Merger DD : Let's Talk About DilutionThe "high dilution" argument has been proposed to support the idea that it’s better to sign the first offer of getting (only) 30% of the merged company. Some even said that we would be diluted by 60% if we are paying that debt alone, saying no to that deal. The 60% is obtained if we are paying the debt all in equity. The good thing about the work NEXG and SGNL managements have done is that they convinced Nebari to buy a 0.6% NSR for US$6M on Goldboro, leaving the debt amount to about US$14.4M (SGNL’s part) with a mature date being in June 2027. Here is the arrangement proposed with Nebari:
Restructured Credit Facility with Nebari to deleverage combined entity: - It is proposed that Signal’s outstanding credit facility of approximately US$20.4 million with Nebari and NexGold’s US$6.0 million facility with Extract Capital will be repaid.
- NexGold is working to arrange a new US$12 million secured credit facility with Nebari over a term of 30 months and the issuance of US$4.0 million of NexGold shares, with a one (1) year right to place.
- The arrangement would also grant a 0.6% NSR on the Goldboro Project to Nebari for US$6 million with a 100% buy-back right at the Company’s option for the first 30 months.
See the highlighted text? US$4M worth of shares will be issued to Nebari. That means, if we use a generous 1$ SP post-merge that 4M shares will be added to the float (dilutive). I’m aware that Nebari would prefer to have a participation in the merged company, but management always said they was a good partner for SGNL and we should not assume that they no longer want to sit at a table and renegotiate the credit facility with us. Surely something can be arranged by adding a NSR to Goldboro.
If SGNL extends the mature date to February 2027 this would give management time to receive the permits, get our rerate and then finance the equity part at a higher SP. Dilution will be less in that scenario than the 60% proposed.
I also did some back of the napkins calculations to see how SGNL shareholders could be diluted if the deal is done and compare it with the 60% dilutive factor advanced by some if we go all equity to pay the debt ourselves with equity. Base on the DD I have done, despite what the market is currently giving to SGNL (and our market cap is currently topped by the merge deal), I consider both companies to be of equal values as SGNL is way more undervalued than NEXG is.
So, we currently have 255M shares outstanding. SGNL just announced that the Financing has been closed and 120M new shares will be issued if the merge deal goes through. Right there, there is a 32% dilution done at 8.7 cents.
Now, for a shareholder that did not participate in the above mentioned financing, which I assume is the case for the majority here, since we will get 0.1244 NEXG shares, representing 29% of the merge company, you will be diluted by an extra 21% if we valued both companies to be equals (which I think it is). Your dilution factor is now 53%. The merged company will have 132.86M shares after the merge deal (76.21M NEXG +10M FT financing + 46.65M SGNL). Add to that the 4M shares that will be added with the new deal with Nebari, which give a 3% dilution. We are now at 56% dilution. Add to that the current obligations NEXG has regarding the different royalties they have on their properties. I already demonstrated that they will need to start paying Sprott in June about CAN$3.75M yearly with the following terms: - The Company may elect to satisfy the payment on the loan in cash or the issuance of common shares of the Company at a price per common share equal to the greater of: (a) a 5% discount to the five-day volume weighted average price of the five consecutive trading days prior to the date payment is due and (b) the maximum permitted discount by the Toronto Stock Exchange, at the Company’s sole discretion. The minimum payments are secured by a general security agreement and is registered against the Company’s assets.
We do not know what will be the SP next year, but let be generous and say that it doubles to an average price of about $1.50. Issued shares would be around 2.63M a year at the 5% discount price of %1.425 a share. This will add a dilution factor of about 2% for each of the first 2 years, meaning 4%. Adding it to the 56% calculated before, we are now near 60%. And I was generous 1.50$ NEXG share price average. Is that close to the 60% if we go alone?
I think we should not panic here with the 60% dilution factor if we are paying the debt alone as we would be diluted about the same with the current deal anyway. Please do your DD about NEXG financial situation and you will see, as I am, that they are in deep need of royalty free Goldboro to solve their financial challenges. This merge deal is presented as being a “friendly” offer but on my side, I want “friends” around me that are considering us as equals and respect what we were building over the years.
P.S.: Shiftyone is on my Ignore list. So if you see him challenging anything in that post, just make sure you verify his information before considering it.