Thursday, April 1, 2010

Lihir Gold (LIHR) - Buyout Bid Rejected; Stock Gaps Up

LIHR is trading 36.15 up 28% with IV30™ down 15%. The LIVEVOL™ Pro Summary is below.

The news: LIHR Rejects Newcrest Mining's $8.5 B Buyout (from AP)

NEW YORK -- Australia-based gold producer Lihir Gold Ltd. said it has rejected an $8.5 billion cash-and-stock takeover bid from Newcrest Mining as inadequate.

In a statement Wednesday after the markets closed, Lihir Gold said that on March 29 Newcrest offered one Newcrest share for every 9 Lihir Gold shares, plus 22.5 Australian cents (US20.7 cents) per LGL share.

Lihir Gold said that based on Newcrest's March 31 closing price, the offer was valued at 3.87 Australian dollars($3.55) per share and valued the company at $9.2 billion Australian dollars ($8.5 billion).

Shares of Lihir jumped $8.09, or 28.7 percent, to $36.34 in morning trading. Earlier, shares touched a new high of $36.76.

The company has traded over 4,425 options in the first 2 hours on total daily average option volume of just 314. Most of the contracts have been calls - sales of the May 35 kind @ ~$2.70. The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge).

The Options Tab (click to enlarge) illustrates that the May 35 call volume is larger than the OI - but close in size. You can also see that the rest of the options have been relatively dormant.

The Level 2 pop-up shows one of the days the OI spiked in LIHR (2-5-2010). It implies that some opening trades occurred on 2-4-2010.

Looking at the Time & Sales for that day and those calls we can see they were purchases. In other words, a bunch of the sales today are closing that long OI.

The order flow thus far essentially implies either (or both):
(1) No one has picked up on this stock yet
(2) No one has found a sweet spot to lay down a good bet

The Skew Tab is included (click to enlarge).

You can see the shape is actually pretty "normal". To read why skew exists and what "normal" skew looks like, you can go click here. Many pro traders make a living off of deal stocks by purchasing cheap options (usually puts) and hedging that off with a long position (varying between calls and stock or both).

The general idea is to make small money/breakeven if the deal goes through at the "deal" price, but to make size if the deal falls apart. This opportunity avails itself when market price discovery takes too long and "arbs" between months in options develop. For example - buying an option in the second month and selling the same option in the front month for the same price.

Finally, the Charts Tab (3 months) is below (click to enlarge). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue). The yellow shaded area at the very bottom is the IV60™ vs. the HV60™ vol difference.

Note that even at this gap price - the stock has been near these levels before - the 52 wk high is the 35 range. A higher bid, a dropped bid, both and neither are all possible. My approach is pretty simple - I stare at the montage all day until I see a gap opening up - some sort of cheap play that I feel is mis-priced. This happens often times with resting closing orders coming in and market makers on "auto quote" not adjusting fast enough.

This is trade analysis, not a recommendation.

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