Video interview: American Pacific Mining’s Constantine buy a ‘win-win’ for both juniors

Vancouver-based American Pacific Mining (CSE: USGD; US-OTCQX: USGDF) has announced the acquisition of Constantine Metal Resources (TSXV: CEM) and its Palmer zinc-copper-gold-silver volcanic massive sulphide project north of Haines in Alaska.

The transaction provides American Pacific with a second, advanced-stage asset under an active joint venture exploration agreement with a much deeper-pocketed partner, giving management time to consider options for its growing portfolio of earlier-stage gold prospects in Nevada.

American Pacific’s other main asset is the Madison brownfields project in Montana and is under option to partner with Kennecott Exploration, a division of multinational mining company Rio Tinto (NYSE: RIO; LSE: RIO; ASX: RIO).

Under terms of the deal, Constantine shareholders will receive 0.881 shares of American Pacific, representing a 48% premium to the value of the 20-day average share price of Constantine equity.

The deal is a “win-win” for both juniors in a tough market, strategic investor Michael Gentile, the largest shareholder of both companies, told The Northern Miner in an interview. Gentile, who is the largest shareholder in more than 20 junior mining companies, has made it a personal project to take advantage of the depressed market and put good-quality assets together with good-quality management teams.

“A consistent lack of capital has resulted in Constantine’s share of the project diluted over the past several years,” he explained. “Bringing in an experienced management team, with a strong balance sheet and financing connections, makes sense in moving the asset forward with exploration drilling that can grow the asset’s value.”

Gentile pointed out that the market recognized the value of the merger, with the share prices of both companies rising when the deal was announced.

Despite American Pacific shares trending down 40% over the past 12 months at 50¢ per share, it jumped 20% on Aug. 15 when the deal was announced and is still up 4% since then. The company has a market capitalization of $59 million.

Similarly, at 39.5¢ per share, Constantine shares gained more than 5% on the deal announcement and are still up 1.3%, despite the stock being down 24% over the 12-month frame. It has a market capitalization of $24.1 million..

Constantine historically held a 51% controlling interest in the Palmer asset, which required the company to finance its share of exploration. Constantine’s finances have been constrained for some time. Without a reliable source of income other than raising cash on the market, in October 2019, Constantine took out an unsecured, five-year US$630,000 loan at 12% interest from an investment group to pay operating costs. However, it was not enough.

The company’s interest has, to date, diluted to 45%.

Constantine’s Palmer project partner, Japan-based Dowa Metals and Mining (DOWA), has committed to funding the 2021 and 2022 exploration programs.

The Alaska Department of Environmental Conservation had recently approved Constantine’s engineering plans for a revised wastewater management system at the Palmer project.

DOWA’s $18-million 2022 exploration budget covers the construction of new infrastructure in preparation for underground exploratory operations, which the company expects to begin in mid-2023 and, critically, includes building an underground tunnel that would allow year-round exploration.

The Palmer project is at an advanced exploration stage. Palmer occurs within the same belt of rocks that hosts the Greens Creek mine, one of the world’s richest VMS deposits.

The project hosts two NI 43-101 compliant resources, the Palmer deposit and AG Zone deposit, with a consolidated mineral resource of 4.7 million tonnes grading 10.2% zinc equivalent in the indicated category and 9.6 million tonnes of 8.9% zinc equivalent in the inferred category.

A preliminary economic assessment was completed in June 2019, which presented a low-capex, low-operating cost, high-margin underground mining operation with attractive environmental attributes. The study calculated an after-tax NPV (at a 7% discount rate) of US$266 million at Palmer and an IRR of 21%. It used 2019 base case metal prices of US$1.22 per lb. zinc, US$2.82 per lb. copper, US$16.3 per oz. silver, US$1,296 per oz. gold and US$220 per tonne of barite.

According to American Pacific CEO Warwick Smith, the consolidated company will “be well financed with a pro forma cash balance exceeding US$10 million, allowing (American Pacific) to aggressively progress projects while leveraging spending commitments of partners.”

Should shareholders approve the agreement, American Pacific will have the option to contribute toward any further cash calls before the end of the year to mitigate further dilution.

A special shareholder meeting is required to approve the agreement between the two companies, which will occur in two to three months.

Smart consolidation

Gentile believes there are too many so-called ‘lifestyle’ companies in the junior mining sector.

“Having looked at hundreds and thousands of these companies, my view is there are too many junior mining exploration companies out there,” he said. “There are too many companies with $10 to $15 million market caps with no access to capital, spending a million or two a year on general and administrative expenses and just a few dollars a year in the ground.

“It’s not a good business model for shareholders because the dilution and the cost of capital are way too high to create real value,” said Gentile.

Combining juniors with good assets and teams is about getting those competent companies larger, so they’re more institutionally attractive and have access to better and lower-cost pools of capital, he says. “It’s about putting the best assets in the best people’s hands. I’m working on a few initiatives towards achieving smart consolidation right now.”

Click here to watch the video interview.