George Topping, an analyst with iA Securities,
discussed the business combination arrangement on the table between the two
mining companies.
George Topping, an iA Securities analyst, reported in a March 19 research
note that Rye
Patch Gold Corp. (RPM:TSX.V; RPMGD:OTCQX) announced that Alio Gold would
acquire all of its outstanding shares. "While the offer for Rye Patch's
recently commissioned mine in Nevada [with a 200 thousand ounce (200 Koz) per
year plant] is highly undervalued, Alio brings a lot to the table in terms of
cash, technical ability and risk reduction," he concluded, referencing
Rye Patch's Florida Canyon mine.
The analyst described Alio as a junior producer with three mines in
Mexico, one in production, another in development and a third in exploration.
The company produced 83.5 Koz in 2017 and guided for 90–100 Koz in 2018.
Major shareholders of Alio include Goldcorp and the Lundin Group.
The "upside for Rye Patch," Topping explained, would come from
Alio's $51.6 million ($51.6M) cash reserve, its cash flow-generating assets
and its team's expertise, all of which would further mitigate risk during the
continuing Florida Canyon mine ramp-up.
Via the proposed merger, Rye Patch shareholders would receive 0.48 of a
common share of Alio in the place of one Rye Patch share. This represents a
35% premium over the 20-day volume weighted average price and is equal to
about $1.57 per share, or $128M undiluted. "With 47% ownership of Alio
going forward, Rye Patch shareholders will still enjoy the growth in
production and gold prices but at a much reduced technical, managerial and
financial risk," Topping noted. The Rye Patch-Alio deal is expected to
close on May 25, 2018.
However, Topping indicated "many Rye Patch shareholders were
disenchanted" with the proposed transaction and several bigger ones,
along with members of management, have already chosen to tender their shares.
Further, a competing bid is unlikely, he added, largely because "the
$15.3M warrants with an exercise price of $1.65 are a deterrent to a
materially higher offer."
IA Securities revised its rating on Rye Patch to Tender from Buy and
reduced its price target to CA$1.60 per share from CA$3.25 per share. Rye
Patch is currently trading at around CA$1.26/share.
