The gloves seem to be off between Red Eagle Mining (RD.V) and CB Gold (CBJ.V) as the latter has published an answer on Red Eagle’s unsolicited approach. As a brief reminder, Red Eagle Mining made an all-share offer to acquire all outstanding shares at a ratio of 0.162 new shares of Red Eagle per old share of CB Gold.
In its rebuttal, we noticed several ‘interesting’ arguments by CB Gold, and we would like to provide our opinion on several statements made in CB Gold’s press release. Once again, even though Red Eagle Mining is a sponsor of this website, this article was written by ourselves and no one at Red Eagle Mining has read it before it was published as we do not accept any influence on the reports we publish.
Red Eagle Mining and CB Gold: the gloves are off
The gloves seem to be off between Red Eagle Mining (RD.V) and CB Gold (CBJ.V) as the latter has published an answer on Red Eagle’s unsolicited approach. As a brief reminder, Red Eagle Mining made an all-share offer to acquire all outstanding shares at a ratio of 0.162 new shares of Red Eagle per old share of CB Gold.
In its rebuttal, we noticed several ‘interesting’ arguments by CB Gold, and we would like to provide our opinion on several statements made in CB Gold’s press release. Once again, even though Red Eagle Mining is a sponsor of this website, this article was written by ourselves and no one at Red Eagle Mining has read it before it was published as we do not accept any influence on the reports we publish.
CBJ: “As a result, any share transaction with Red Eagle would ultimately result in the destruction of value to CB Gold shareholders.”
CB Gold hadn’t released any operational update since the beginning of this year, as the company didn’t have sufficient cash to further advance the project. So it’s a little bit weird to see them accusing a potential buyer of making a ‘value destructive offer’.
Red Eagle will undoubtedly want to advance the asset towards production as fast as possible to create value. Red Eagle went from project acquisition to a construction start in less than 4 years time (and is the first ‘large’ commercial mine to be permitted in Colombia), that doesn’t sound like a company that is destructing shareholder value.
CBJ: “Dramatically Inferior Value. The estimated value of the Sale Transaction is in excess of C$20,000,000, including US$2,000,000 in cash paid at closing plus the assumption of more than C$3,000,000 of existing liabilities. By comparison, the Potential Proposal, if received, would have a market value of C$8.4 million.”
This is an interesting one. As we explained in our blog post on Wednesday (http://caesarsreport.com/blog/red-eagle-is-hunting-for-cb-gold/), US$17M isn’t really US$17M as the majority of the payment will only kick in several years from now. As such, all those deferred payments need to be discounted (as cash in the future has a lower value than cash in your hands today). By applying an 8% discount rate, the total sum of the cash flows is approximately $10M. Additionally, if the Vetas project gets into production, the future value of the Red Eagle shares will be much higher than the C$8.4M.
It’s a critical error to compare a US$17M+ revenue over an extended period of time (very likely in excess of 10 years) with an ‘on the spot’ offer without taking the potential share price appreciation into account over the same period of time as a result of developing the project.
CBJ: “No Cash. If received, the Potential Proposal would be an all-share transaction with no cash component”
Under the OM L terms, the shareholders of CB Gold wouldn’t see any cash anyway, as it would be kept inside CB Gold as a company. So this isn’t really an argument as in none of both scenario’s the shareholders of CB Gold would see a penny.
CBJ: “No Upside from Vetas.”
This is a very weird argument. If shareholders of CB Gold keep the Red Eagle shares they will receive, then they are actually participating in the full upside of Vetas vs. ending up with a 3% NSR. One of the arguments in the press release was the ‘destruction of value’ as CB Gold shareholders would only own 6.5% of Red Eagle Mining.
That argument could now easily be turned against CB Gold as well. What would you like to own; a 3% NSR on the property or a 6.5% stake in the company owning 100% of the asset which also owns another gold mine? That’s not a difficult choice.
CBJ: “Risk of Putting the Company into Bankruptcy”
That’s not really a risk caused by Red Eagle Mining. Between December 2014 and the announcement of the sale, CB Gold hasn’t released a single press release. During those 5 months, the share price of CB Gold has increased by over 200% to in excess of 10 cents. The average share price for the month of January was 11 cents. Why didn’t CB Gold raise some cash back then? Even if it would have to issue shares at 8 cents, a 20% dilution would have resulted in a cash inflow of C$2.7M. Blaming Red Eagle for putting CB Gold on the verge of bankruptcy isn’t fair at all.
CBJ: ‘If Red Eagle had any intention to negotiate in good faith, they would have announced this Potential Proposal more than 3 days prior to the proxy cut-off date for our Meeting’
CB Gold has a point here, Red Eagle Mining is relatively late with its offer, but let’s not forget the transaction was only announced on May 19th, just 35 days before the meeting. However, Red Eagle already submitted an indicative term sheet on June 4th (16 days after the original announcement and 19 days before the vote), so there seems to have been plenty of time to negotiate before starting a public fight. Today is June 19th, and in the past 15 days since the indicative term sheet there has been plenty of time to negotiate a better deal that could be accepted by all parties.
CBJ: “Market Repudiation. Following Red Eagle announcement and at today market closing, CB Gold share’s price fell 25% clearly demonstrating market repudiation of the Red Eagle Potential Proposal.”
This is once again a flawed argument. CB Gold is 100% correct when it states CB Gold’s share price went down after the announcement, but it conveniently forgets its share price lost 50% and closed 33% lower at 4 cents in the first 5 trading days after it announced its deal with OM L Trading and has been trading at those low levels ever since.
Conclusion
The OM L Trading – Red Eagle Mining – CB Gold fight will very likely intensify over the next few days, and we hope this is just a defense strategy by CB Gold. Hostile takeovers are extremely rare in Canada and we really hope an amicable and fair solution could be reached for all parties involved. The best thing to do for CB Gold might be to postpone the general meeting by a few weeks and start the negotiations with Red Eagle Mining. It shouldn’t be too difficult to come to an agreement which would make both parties happy. Meanwhile, it should hire ISS or another independent proxy advisory firm to determine which of both proposals is superior. Should those firms side with CB Gold and rule in OM L Trading’s favor, then Red Eagle will have no choice than to sweeten its offer. We think hiring an independent advisory firm might be the only way out here.
We truly believe a merger between Red Eagle Mining and CB Gold would be a great fit. A very interesting exploration property (Vetas) being managed by the only management team which has been able to get a gold mine in Colombia permitted (Red Eagle) should bring lots of advantages, and a merger between both companies might be a great first step towards a mid-tier South America-focused gold producer.
Disclosure: Red Eagle Mining is a sponsoring company. Please see our disclaimer for current positions.
