Eclipse Gold Mining: A Potentially Shareholder Unfriendly M&A Transaction

On December 7, Northern Vertex Mining Corp. (TSXV: NEE) announced it would be acquiring Eclipse Gold Mining Corp. (TSXV: EGLD) in a no-premium, share-for-share exchange transaction. Northern Vertex will be the surviving company, while Eclipse shareholders are to receive 1.09 shares of Northern Vertex for each share of Eclipse they own. 

The companies hope to receive regulatory and Eclipse shareholder approvals in February 2021 and close the merger shortly thereafter. Current Eclipse shareholders will own only 18% of the combined firm. Terms of the takeover (the press release terms it a merger) must be considered disappointing for Eclipse shareholders.

First, Eclipse investors were optimistic through much of 2020 about the company’s flagship Hercules gold project on the Walker Lane structural zone in Nevada, a trend well known for bulk disseminated gold deposits. Numerous mines in the region have produced substantial quantities of precious metals, as well as boasting high levels of resources. In June 2020, Eclipse disclosed that a drill program at Hercules had intersected shallow oxide-gold in almost every drill hole and that broad zones of higher-grade mineralization were identified. 

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Based on this, Eclipse shares traded in a $0.75 to $0.90 range from early April through mid-October. Nevertheless, the company agreed to be acquired with no implied merger premium when the stock was trading at $0.57 per share, the low price of the year excluding a two-week period in March 2020 when most Western economies announced COVID-19 shutdown plans.

Second, Northern Vertex shares began to rise noticeably in July after the company announced record gold-equivalent production in the quarter ended June 30^th at its Moss Gold Mine in Arizona. Furthermore, in August, Northern Vertex announced that assay results from its drilling and resource expansion program at Moss suggested the prospect of widespread district scale mineralization. 

In response, Northern Vertex shares rallied from around $0.27 in mid-June to the $0.60 range in October and November. On the day it announced its deal with Eclipse, the shares were trading at around $0.58. As a result, Eclipse accepted a share-for-share takeover bid AFTER the reference currency for the bid (Northern Vertex stock) had more than doubled over an approximate six-month period.

Third, as part of the merger accord and before the transaction closes, Eclipse alone plans to raise $20 million of equity through a “best efforts” private placement of new Eclipse shares – at a discounted price of $0.50. Northern Vertex is not planning any similar issuance of stock. Eclipse’s sale of new shares, which is quite large in relation to the company’s market capitalization of $33 million, could depress Eclipse’s stock price until the anticipated mid-January 2021 private placement closing date. (We do note that any pressure on Eclipse’s stock price should similarly affect Northern Vertex’s stock price because the 1.09 merger exchange ratio now links the two.)

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Perhaps even more troubling and shareholder unfriendly to Eclipse than the $20 million raise: only about half of the contemplated $20 million issuance will be used to fund exploration and development at either Hercules or Moss. The other half will be used to purchase Northern Vertex warrants owned by the Maverix investment firm.

Lastly and as noted above, the actions of risk arbitrageurs could limit the share prices of both Eclipse and Northern Vertex until the merger closes. Based on the spread between the two share prices and the 1.09 exchange ratio, such traders will likely buy one and short the other to lock in a fixed profit. The shares of companies in a share-for-share exchange generally do not simultaneously rally until after the merger closes, barring a major post-merger news announcement.

Pro Forma Northern Vertex – Eclipse Financials

The combined company is projected to have a solid balance sheet – cash of nearly $30 million, offset by convertible debentures of $6.7 million and other debt of nearly $7 million. In its fiscal year ended June 20, 2020, Northern Vertex had revenues of US$57.0 million and operating cash flow of US$10.1 million. Eclipse is a pre-revenue company.

Conclusion

The merger agreement which Eclipse reached with Northern Vertex does not appear to be friendly to Eclipse shareholders. Eclipse agreed to a takeover price, which was substantially below where it traded for much of 2020, and the share-for-share exchange ratio is predicated on a much higher Northern Vertex share price than that company’s share price level six months ago. Furthermore, an ongoing $20 million private placement could negatively effect Eclipse’s stock price through at least mid-January 2021.

Eclipse Gold Mining and Northern Vertex Mining are trading at $0.55 and $0.54 per share, respectively, on the TSX Venture Exchange.

Information for this briefing was found via Sedar, and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.