Thesis Gold: M&A producing overlooked value

Recent merger with neighbouring gold explorer has Thesis on the path to creating significant shareholder value. 50,000M drill program and updated MRE/PEA over the next 12 months.

I’ve a new interview out today, this one an update from Thesis Gold. Video is below:

 For my intro episode for Thesis, check out episode 22 here

I will provide a proper written introduction to Thesis later, but I wanted to here to just briefly discuss their recent proposed merger with Benchmark Metals.  Back on June 5, it was announced that Thesis Gold and Benchmark Metals (BNCH.V), neighbours in BC’s Toodoggone District, were merging together under the name Thesis Gold, pending approval.

Here’s a summary, courtesy of mining.com: (source)

Under the definitive agreement announced on Jun. 5, Thesis Gold’s shareholders will receive 2.56 of a Benchmark common share for each Thesis share at a value of 96¢ per share. Based on Thesis Gold’s 20-day volume weighted average trading price, the transaction represents a premium of 27.8% to Thesis shareholders.

If the transaction is approved and closed, Benchmark and Thesis shareholders will own about 60% and 40%, respectively, of the combined company’s outstanding shares. The company would then implement a 2.6:1 share consolidation of its common shares and change its name to Thesis Gold Inc.

I believe, and obviously the companies involved do as well, that this merger is a natural fit.  Next door neighbours, this allows them to consolidate the Toodoggone district, which of course in turn creates a variety of synergies which should result in faster, simpler, and more economical development into a mine, not to mention more ounces.  The geological potential is certainly there – Benchmark comes with a 3.6m oz resource they’re moving through the development stage with, though there remains potential for more.  See the infograph below from Benchmark for the basics on it. And Thesis has the potential for just as much as they just keep adding impressive ounces – lots of targets that end up giving up very economic grades and widths in the assays – and lots of exploration meet left on the bone

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And yet, as another example of the sickly junior market we find ourselves in, this announced merger fell flat in the market.  After closing the day of the merger, June 5, at CAD$0.81, Thesis is down to $0.62 as of market close June 23.  Benchmark has also struggled since the announcement, falling from $0.38 down to $0.275 over the same time period.  Combined, the current market cap of the two companies is presently CAD$110M. 

Obviously the market response is disappointing for investors in these companies.  However, I believe that this is an accretive transaction where the two companies collectively are greater than the sum of their parts, though obviously the market doesn’t share this interpretation presently.  If I were to try to guess the reason, it’s that the market feels this might end up a confused company – is it an explorer?  A developer? Which target is the priority?  How do the two different systems fit together under one mine plan?  The companies are indeed at two separate stages and there will have to be a clarified purpose of understanding for them to unite and move forward, but that is hardly an insurmountable obstacle. Indeed, we can expect an updated MRE and PEA within about 12 months which should begin to paint a much clearer picture for a skeptical and fearful market, not to mention the imminent 3 rig, 50,000M drill campaign. For me, this is merger a great example of a market selling low on something it doesn’t understand yet.  Which is exactly the sort of situation keen, contrarian investors with high conviction can take advantage of.  It also helps that Ewan Webster is an intelligent, capable geologist-turned-CEO who understands this district intimately well and possesses personal qualities I believe make him deserving of shareholder trust.

As for future valuation potential, Thesis seems exactly the sort of play that well have a healthy premium attached to it in the next bull market. I also believe this new amalgamated company would be a prime takeover candidate if it manages to reach the 6-7+ M oz I believe it has combined together.

So for all these reasons – proven resource and ample prospectivity, smart M&A, an indifferent market undervaluing what is happening, a strong CEO, and strong potential for future value rerating, this is a company I believe is a buy and worth scaling into a position.