The Gold Report - Thu, Mar 22, 2018

Nevada-Based Precious Metals Miner Announces Merger Proposal

George Topping, an analyst with iA Securities, discussed the business combination arrangement on the table between the two mining companies.

Florida Canyon Mine

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 (ALO:TSX; ALO:NYSE) 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.

Disclosure:
1) Doresa Banning compiled this article for Streetwise Reports LLC and provides services to Streetwise reports as an independent contractor. She or members of her household own securities of the following companies mentioned in the article: None. She or members of her household are paid by the following companies mentioned in this article: None.
2) The following companies mentioned in this article are sponsors of Streetwise Reports: Rye Patch Gold Corp. Streetwise Reports does not accept stock in exchange for its services. Click below for important disclosures about sponsor fees. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
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