Heavily promoted nickel explorer Equitas Resources (EQT-V) said today, after a nearly week-long trade halt, that it’s taking on a Brazilian gold project through a merger with privately held Alta Floresta Gold. After the deal is done it is to own 50% of the combined company.
1. Awkward. I’ll guess I’m not alone in thinking it’s a mite strange for an early-stage nickel explorer with a stated mission to find Canada’s next nickel deposit, and a nickel-focused team guiding the young exploration project near Voisey’s Bay in Labrador, suddenly picking up a gold asset in Brazil and planning to develop it. Part of the oddness of the deal is just that: timing. It comes so suddenly and in the middle of Equitas’ full bore exploration plan near Voisey’s.
Most investors no doubt thought the idea in Equitas was to play on Voisey’s Bay and hope for a new, huge nickel discovery. Indeed, that’s highlighted as the company’s raison d’etre. It’s in the midst of drilling what it considers a hot target near Voisey’s Bay and late last year outlined results on early drilling. And now, in the midst of that mission, it has gone south to tackle a Brazilian gold project.
Maybe a little forewarning next time?
2. Short on details. Equitas highlights cash flow, and placer production at Cajueiro, the project in the Amazon rainforest it proposes to acquire. But it does not detail, at all, how much cash flow is coming from placer mining. It simply describes production, reported as starting in 2015, as modest.
So, it’s not unreasonable to want to know a bit more on this front. After all Equitas brings cash to the table in promising to allocate $1 million to advance the Brazilian assets. Does it expect a reasonable payback here with stated cash flow? And further, it would be nice to understand what the operation is permitted for. That is, placer only? And if so, at what rate? And for how long?
3. And then there’s the question of stretching finite resources in a market like this, considered by many one of the worst bear markets in junior stock. You might operate a nickel exploration play on a shoestring. But you won’t advance a gold deposit – even a very small one like that outlined in Brazil at Cajueiro – on one.
Which really brings us back to the first question and what kind of cash flow Cajueiro generates.
It doesn’t sound like Cajueiro is self-funding, as part of the proposed merger requires Equitas to both allot US$1 million to the project, of which US$300,000 is to flow after due diligence by Equitas on the project. That is, it sounds a little like Alta Floresta Gold needs cash and doesn’t make much of it. Further, the deal is subject to Equitas doing a $2.5-million private placement. That’s a lot of potential dilution for a junior with a recent market cap around $6 million.