Blue Moon shareholder battle spotlights shades of grey in junior market

A minority group of shareholders in Blue Moon Metals (TSXV: MOON; US-OTC: BMOOF), which holds a first-resource-stage zinc-silver project in California, says its CEO issued defensive stock offerings that destroyed an estimated $8 million in stock value.

The lack of transparency and lost capital are a lesson for junior mining investors, mining engineer Michael McClintock, founder of the McClintock Group of stockholders, said in an interview with The Northern Miner. The group once held about 15% but it’s been diluted to around 3.5%, he said.

Part of McClintock’s argument is that the TSXV and Canadian securities regulators should have probed defensive capital raisings at below-market prices last year because they benefited CEO Patrick McGrath and board members at the expense of other shareholders. Share offerings at 1¢ when the stock was 2¢, and twice at 6.5¢ apiece when the stock was around 9.5¢ and 8¢, followed a 10-to-one rollback, documents show.

“Between the three financings they did, they issued upwards of 65% new stock that was all done either to insiders or close associates,” McClintock said from Vancouver. “Two of those financings were announced as closed, which I’ve never really seen done in the industry before.”

Blue Moon’s McGrath said the company required capital raisings to stay afloat. Commenting by email, he said Michael’s father, Jack McClintock, was on the board at the time of the first financing, and that the McClintock Group could have asked to be part of the financings. They were needed because the company had $30,000 in cash and $315,000 in debt as of the end of 2022.

“If the company did not raise capital, it would simply not survive and it would lose its assets,” McGrath said. “This is the case of most junior TSXV companies.”

Best interests

A defensive capital raising is a pre-emptive move to discourage a takeover by offering shares to certain people at a discount. It increases the number of shares available and makes it more expensive for a hostile acquirer to buy enough shares to gain control.

They aren’t illegal in Canada, but companies are supposed to demonstrate they’re in the best interest of shareholders and not merely a tactic to entrench management. It has similarities to a ‘poison pill’ clause sometimes placed in a company’s bylaws.

McClintock’s father, John, known as Jack, has a long history with Blue Moon, starting as CEO when the company listed in 2007. He resigned in 2015, rejoined the company in 2017 as a director. He left again in February last year, unhappy with how the roll back was done and the discounted share offerings to management and directors.

Michael McClintock issued an open letter to shareholders in April 2023 raising concerns. Management wasn’t providing adequate updates, it might try to sell the Blue Moon project at a significant discount to its market value, and the share roll back was unnecessary and had further diluted shares, McClintock said. He offered to be CEO for a salary of $1 a year.

‘No business plan’

Blue Moon replied the following month that McClintock had “no meaningful business plan, no indications of access to capital nor any prior public company experience.” McClintock had “onerous terms for the company that the board would not accept,” it said, referring to his offer to be CEO.

“The bottom line is John McClintock has led Blue Moon for 14.5 of the last 16 years without success,” Blue Moon said in May 2023. “If Blue Moon shareholders want a different plan than the last 16 years, they should be looking to the current team.”

McGrath said Blue Moon needed to roll back shares because it had 150 million shares outstanding and the company was trading well below the TSXV minimum price to complete a financing.

Defensive capital raising is rare, but one of many issues investors in junior mining companies need to be aware of, James Brown, partner at law firm Osler, and mining practice co-head Alan Hutchison said in an interview. Other concerns are being able to decipher technical reports, a stock’s liquidity, joint venture partner conflicts and how advanced the project is.

“In a lot of cases, issuers, particularly junior exploration companies, just need capital to carry on and keep the lights on and continue their programs,” Brown said by phone. “There are definitely cases in high-profile situations where there can be defensive tactics, but that is something that the securities commissions do focus on in the context of particular proxy contests or transactions.”

TMX, owner of the TSX and TSXV exchanges, and the securities commissions in British Columbia and Ontario declined to say whether Blue Moon was investigated because of McClintock’s claims.

Transparency rules

John Kaiser, who has published a mining industry newsletter for 30 years, said the Blue Moon dispute lies in a grey area where it’s difficult to determine who’s been wronged. Kaiser blamed the TSXV for weakening transparency rules on private placement details, which often hides who’s buying and how much.

“It is yet another sign of the F-You attitude the establishment has towards the investing public,” Kaiser told The Northern Miner by email. He commented on the company’s latest private placement that raised $924,000 in August by issuing 26.4 million shares at 3.5¢ each.

“The fact that the stock has developed an uptrend following a ‘pity’ priced financing, out of character with all past financings, suggests that the financing was placed with an ‘invited’ group in individual quantities below insider thresholds.”

Indeed, Blue Moon said three new proposed directors would stand for election to the board Oct. 17. All are well known reputable mining industry executives. They are former Iamgold (TSX: IMG; NYSE: IAG) interim CEO Maryse Belanger, Wheaton Precious Metals (TSX: WPM, NYSE: WPM; LSE: WPM) corporate development vice-president Haytham Hodaly, and Christian Kargl-Simard, the CEO of Adventus Mining when Silvercorp Metals (TSX: SVM; NYSE: SVM) bought it this year for $235 million.

McGrath declined to say why or how the proposed board members were attracted to the company, but said Blue Moon would update shareholders in the coming weeks of its plans and direction.

Share surge

The CEO said the value of the McClintock Group’s shareholdings since Feb 13, 2023, the date of Jack McClintock’s resignation from Blue Moon, to Oct. 10 this year have gained about 250%.

Blue Moon’s share price has risen more than tenfold to close at 34.5¢ on Tuesday from 3.5¢ before the latest capital raising was announced Aug. 15. The company has a market value of $18.2 million.

But McClintock points out the stock was at 60¢ in 2021 when the company did a financing. From then until the August capital raising, the stock lost 94% of its value and $8 million for shareholders, McClintock estimated. His group and other legacy shareholders dating to before the rollback have experienced 72% dilution since February 2023. McClintock says legacy shareholder losses may exceed $20 million when based on the asset’s fair value.

McGrath said the market cap today is higher than any period in 2022 and 2023. “The McClintocks are simply cherry picking the very high and the very low and ignoring the recent share performance,” he said.

Another company where McGrath is CEO, Burell Resources (CSE: BURY), raised $800,000 from an initial public offering in July 2021, and hasn’t issued a press release since. It has a historically explored gold project in Nevada.

‘Pressure worked’

McClintock said his group’s efforts at Blue Moon contributed to the company’s board changes and news Oct. 10 that it hired a company to conduct a new preliminary assessment on the project for release in next year’s first quarter. The last one was done in 1989 under a former owner.

“We strongly believe that the situation would have been far worse had we not applied the shareholder pressure,” McClintock said. “We really want to see Blue Moon succeed, and we hope we can impact a positive change.”

Blue Moon sold its 13-sq.-km Yava property with silver and base metal potential in Nunavut to Honey Badger Silver (CVE: TUF) on Oct. 2 in an all-share deal valued at $340,000.

The November 2023 update at Blue Moon in California upgraded nearly half (48%) of the previous resource to the indicated category. The project holds 3.5 million indicated tonnes grading 6.14% zinc, 0.75% copper, 1.54 grams silver per tonne, 0.05 gram gold and 0.24% lead for 431 million lb. contained zinc, 53 million lb. copper 17 million lb. lead, 5 million oz. silver and 200,000 oz. gold.

The project has 3.8 million inferred tonnes grading 5.94% zinc, 0.59% copper, 1.56 grams silver, 0.05 gram gold and 0.34% lead for 455 million lb. zinc, 45 million lb. copper, 26 million lb. lead, 6 million oz. silver and 200,000 oz. gold.