Gold Merger Unearths Shareholder Value

week that it is joining forces with Australian operator Titan Minerals Ltd. (ASX: TTM) to create a diversified, ASX-listed gold company with a portfolio of projects throughout Latin America.

In a news release, Company management explained that all of the issued and outstanding CGLD common shares will be acquired by Titan by way of a share exchange, representing an implied equity value of C$0.45 per CGLD share (at time of announcement). There is a significant premium for Core Gold shareholders here, as those who hold shares of both miners will each hold roughly 48.5% and 38.9% of the combined company, respectively. The new shareholders subscribing for Titan shares under the placement holding approximately 12.6% of the combined company, based on a minimum raise of $20 million (AUD) / $18.9 million (CAD). Core Gold will receive 20 Titan shares for every 1 of Core Gold’s shares.

At today’s exchange rate, the computed value of each Core Gold share is 20 x $0.025 (AUD) = $0.50 (AUD) @ fx of 0.945 = $0.47/share (CAD).

When the deal was announced, it was approximately $0.45 (CAD), representing a premium of:

• 44.7% to the closing price of Core Gold common shares on the TSX Venture Exchange (the “TSX-V”) of C$0.31 on February 22, 2019, being the last trading day prior to announcement of the Merger;

• 53.8% to the 20-day volume weighted average price (“VWAP”) of Core Gold common shares on the TSX-V as of February 22, 2019;

• 65.3% to the 30-day VWAP of Core Gold common shares on the TSX-V as of February 22, 2019.

This deal is not simply a straight cash take-out. For investors assessing the transaction, here are the “pro” and “con” takeaways:


Pros:

• Alleviates Core Gold’s significant balance sheet concerns via injection of new capital (existing Titan cash position of A$5.5M + new equity raised of minimum A$20M + additional debt or equity financing of ~A$14M = total of ~A$40M of new capital). As of September 30, 2018, Core Gold had cash of US$1.16M and US$22.5M of debt (US$6.7M) and outstanding payables (US$15.8M)

• Pro-forma cash position of ~C$25M (A$27M) allows for potential unlocking of value from exploration assets. With the new capital and balance sheet relieved, the Company can spend capital developing its assets, which would otherwise be left undeveloped given the capital constraints

• Significant immediate upfront premium to Core Gold of 65.3% (30-day VWAP), significantly higher than the selected LatAm junior gold exploration and development corporate-level precedent transaction median of ~47%

• Core Gold to retain 4 of 7 Board votes (3 Titan nominees, 3 Core Gold nominees + Core Gold’s right to appoint the new Chairman)

• Core Gold is entitled to a 60-day “go-shop” period during which it may solicit superior proposals

• Core Gold is entitled to dispose of non-core assets, which it is currently pursuing

• Access to a significant Australian institutional investor following, including Australian funds Tribeca Investment Partners and Terra Capital

• Access to a well-respected and well-followed Australian capital markets/financing/IR team, including Nick Rowley who is a key principal and current Director of the ASX-listed major lithium producer Galaxy Resources (A$860M market cap)

Cons:

• Dilution – It is obvious that dilution is a part of this deal, but it is important to note that at today’s share price of ~C$0.28, a A$20M private placement (if available at all) would be at a significant 10-15% discount – likely $0.20-0.22 (with warrants) – compared to the C$0.45 premium currently being attributed to CGLD as part of merger. The Company cannot withstand any further debt and requires significant equity to alleviate the balance sheet. With high costs at Dynasty Goldfield, future capital injections (either dilutive equity at ~C$0.20 per share or additional expensive debt that the Company cannot withstand) would be required.

• Culture differences and trading frictions between Australian and Canadian exchanges. While not as easy to trade as in Canada, Australia is seeing near-record highs in the AUD gold price and the Australian exchange does not currently have a sector as dominating as cannabis in Canada. Mining remains a core sector in Australia and investors continue to have appetite for mining equities

• CGLD shareholders to receive shares in Titan, a likely unknown mining company to Canadian investors and a relatively newly-listed company (March 2017), which as of now has over 2.7 billion shares outstanding. As part of the deal, however, there is a proposed 10:1 share consolidation and post-$20M financing, the Company is expected to have ~660M shares outstanding. While this may seem like a high number of shares outstanding compared to Canadian companies, this is a common share structure in Australia.

Core Gold Lead Director, Gregg Sedun noted for shareholders that this merger with Titan unlocks value from CGLD’s underexplored exploration and development assets.

“With the additional $20 million (AUD) of equity capital to be obtained at closing of the Merger, we can now undertake a significant exploration program at Dynasty Goldfield, drill test the other highly prospective properties, as well as optimize production capacity and recoveries at the Portovelo mill and processing plant, which has been underperforming due to Core Gold’s capital constraints. While still retaining 48.5% of the pro-forma entity, this transaction with Titan provides an attractive and immediate premium to Core Gold shareholders and allows them to participate as meaningful shareholders in a well-funded gold company listed in Australia where we believe more attractive valuations will be afforded to our asset base.”
Titan’s Executive Chairman, Matthew Carr added that the combination of Titan and Core Gold has compelling strategic logic and merit, which was unanimously recognised by the Board of Directors of both companies.

“The combined organisation will be an emerging Ecuador and Peru focused gold company with an outstanding portfolio of gold assets. We are confident that merging the companies will result in significant benefits to both sets of shareholders with a potential re-rating opportunity for the expanded shareholder base from an enhanced capital markets profile.”

The resulting Latin American gold explorer, developer and producer boasts a large gold portfolio in Ecuador and Peru:

• Measured: 437koz Au (2.9Mt @ 4.7g/t gold), Indicated: 585koz Au (4.0Mt @ 4.6g/t gold) and Inferred: 1.1Moz Au (7.8Mt @ 4.4g/t gold) at the Dynasty Goldfield project in Ecuador, reported in accordance with the existing Canadian NI 43-101 Technical Report

• Current gold production in Ecuador and Peru with substantial near-term development potential

• Portfolio of highly prospective exploration projects across Ecuador and Peru

(Map via Core Gold Inc. Click to enlarge.)

Core Gold is currently focused on its wholly-owned Dynasty Goldfield project in southwestern Ecuador with a CIM-compliant mineral resource estimate of 437,000 ounces of gold at 4.7 Au g/t measured, and 585,000 ounces at 4.6 Au g/t indicated. Mineral from Dynasty Goldfield is treated at the Company’s wholly-owned Portovelo treatment plant near the town of Zaruma.

Other significant gold exploration projects owned by Core Gold include the Linderos and Copper Duke projects in southern Ecuador. Both of which and Dynasty Goldfield, are on the main Peruvian Andean gold-copper belt extending into Ecuador.

Core Gold is a mining company on the hunt for the best deal for shareholders and this Titan proposal appears to offer the best value. If a superior proposal appears in the next 60 days during the “go shop” period, it would quite obviously be a bonus for shareholders. However, as it stands now, this Titan deal offers promise that could benefit its stock.



FULL DISCLOSURE: This is a paid article produced by Stockhouse Publishing.