SolGold & Cornerstone Announce Friendly Merger Transaction
Some luck is required here
I have covered Cornerstone Capital Resources Inc (Cornerstone) on the 21st July 2021.
The theory has been that Cornerstone would be highly valuable due to their 15% carried interest in SolGold and 21% vested interest in the Cascabel copper-gold project in Ecuador (Cascabel).
Cascabel being one of the few significant copper deposits discovered globally would be highly interesting-valuable to SolGold major shareholders Newcrest and BHP. Since both are vested in Solgold, SolGold is bound to find a home within either of these two giant and Cornerstone's shareholders would be holding on to their 15% Cascabel assets with jingle in their pocket for a very long time.
Sadly, there is usually no fairytale in the world of business.
On last Friday 7th October, SolGold PLC announced that it has agreed to buy the entire issued share capital of Cornerstone in an unanimously recommended friendly merger, valuing Cornerstone at around 96m pounds (CAD 146m).
Cornerstone shareholders will get 15 SolGold shares per share they own, and the London-listed company may pay 20 per cent of the bill in cash. Existing Cornerstone shareholders will end up with a fifth of SolGold (which looks relatively fair) if the deal goes through
Why would the director of Cornerstone commit to such as deal?
Cornerstone has a 15% carried interest in SolGold and that meant that they could have gotten a free ride when BHP or Newcrest takes over the Cascabel project.
I think there is only 1 plausible reason - Cornerstone's directors do not have a choice if they want to cash in on their Cascabel asset.
BHP who is most likely the preferred buyer for SolGold assets would not want to give Cornerstone Capital shareholders a free ride. The Cascabel asset needs to be absorbed into SolGold before any possible deal can be consummated.
Why am I so sure that BHP would be the preferred buyer?
On 4th November 2021, SolGold Chairman has complained publicly that BHP is trying to meddle in the reappointment of its board members.
Subsequently on 16th November 2021, SolGold named former BHP executive Darryl Cuzzubbo as the SolGold’s new boss.
BHP has USD 12.4b in cash and USD 6.1b in net debt at the end of December. Since BHP is so big, the acquisition has to make a material contribution to the BHP's USD 65b plus revenue and USD 40b of EBIDTA.
That means that it has to be a big asset or a very promising early stage explorer like SolGold which will take around USD 2.7b in pre-production cost over the next decade.
SolGold reckons that it could mine Cascabel for 26 years at 210,000 tonnes of copper equivalent a year and generate USD 14.4b of cashflow after tax based on copper of USD3.60 a pound.
That should sound interesting enough for BHP to pounce.
So what is going to happen next?
Cornerstone's director are somewhat suggesting (through this sale) that the 100% ownership of Cascabel copper-gold project in Ecuador is worth a lot more than SolGold current valuation.
Given that SolGold shares closed at around 17pence on Friday, and Cornerstone has around 36.92m shares in issue, this implies a valuation for Cornerstone of around GBP 96m. It implies that SolGold would be technically worth around GBP480m post transaction.
SoldGold reportedly has only enough cash to see it through to the end of the year and it is clear that SolGold would be raising cash from shareholders soon.
If the fundraising is small, then BHP and Newcrest would most likely try to maintain their current shareholding status quo.
If it is a lot, then we shall see a slinging match between the two giant.
Overall, the second development will bode well for Cornerstone and SolGold shareholders.
There are many ways to play this development.
You could either buy Cornerstone to convert into SolGold shares, buy SolGold shares directly or even ASX-listed minnow DGR Global who own 8.9 percent of SolGold shares as shown on SolGold most recent annual report.
The risk is that there is chance that the Cornerstone deal may not go through and Cascabel would be left to fallow for a very long time.
Vote yes to the transaction and let's cross our finger for the sale of Cascabel to the highest bidder.
I am vested in Cornerstone and may choose to sell anytime.