Golden Arrow Resources (GRG.V) completed the sale of its 25% stake in the Puna Operations to SSR Mining (SSRM, SSRM.TO) in Q3 2019 as the company would have been unable to meet the cash calls to wire more funds to the Argentinean subsidiary to fund the ongoing capital requirements.

As you may remember, we voted against the sale (which was merely a symbolic vote) and were afraid the incoming cash and SSR Mining stock would evaporate pretty fast as Golden Arrow was facing hefty payment schedules to earn into their new projects. Fortunately the company was able to kick the can a bit further down the road on those payments, allowing itself to have a little bit more room to breathe.

The sale was an unfortunate event. Shareholders who purchased shares of Golden Arrow after the company released the news of its discovery holes at Chinchillas were sitting on a 48% loss when the sale was announced. Unless anyone sold on the spike during a marketing campaign in early 2016, shareholders were generally underwater.

Golden Arrow Resources Chart

Not because Chinchillas turned out to be a lousy project, not at all, but because the deal with SSR Mining wasn’t optimally structured. We had the impression Golden Arrow was expecting SSR Mining to make a move to acquire either Golden Arrow or its 25% stake in the Puna Operations. This eventually happened, but it was SSR Mining dictating the acquisition terms as the mid-tier producer played it very well as it acquired the stake at a discount to the book value on Golden Arrow’s balance sheet.

In our August report, we also mentioned this:

Golden Arrow’s management should pledge to not issue any bonuses to themselves for completing this transaction. After all, the share price is currently trading 48% lower than when Chinchillas was discovered, so there’s no reason for bonuses to be distributed as zero shareholder value has been created (in fact, considering the current share price is trading 48% below the pre-discovery announcement, a lot of value has been destroyed for long-time shareholders). Considering the financial statements of Golden Arrow show C$1.45M has been spent on G&A in just the first six months of the year (excluding regulatory fees and travel expenses), Golden Arrow’s staff will hardly have to eat peanut butter sandwiches if this would be the second year without bonuses payable. The [aforementioned] G&A [expense] does not include the Puna Operations G&A as Golden Arrow is not consolidating its interest in Puna.

We understand it when a company sometimes is being forced in an unenviable position, and once you are cornered, there is no easy way out of a tough position. While we understand that selling the 25% stake in Puna Operations to SSR Mining was the only way out, we felt that this should not be a ‘bonus-able’ event as no shareholder value was created as Golden Arrow’s share price was trading almost 50% lower compared to the post-discovery hole share price. Unfortunately Golden Arrow’s board and management appeared to disagree with this view, as we found this sentence in its Q3 report:

We are still waiting for the full-year financial results to be filed (which should happen any day now) and expect to see those bonus amounts paid out by now. No detailed breakdown was given but in the ‘key management personnel compensation’ section of the financial statements, a comparison with the 9M 2018 compensation gives us a good idea as to who’ll take home the bonus money:

When a mid-tier producer is playing the game smarter than a non-revenue junior, unexpected issues could occur, like having to sell the remaining stake in Puna Operations below book value. C’est la vie, we get that. But this should not be a bonusable event or at the very least, if Golden Arrow wants to reward its field teams, it should not warrant a bonus exceeding C$1M.

Disclosure: The author has a long position in Golden Arrow Resources. The company is not a sponsor of the website, but has been a sponsor in 2016.

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