On May 11, 2015, Crocodile Gold Corp and Newmarket Gold Inc. announced that they are merging to establish a new platform for gold asset consolidation. Based on reported information, the structure of the new company ("NewCo") will look roughly like this:
Newmarket brings a good management team, less than $1.5 million in cash and a market cap of $15 million to the table in exchange for which, Crocodile has agreed to give up 8% of the new company. The question is: why would a quality gold mining company with a "track record of free cash flow generation" be willing to pay such a high price for what amounts to a high quality management team? The answer is that on the surface things may appear better than they actually are. Although production has been increasing and Crocodile has generated slightly positive free cash flows over the last two years; operating costs are a major concern. They represent over 70% of revenues for each of the last 3 years, leaving very little room for further development of mining operations never mind generating a return for shareholders. The high percentage of operating costs is due to the relatively low grades for the underground mines and will not change until gold prices increase dramatically. Investments in mining property (IMP) have been uncharacteristically low at 24% of revenues over the last two years (down 45% in 2012). In our opinion this number will rise significantly in the coming years as the mines will require increased development work to maintain production levels than has been done in the last two years. Even a small increase in IMP will erode what little cash flows exist. The next question: what is the value to each party?Value to Newmarket Gold Newmarket stated as far back as 2013 that they were looking to acquire production and near production opportunities and grow into a mid-tier gold mining company.