INVESTMENT COMMENTARY — Merger expected to boost Granges

With the merger between Granges (TSE) and Hycroft Resources & Development (TSE) now approved, Yorkton Securities sees upside in the combined company.

“Very simply, the merger unites cash on one side with producing assets on the other,” writes the brokerage firm. “We suggest the market’s interpretation of the merger’s math could look something like this: 1 + 1 = 3.”

The amalgamation is expected to take effect May 1, with shareholders of Granges receiving one new share for each old share and shareholders of Hycroft receiving 0.88 of a new share for each share held.

The new company will have 45.9 million shares outstanding, about $42 million in working capital and no debt.

Granges brings to the table cash, 50.5% of Hycroft’s outstanding shares and $29 million in debt owed to it by Hycroft.

The company’s primary asset will be Hycroft’s Crofoot-Lewis open-pit, heap-leach mine in Nevada. Production in 1994 totaled 94,808 oz. of gold and 314,756 oz. of silver at a cash cost of US$294 per oz. of gold produced. Yorkton expects Crowfoot-Lewis to produce about 110,000 oz. gold and 325,000 oz. silver this year, with cash operating costs dropping to US$260 per oz. The increase in output and improved costs are based on mining moving to the Brimstone deposit, which will utilize dump leaching without the expensive 3-stage crushing process required in previous leaching operations. As of Jan 1, reserves at Crofoot-Lewis were estimated at 66.5 million tons grading 0.019 oz. gold per ton, which was higher than the previous year’s estimate of 56.7 million tons grading 0.018 oz. The stripping ratio for the more recent estimate is 2.3-to-1.

The potential to expand reserves further is seen as excellent, both to the north and the south of existing workings, as well as at depth with respect to higher-grade sulphide deposits.

About 83% of the Crofoot-Lewis reserve exists on patented claims and will therefore be immune from any potential royalties brought in by an expected change in the U.S. Mining Law.

Based on a share price of $2.38 for Granges (and based on an adjustment in the market capitalization of the new company to reflect the $42 million in working capital), Yorkton believes the company is cheap relative to its peers. The adjusted market capitalization of the merged Granges works out to US$38 per oz. of gold reserves and US$432 per oz. of annual production. This compares favorably with Viceroy Resources, for example, which trades at about US$867 per oz. of yearly production and US$92 per oz. of reserves. New York-listed Atlas, which now holds 37.2% of Granges’ outstanding shares, will own about 27% of the new company and remain its largest shareholder.