CEO.CA Chairman's Briefing

In December 2021, shell-corp-cum-mining-co North Peak Resources (NPR) announced that it had reached a definitive agreement with Gary Grauberger, for an option to purchase from him the Black Horse property, a 2,733 acre parcel in White Pine County, Nevada, that, for a few years more than a century ago, hosted a gold rush.

The agreement calls for NPR to make an initial payment of $1.0M cash and 1.25M shares (@ $0.40/share, or $500,000 total), which it did in December, followed by two payments of $10M cash, in June 2023 and June 2024, respectively, in exchange for 50% interest in the property. NPR would then acquire the remaining 50% once it obtained all permits required to begin production.

Although I am long shares of the company, I believe that economic and market conditions have deteriorated since the Black Horse option agreement was announced such that the terms of the option agreement are no longer in the best interests of all stakeholders. My investment recommendation for NPR remains neutral until, and unless, the terms of the agreement are restructured.

I will first provide a brief background of the period of gold mining activity in the Black Horse district, with attention largely paid to the evolution, and shortcomings, of the majority owner. I’ll then delve into the crux of this article by focusing on the following points:

• Why NPR is now in a superior position to renegotiate
  
• Why Grauberger will likely be amenable to a restructuring
  
• How a restructured agreement will benefit all the stakeholders
  

Background of Black Horse

The Black Horse property comprises 136 claims, all but one of which encompass a majority of the historic prospects and mines within the Black Horse District, so-named after the first announced gold discovery at the namesake Black Horse mine in March 1906.

The Black Horse District emerged onto the Nevada mining scene, in early 1906, to much fanfare, with local papers proclaiming of a new gold strike almost every day. Prospectors soon flocked to these remote foothills of eastern Nevada, enticed by headlines such as “New Cripple Creek in Nevada; Salt Lakers in big luck at Black Horse” (July 25, 1906) and “Black Horse District—A young Collosus [sic]” (July 30, 1906).

A New York businessman, with economic momentum at his back and fresh investor cash in his pocket after the recent IPO of his company, Amalgamated Nevada Mines and Power (“Amalgamated”), caught wind of the gold finds and quickly descended on the Black Horse, improvidently spending to amass the rights to 12 mining streams, 34 miles of canals and flumes, and 56 lode claims, in the district including the five largest and most-developed mines.

Black Horse lacked milling facilities, however, and it quickly became apparent that the expense of shipping unprocessed ore from this remote region was unsustainable. What Black Horse needed was a processing mill. As one local paper summarized it in January 1908: “Milling facilities is the one thing needed to make Blackhorse an important producing camp. A large portion of the ores obtained there would be of shipping grade under ordinary circumstances, but the long haul to railroad precludes the shipping of anything but the very high grade.”

But Amalgamated, already hard-pressed for cash from the Black Horse acquisitions and continuing to operate at loss, lacked the capital to construct the mill. And while in 1906, investors were lining up to hand Amalgamated money, investors were now unwilling to fund even what was the last, crucial component needed for Amalgamated to turn Black Horse into a profitable mining operation. As one paper noted in April 1908, “the reorganized (company) had arrangements last year to begin the work (of building a mill at Black Horse), but the carrying forward of its plans was delayed by the financial depression.”

*NOTE: The U.S. stock market began to decline in April 1907, culminating in the “Panic of 1907”, a period of 11 months over which the New York Stock Exchange declined by more than 50%.

Without a processing mill, mining and exploration activity at Black Horse quickly ground to a standstill; enthusiasm waned, and prospectors began to disperse. As reporter Will Higgins of the Salt Lake Mining Review wrote in November 1910, “the unforseen [sic] oftimes happens, and while Blackhorse was slated everywhere to be a sure winner, its leading properties fell into the hands of the boomer, the promoter, and complications followed. . . out of misdirected efforts by inexperienced and grasping operators, the result being that the leading property of the camp. . . has been virtually idle for a number of years’ past.”

After “several years of litigation which plunged the company into debt,” Amalgamated was able to scrape together enough capital to construct a mill, which was completed in November 1910. But Amalgamated still wasn’t able to get out from under it’s significant indebtedness, so the underground workings mostly remained empty. In fact, most of the ore that was processed by the recently constructed mill was either custom ore from one of the few prospectors who’d remained, or it was the ore that had been extricated from the mine workings, sacked, and placed on ore dumps during the previous three years.

