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Tuesday, November 15, 2016 Derek Macpherson

Red Pine and Augustine Advance Merger Agreement


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Following the signing of an LOI on December 17, 2015, Red Pine Exploration Inc. (TSXV:RPX ) and Augustine (CNX:WAW) have announced they entered into a definitive arrangement agreement whereby Red Pine will acquire Augustine. The proposed name of the new entity is Wawa Gold Inc. Each company currently holds 30% interest in the Wawa gold project in Ontario of which Red Pine is operator. Upon completion of the transaction, Augustine will become a wholly-owned subsidiary of Red Pine which is to own 60% in the Wawa Gold Project and to remain as operator of the new entity. The project’s remaining 40% stake is held by Citabar Ltd, which is also a significant shareholder of Augustine. We believe that the merger of Red Pine and Augustine is likely to be a catalyst for Red Pine´s share price and result in a more aggressive exploration program at Wawa. In our opinion, relative to other projects in the area, the Wawa gold project has been underexplored because of its current ownership structure.


Transaction metrics have become less favorable for Augustine shareholders. On December 15, 2015, two days prior to the announcement of the LOI, Red Pine traded at C$0.07/sh and Augustine at C$0.04/sh. Since then, both companies have outperformed peers as the GDX (Gold Miners ETF) has since then gained 53%, while Augustine has gained 100% and Red Pine 57% (as of November 11, 2016). The LOI exchange ratio was 0.80 per Red Pine share to each Augustine share, but now it is at 0.76. This constitutes that Augustine shareholders would previously have obtained a premium of 40%, but given current share prices and with the new exchange ratio, the premium is now a mere 4.5%.

Pending financing impacts ownership structure. Under the arrangement agreement, both companies have provision to conduct additional financing with Red Pine being allowed to raise an additional C$,1,000,000 (amounting to ~9.1 million shares given the current share price) prior to closing of the transaction. Augustine is eligible to complete a private financing by issuing 5 million shares, each with a warrant, at a price of C$0.10/share. This transaction is expected to close before year-end. Under the option agreement with Citabar, Augustine stands to issue an additional ~18 million shares to Citabar (~17% of shares currently outstanding). Accounting for these share offerings, current Red Pine shareholders will hold ~114 million shares (~54%) of the new entity and Augustine shareholders will hold ~98 million shares (46%) on a non-diluted basis.

Red Pine’s CEO to continue in role. Under the proposed senior management structure of the new entity, Quentin Yarie, the current President and CEO of Red Pine, is to remain in his role while Robert Dodds, the current CEO of Augustine, is slated to become the Executive Director of Mine Development. Red Pine has entered into agreements with some of Augustine’s major shareholders and directors, including Robert Dodds, to gain support for the transaction. Red Pine estimates that 46% of current shareholders support the transaction, but for the transaction to proceed, it must be approved by two-thirds of Augustine shareholders.

Valuation excludes the potential of resource increase. At $35/oz Au, Red Pine currently trades at discount to peers ($52/oz) and in our view, the market does not take into account the resource growth potential. We expect the planned consolidation of the Wawa Gold project’s ownership structure to be an important catalyst for Red Pine.

Company description: Red Pine Exploration Inc. (TSXV:RPX) is a gold and base-metals focused exploration company that holds a 30% interest through a joint venture with Citabar (40%) and Augustine Ventures (30%) in the Wawa Gold Project. Red Pine is the operator of the joint venture and is focused on expanding the existing gold resource on the property.
 
Derek Macpherson | VP Mining Analysis
Sunneva Bernhardsdottir | Associate, Mining Analysis
Victoria Ellis Hayes | Associate
 
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Company Specific Disclosure Details
Red Pine Exploration Inc. - TSXV:RPX - 2,3,4
Augustine Ventures Inc. - CNX:WAW - 2,3,4
Citabar LLP - N/A - 2,3,4

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