey's bid and advises shareholders not to take any action in respect of the offer. We agree - regardless of the fact that Nautilus now appears to be drifting at sea while awaiting arbitration proceedings with the government of Papua New Guinea, having recently cancelled its equipment building contract for its first underwater mining project, Solwara 1. That's because Mr Bailey's latest antics suggest another Vaaldiam-type offer could be in the offing.

In an open letter Mr Bailey wrote to Nautilus shareholders on 11 January, he argued: "As the largest shareholders of NUS, Metalloinvest, Anglo American, Mawarid Mining and we are urging [you] to join our tender as we are unwilling to put our trust in the existing board…". But Nautilus claimed on 14 January it had been advised the company's two largest shareholders, Metalloinvest (which holds a 21 per cent interest) and MB Holding (which holds a 16.9 per cent interest), that they had not even been approached by Mr Bailey concerning his offer.

Subtly, Mr Bailey is now changing his tune. He outlines a "win-win" scenario for shareholders: sell out now at a premium, or vote for his proposed new slate of directors in an upcoming proxy fight. Mr Bailey says he will "stop the bleeding and unlock share value trapped in the underlying assets" by spinning off the Solwara 1 project and advancing Nautilus's other assets with a new management team. As it turns out, Nautilus holds exploration tenements in the territorial waters of Tonga, Solomon Islands, Fiji, Vanuatu and New Zealand, as well as a patch of the ocean awarded by the International Seabed Authority in international waters between Hawaii and Mexico.

We can only speculate on whether Mr Bailey is using the takeover offer to sell his holdings at a higher price or if he is trying to take control of the company via a proxy fight without paying a substantial premium. Likewise, we can only guess if he has the money to go through with a formal bid. No matter which way it turns out, however, Mr Bailey will doubtless live up to the reputation his association with the Band of Scoundrels suggests.

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