After being rebuffed by CB Gold (CBJ.V) late last week, Red Eagle Mining (RD.V) decided to go public and make an offer to acquire all outstanding shares of CB Gold. In this update we’ll explain why the offer is definitely superior to the earlier offer from OM L Trading to acquire the company’s flagship project. Even though Red Eagle Mining is a sponsor of the website, this explanation is our own opinion and has not been influenced by anyone at Red Eagle Mining.
Red Eagle is offering 0.162 new shares of Red Eagle per share of CB Gold, resulting in an approximate value of C$0.051 per share, or a 46% premium compared to the 20 day VWAP. When Red Eagle first approached CB Gold, CB said the offer was inferior to an offer from its largest shareholder which would pay US$2M in cash up front and a 3% NSR with advance payments up to US$15M. That sounds very attractive, but the amount of those payments is very low at just $360,000 per year in the first year. As those payments would only start 24 months after the closing date of the agreement, the value needs to be discounted. If one would apply an 8% discount rate, a lump sum payment of $15M in 2017 would have a value of US$13M today and decreasing the longer it takes to receive the entire amount, so as the advance payments will be spread out over at least 20 years, the NPV will be much lower. Assuming a payment of $360,000 in Y1, and $720,000 per year in Y2-4 increasing to $2.4M per year in years 5-9 with a residual payment in Y10, the pre-tax NPV8% of the sum of the cash flows is roughly US$10M.
It wasn’t a bad deal, but shareholders would only see any returns further in the future, and meanwhile the company would continue to burn cash. Despite CB Gold being an empty shell after the sale of Vetas, the company would still have to pay its listing fees, lawyer fees and the CEO’s C$20,000/month salary (according to CB Gold’s most recent Management Information Circular). This means that even in the first year of the advance payment of the royalty, the royalty income won’t even be sufficient to cover the overhead costs of CB Gold as a standalone company.
However, by chosing Red Eagle shares, shareholders of CB Gold would not only get a more liquid investment, they would also keep the full upside potential of the Vetas project (instead of being capped at US$17M), as well as exposure to Colombia’s first commercial underground gold mine which should be in production just over 12 months from now, further reducing the financing risks and needs. On top of that, Red Eagle’s team has proven it has been able to permit an underground mine in Colombia, and it should be able to repeat this success at Vetas. So yes, we do feel the Red Eagle offer indeed IS a superior offer, and apparently so do shareholders representing 30% of CB Gold’s voting rights which have told Red Eagle they would vote against the sale to OM L trading.
This situation will be very interesting, and we expect CB Gold to have to postpone its general meeting which was planned to be held next Tuesday.
Disclosure: The author holds a long position in Red Eagle Mining. Red Eagle is a sponsor of the website. Please see our disclaimer for current positions.