Black Horse grabbed headlines one final time when, in August of 1913, the report came in that the mill had been totally destroyed by a fire. However, it seems there was little need for the mill by that point, anyway; as one paper noted, “for some time, the mill has been idle, as the company stopped all work some time ago pending the settlement of financial matters.” This was the last time in the 20th century that any newspaper would mention Black Horse district and gold in the same article.

Public documentation of mining activity in the district following the mill fire is sparse, and it’s limited mostly to USGS reports and other available documents concerning scheelite (tungsten) exploration and mining, which took place during the 1940’s and early 1950’s, after the U.S. War Production Board ordered miners to cease gold production and instead produce “strategic metals,” such as tungsten. Besides scheelite production, the Black Horse district hosted a couple of small privately-owned silver and lead mines along its outer boundaries (located beyond the boundaries of the current Black Horse property), as well as a smattering of individual prospectors off-and-on throughout the latter half of the past century.

Thence we arrive at 1998, when Gary Grauberger first filed claims in the district. And because that is the point at which the Black Horse district’s past meets the present, this is where I’ll end the historical background.

The deterioration in market and economic conditions jeopardizes NPR’s stated goal and imperils current shareholders

Economic and market conditions have deteriorated significantly since NPR announced finalized terms of the option agreement. NPR is facing a $10M cash option payment on June 6, 2023. NPR will need to raise at least $2.0M, likely through a private placement, to cover that payment.

So, first, I want to take a step back and review NPR’s stated goal, which comes from the investor presentation published prior to the Black Horse option LOI announcement:

Goal – “To acquire properties at low cost acquisition prices and apply strategic investment in exploration in line with [the] commodity cycle.”

NPR’s stated goal is to acquire properties at low acquisition prices. According to social media reactions to the agreement, as well to my own research of comparable transactions, it appears that, at least on the surface, NPR whiffed. $0.5M in shares plus $23.5M in cash plus permits approval for 2,733 acres, of which a significant portion contains a historic inferred resource estimate of 350,000 ounces of gold, seems high on nearly every metric. Yes, there are many layers here that could be peeled back, but what matters for this article is market sentiment, because that’s primarily what dictates the price at which a private placement is issued, and a lower price means more shares issued, which means greater dilution. And as long as there’s a need for NPR to return to the equity market to raise cash, it's beholden to what the market is signaling. The market has come to unanimous agreement: “NPR overpaying, and I think it can do better.” And I agree.

NPR is in a stronger position to negotiate terms

I do believe that there’s a silver lining to the deteriorated economic conditions, which is that NPR now has more bargaining power than it had when the option terms were negotiated. And I also believe that it behooves the directors and management of NPR to recognize the company’s improved position and take action to ensure the company has the best chance of long-term success, by restructuring the option agreement in a way that benefits all stakeholders.

That said, I neither hope nor anticipate either NPR or Grauberger will walk away from the agreement. To the contrary, I believe that a renegotiated option agreement, particularly one that extends the terms and allows for non cash-based payment, will prove to be beneficial for both.

Why NPR is now in a stronger position to negotiate contract terms:

1. NPR’s cash balance as of March 31, 2022 was $9.36M, compared to $6.78M as of September 30, 2021.
   
2. NPR’s cash per outstanding share as of March 31, 2022 was $0.3928, compared to $0.3383 as of September 30, 2021, despite the March 2022 equity offering.
   
3. While NPR cautioned in its Q2 2021 MD&A that “management and directors believe that there is currently a great deal of competition for (brownfield) gold properties, and this has somewhat inflated the price of gold properties,” it’s likely that this dynamic has since shifted to now favor the buyer. That is, the brownfield gold project market is no longer the “seller’s market” it perhaps was 12 months ago, as asset prices across the board have continued to decline, and the appetite of speculative capital has seemingly dried up. So, now, it’s likely a market with fewer suitors who are offering a lower premium, and sellers who are more willing to accept extended and/or more flexible terms.
   
4. The question that Mr. Grauberger must answer for himself is: if NPR indeed walks away from Black Horse, is there any other person or company out there that would step in and accept a price and terms that are even remotely close to the current ones? If not — and I believe that is very likely the case — is he, and potentially his beneficiaries, willing to wait around another six months, or year, or two years, or 22 years?
   
5. NPR has already performed some level of diligence on alternative properties. According to its current Investor Presentation, since 2020 it has “reviewed + 60 properties,” and according to its Q3 2021 MD&A, it “narrowed its North American focus and examined project opportunities in Nevada.” If Grauberger refuses to compromise on the terms, NPR must be willing to walk away from Black Horse; if it does walk away, it won’t be starting over from scratch.

