Gold Standard Ventures (NYSE: GSV) is about be acquired by Orla Mining (ORLA) in an almost all-paper deal, reportedly amounting to a consideration of C$242 million and a hefty 35% bonus – if you’re willing to believe the press release.
For what it’s worth, if you follow the logic of the press release and consider the June 10 end-of-day price action for GSV ($0.399) and Orla ($4.29), and if you also consider the report from proposed exchange of 0.1193 Orla shares for each GSV share, the premium amounts to 26.5%.
But that’s beside the point, because whatever the theoretical premium was just before the press release, it all evaporated once the market found out about the deal.
But let’s go with the overall figure anyway, and generously assume the quoted deal value of C$242 million (or $187.6 million in US denomination), and check how that valuation plays out for GSV investors. .
GSV controls the Railroad-Pinion gold project as well as the Lewis project, both in Nevada. The former is clearly the flagship asset of this junior development company and the recent feasibility study calculated an after-tax (5%) NPV of $487 million roughly at the current price of gold. Taking into account GSV’s C$17.5 million (US$13.5) cash position and assigning no value to the Lewis project, the multiple offered by Orla is only 0.36xNPV. Much less developed, and dare we say, much less attractive projects have achieved better multiples in the recent past.
Or take a different angle and consider the book value of GSV’s assets, as filed for the end of the first quarter of this year.
Hardly a bounty to view from this angle either. After all these years of investing, Orla buys GSV well below book value at a multi-year share price low. The press release then lists other “benefits” for GSV shareholders arising from this agreement, but this is not the time to add insult to injury, so let’s just say that this list of ” advantages” is about as far from the reality of investors. than the 35% premium claim.
And before you ask, yes, we called the company and expressed our views; and we were most certainly advised that this transaction was deemed to be in the best interest of shareholders, despite all evidence to the contrary. However, all is not lost. GSV may have failed miserably at creating shareholder value along the Railroad development path, but there are exceptions: CEO Mr. Attew and CFO Mr. Neeser are two shareholders who will really benefit from this agreement: their parachutes are worth C$1.6 million and C$0.9 million, respectively.
To be clear, GSV is not some weird junior explorer with a meager project in the middle of nowhere in a dodgy jurisdiction. Quite the contrary in fact. The Company’s Railroad Gold Project is located in Nevada, close to infrastructure, and has a strong feasibility study under its belt. We visited the project before the pandemic and came away very impressed, convinced that it is a remarkable project in its own right with many exploration benefits to start, a project that will be transformed into a very profitable mine in the not-too-distant future (Orla Mining would probably agree).
And to be clear again, there is no urgent financial need to complete this deal at this time. The Company has sufficient liquidity to carry out planned permitting and exploration work as set out in the Press release of April 18. Certainly, it helps to get permits across the line, as Mr. Attew promised to do a short time ago.
So why oh why?
Frankly, there is no rational justification for this agreement that comes to mind. Except for one nagging idea that has been bothering us since we discovered this transaction. Let us explain and support ourselves by going back to 2017. A certain Mr. Chuck Jeannes had been the CEO of Goldcorp (now Newmont (NEM)) when the major acquired the Camino Rojo project. Goldcorp spent around C$500 million on the project before selling it again to Mr. Chuck Jeannes, who had moved on to become chairman of Orla Mining. The man only paid C$32 million in Orla stock the second time around – literally pennies on the dollar. (Rude Otto has the whole story on his blog here).
Fast forward to 2022, and we can’t help but suspect that Goldcorp Connection has once again been hard at work, this time orchestrating the GSV deal. GSV CEO Mr. Attew was Goldcorp’s chief financial officer until the merger with Newmont. When he took over as CEO at GSV in late 2020, expectations were high, and those expectations explicitly included Mr. Attew bringing the Railroad project into production. Instead, we find him selling the company at a multi-year low to Orla Mining, where former Goldcorp boss Mr. Chuck Jeannes is still chairman of the board.
It may just be a nagging idea and there may be far fewer sinister forces at play, but at this point our lessons learned include avoiding junior miners with mining projects. attractive heap leaches led by former Goldcorp executives; and write down the names of the actors involved and never trust these people with our investment money again.
Where To Leave this place ?
Looking at the current share prices of both companies, the arbitrage has narrowed to just 3%, indicating a market confident that this deal will most likely close. Orla’s share price suffered from the news of the deal, and for investors interested in the company, the drop arguably represents a buying opportunity. GSV shareholders can simply hold their position and wait for their shares to be exchanged for Orla shares at the close of the transaction if they wish to go that route.
And surely, there’s a lot to like about Orla Mining. The company recently announced commercial production from its Camino Rojo mine, following a remarkably quiet construction period. Orla clearly has the expertise to do the same at Railroad in due course, and she controls a third project with similar characteristics in Panama. If management continues to orchestrate deals as it has done with Camino Rojo and now the Railroad project, then there is good reason to believe that Orla will become a mid-level gold miner in just a few years and will create value along the way.
Investors in GSV who do not wish to exchange their shares for Orla shares would probably be better off selling their shares immediately before closing the deal with Orla. GSV’s share price will be tied to Orla’s future, and there is reason to assume that Orla will recover at least some of the decline it has suffered as the market closes. acquisition of GSV is getting closer and short-term traders are exiting, so patience might be a virtue in this case.