Gold Royalty Corp. and Ely Gold Royalties announced they were combining last week. The deal terms allow Ely shareholders to receive some combination of cash and Gold Royalty shares “subject to pro-ration based on a maximum aggregate cash consideration of C$84 million and a maximum aggregate number of GRC Shares issued of approximately 41.5 million.” This is important and we’ll get back to it later.
The takeover clearly didn’t sit well with Ely shareholders, who were probably wondering why their company was getting acquired by a glorified corporate shell with no revenues, an expensive management team, a collection of awful assets and no path to profitability. Ely’s CEO released an open letter to explain the deal. Essentially: cash + NYSE listing = multiple expansion.
“The transaction has been structured with the Gold Royalty stock/cash option to ensure that Gold Royalty, with its management and its NYSE listing, will be considered as the surviving entity resulting from the business combination. At the transaction valuation, had Gold Royalty agreed to acquire Ely Gold in an all-stock transaction, Ely Gold shareholders would end up owning over 50% of the combined entity.”
Trey Wasser, President & CEO, Ely Gold Royalties – June 25, 2021
There are easier ways to uplist, raise money and bet on multiple expansion. Ending up with a less than half of the combined company is a lot of dilution for a cash pile of unknown size and an NYSE listing. Since this is clearly a takeover, the change of control provisions outlined in Ely’s latest MD&A filing come into play:
The Company has in place termination clause agreements with three of the Company’s officers and directors, whereby the officers and directors are entitled to a cumulative amount of $736,500 in the event they are terminated without cause, or $3,007,500 in the event there is a change of control.
Q1 Management Discussion and Analysis, Ely Gold Royalties
Change of control payments are standard and don’t bother me – why shouldn’t the founder of a company get a severance payment when he essentially fires himself? However, based on the open letter, nobody from either company is going anywhere:
Jerry Baughman and I will both be joining the new Gold Royalty as consultants, and I will also join the board of directors. Jerry and I will continue to generate and purchase royalties for the Nevada portfolio through our Nevada connections. The key difference is that now we will have the capital to participate in larger deals that could be more accretive to shareholder value. In Nevada, it will be business as usual and the combined company will have two talented groups focused on royalty origination and acquisition.
Trey Wasser, President & CEO, Ely Gold Royalties – June 25, 2021
Ely shareholders will have to wait for the circular to see if management will be collecting a payout and keeping their jobs. The companies are assuming Ely shareholders will max out the cash portion of the deal, leaving “GRC and Ely Gold shareholders to own 55% and 45%, respectively, on a fully diluted, in-the-money, and fully-prorated basis.”
However, the touted US$33-million proforma cash balance includes US$18-million of “potential proceeds from in-the-money securities” – so that is definitely not the amount that will be immediately available for acquisitions on day one. Amir Adnani companies are infamous for their bloated G&A expenses, which will also eat into available cash.
The combined company seems incredibly overvalued for what it is. As best I can tell, the management team at Ely Gold Royalties gave away 55% of their company for the following:
- Maximum cash payout to shareholders of CAD$84-million
- ~US$10-million in actual net-new cash to make deals on day one
- The promise of US$12.5-million more when in-the-money GRC options are exercised at $5
- An NYSE listing
- A collection of worthless GRC royalties that generate zero revenue on mining assets no legitimate company would touch
- A second management team and the G&A expenses that go with it, solely supported by Ely’s current cash flows
I have no position, but this goes back on the watchlist as a potential short.
