If one of the better little gold explorers merges with an up-and-coming gold producer, do we get a better company?
The market doesn’t think so.
In fact, it HATES the deal. But I’ll tell you why the market might be wrong, and why this might be a heck of an opportunity.
Two years ago, I visited a company called Northern Vertex Mining Corp. (OTC Pink: NHVCF) in Arizona. They were just starting up a project called the Moss Mine. The thing I really liked about the project — besides the fact that Northern Vertex’s CEO is Canadian hockey great Ken Berry — is that you could see the deposits just lying there, exposed, in the Arizona desert. Not just the one they were about to turn into a mine, but an identical outcropping of rock right beside it. Upside potential? Heck, yeah!
You can watch that video here:
That was in 2018. Meanwhile, I went to visit a mining explorer called Northern Empire, which had the Sterling Gold Project in Nevada. On the tour, I kept tripping over heavyweight mining industry executives from Toronto. It was an A-team of talent. I knew that any project attracting all these heavy hitters had to be worth buying.
I recommended the stock to my subscribers, and a couple months later, Coeur Mining, Inc. (NYSE: CDE) snapped it up, lock stock and smoking barrel, for $117 million. We did very well!
The Northern Empire guys rolled away on a big pile of money. They called me in early 2019 to see their NEXT company, Eclipse Gold (OTC Pink: EGLPF) and its Hercules project.
Hercules is on the prolific Walker Lane Trend in Nevada. This “elephant country” is the kind of place where big, even really big, deposits are found. I was all set to pay a site visit when the coronavirus clamped down. I’ve kept in touch and most recently wrote about the project last month.
Back to Arizona. As time went on, Northern Vertex brought the Moss Mine into production. It had its bumps — most projects do — but in the most recent quarter, the cash-flow sluice gates opened up. Record production of 14,673 gold equivalent ounces fueled record revenue of $26.8 million and record adjusted EBITDA of $13.5 million for the quarter. But the company was held back by a lack of access to capital markets and some other issues.
How to Tick Off Shareholders in One Easy Lesson
On Monday, the bombshell news of the merger between Northern Vertex and Eclipse Gold was reported. Eclipse shareholders will trade one share of their company for 1.09 shares of Northern Vertex. The combined company will be comprised of 71% Northern Vertex shareholders, 18% Eclipse shareholders and 11% new shareholders. The board and management will merge, too, into a new Northern Vertex.
Is it a good deal? The market didn’t think so. Northern Vertex’s shares dropped 3.4% on the day. And Eclipse got clobbered, down 16.9% in one day. I’m an Eclipse shareholder, so ouch! Both stocks bounced the next day … but still.
It didn’t help that the team announced a C$20 million (U.S.$15.6 million) financing agreement at the same time. So, shareholders ended up owning a company different from what they originally bought — a diluted one at that.
I can understand the frustration. The same thing happened to me.
I try not to be sentimental or emotionally involved in stocks. The market for junior miners kicks investors in the shins all the time. Sometimes, there’s nothing better to do than take your loss and move on as you wait for the next big score.
But I also think, in this case, there’s a bigger picture that may point to higher prices.
What the Merger Brings
Doug Hurst, who will be chairman of the combined company (that is, the new Northern Vertex) made some interesting points in an interview …
- Northern Vertex brings its cash flow from an operating gold mine to the mix — a mine that is starting to optimize and turn out cash flow. They also have a great operating team and plenty of upside exploration potential around the Moss Mine.
- Eclipse brings strong access to the capital markets. Its management has been able to make a series of deals, a deal-making capacity that Northern Vertex does not have.
- Eclipse also brings with it VP of exploration Warwick Board. He did very well for Pretium Resources Inc. (NYSE: PVG) and Silver Standard before that, and he’s doing well at Eclipse’s Hercules Project. He’s top-notch. And the area around the Moss Mine is under-explored.
I talked to Eclipse’s VP of Investor Relations Dylan Berg. He said that there are 28 drill cores from Hercules in the lab. None of the results from those drill cores are in yet. So, there’s potential for good results there, the kind that can move a stock. They’re also waiting on a property-wide geophysics survey that could reveal new targets around Hercules.
To be sure, there’s the potential for disappointment, too. It’s still early days.
Dylan pointed out that the new company will have C$30 million (U.S. $24 million) in the bank and no warrants, AND the capacity to raise a lot more money. That gives the new Northern Vertex the opportunity to execute a roll-up strategy in the American West, snapping up prime projects.
Dylan also gave me a list of things the new company aims to accomplish in the next year …
- Regional exploration and resource expansion at the Moss Mine. In other words, find more gold.
- Continued optimization of operations. Aka, increase ore throughput, bringing down costs.
- Establish a new mine plan at Moss. That’s a path forward.
- Continued exploration at Hercules. More potential good news.
- Targeted M&A. Snapping up those prime projects.
- Graduate to TSX. In other words, improve Northern Vertex’s stock listing in Canada and potentially get more liquidity, while also upgrading the U.S. listing.
That’s a good start. Let me add three things on my mind, as a shareholder.
3 Things Angry Shareholders Are Missing
Here’s my view: Shareholders who ended up owning a combined company they didn’t want are exiting now — but here’s what they’re missing:
- Eclipse shareholders owned a company that wouldn’t have been anywhere near production for years. Now, they own an actual producer.
- Northern Vertex shareholders got a second property that is potentially richer and larger than their current asset.
- And the combined management team is top-notch.
Remember Sandstorm?
It might be the same kind of thing we saw happen with Sandstorm Gold Ltd. (NYSE: SAND) in 2017, when it merged with Marianas Resources to get the rich Hod Maden gold project in Turkey.
Sandstorm’s stock fell 10% the day the merger was announced, and it lost about 25% before all was said and done. Investors hated the deal. But now, a few years later, Hod Maden is a hot property — though its startup has been pushed back to 2023 — and potentially a dynamite asset for Sandstorm.
Northern Vertex is a much smaller stock than Sandstorm. It has a market cap of U.S. $110 million and is listed on the TSX-Venture and OTC Pink. Small stocks carry more risk than larger companies.
It all depends on an individual investor’s time frame. But I think people who are selling now, after the news, may be missing out on great things to come. The kind of things that could drive a tiny stock much higher.
I’ll keep my eye on the stock. It’s an example of the busy deal-making going on in the precious metals junior space where companies can change overnight.
All the best,
Sean