Mr. Grauberger would be amenable to restructuring terms

• He’s already agreed to receive partial payment in equity, as NPR’s initial payment on the option consisted of $1.0M cash and 1.25M shares.
  
• This isn’t as if NPR simply decided to backtrack on its agreement; economic and market conditions have changed dramatically since the agreement was finalized. If anything, in consideration of points #4 and #5 in the previous section, Grauberger may in fact be relieved that NPR is choosing to restructure the terms rather than just walk away from the deal.
  
• He has an extensive history of exploring for and developing low-cost gold properties, and Black Horse was the only property he’d steadfastly held on to, which he did for more than 22 years. Like any avid collector can attest to, there’s always that one special item or discovery that you won’t let go of unless you know it’ll stay in good hands. I believe Grauberger recognizes that NPR’s CEO Brian Hinchcliffe has proven that he’s capable of not just acquiring former producing mines, but of progressing them to the point of profitable production, and he’s done so in a way that has ultimately benefited all stakeholders.
  
• In a June 1983 interview, Grauberger, as president of USMX, was asked: “What do you need to know before buying stock in a mining company?” His response: “One should check into the people who are running the company. These people should have been involved in the mining business working for other companies for at least a period of ten years. Everyone involved should be experienced, because it is a very, very tough business. This is crucial to the success of the company.”
• Grauberger doesn’t intend to simply wipe his hands clean of the property and wish NPR ‘best of luck’. According to the October press release, he “will, along with company director Mike Sutton, design new drill programs.” In fact, it seems that Grauberger will continue a professional relationship with NPR, saying that he’s “excited to work with North Peak going forward in identifying other gold/silver opportunities.”
  

A renegotiated option agreement benefits all stakeholders

Cash on hand is the most important form of equity to NPR, as it’s needed for expenditures. Grauberger, however, has a longer time frame by which to benefit from capital appreciation; therefore, equity and options may be the better option for him. And the undoubtedly favorable response by the market would provide an immediate boost to the value of Grauberger’s holdings.

A restructured option agreement would be a WIN for all stakeholders:

• NPR would retain more cash for expenditures and potential expansionary exploration, including the historic mines adjacent BH 90, and have more financial cushion in case of delays or setbacks. Moreover, the improved investor sentiment would, longer term, allow for better-priced and less-dilutive placements with which to fund potential bolt-on acreage.
  
• Grauberger would benefit from the capital appreciation of his equity ownership of a company developing a property that he himself claimed and steadfastly held on to until the right management team offered the capital and wherewithal to develop it into a profitable gold-producer.
• Shareholders would applaud the reduction in anticipated dilution, as well as the vigilant, shareholder-friendly action taken by NPR to react to market and economic conditions in order to better position the company and its stakeholders for long-term success.
  

Conclusion

Through one lens, the story of Black Horse is that of a businessman from New York who nearly went “all in” on a relatively unknown Nevada gold project at a time when the economic and market winds were at his back, but whose plans irrevocably fell apart when the winds quickly turned against him and he failed to adapt quickly enough.

But that was over 100 years ago. History won’t repeat itself.

It won’t repeat itself because this time around, those who now possess the option to be the next owners of Black Horse understand the importance of adapting to shifts in economic and market conditions, and they recognize that to go “all in” on a property, particularly when market conditions have already shifted, drastically, would be imprudent and unnecessarily detrimental to investors who’ve put their trust and money in them. And, the current economic conditions in fact improve their bargaining position.

So, the call to action in this article is less of a warning, and more so a reminder of what NPR’s next step needs to be to keep this company on the right path. I’m confident that NPRs directors and shareholders already understand this, as does Grauberger. In the end, their interests are aligned; they want to see Black Horse become a profitable gold-producing property that ultimately rewards all stakeholders. So, it’s time to turn NPR back toward that mutual goal and restructure the option agreement.

I maintain a neutral investment recommendation on shares of NPR until, and unless, the company announces a restructured option agreement, ideally one that both allows NPR to retain more cash and reduces dilution of current shareholders. Although I’ve already placed my bet, it’s not yet post time, so, for everyone else, my recommendation is to wait until NPR gives the signal that it’s the right jockey, riding the right horse, to get all stakeholders to the winner’s circle.

NOTE: All amounts in $USD

Disclosure: I have a beneficial long position in the shares of one or more of the companies discussed in this article, either through stock ownership, options, or other derivatives. I wrote this article without external assistance, and it expresses my personal opinions. I was not compensated for this article, and I have no business relationship with any company whose stock is mentioned in this article.

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