At 25% Of Merged Company Value, Torchlight Looks To Be Worth Only $0.35/share
Summary
- Torchlight Energy is engaging in a reverse merger, we believe because it has accepted that its assets are practically worthless.
- The company it's combining with, Metamaterial, has no interest in TRCH's business or assets. It appears to only want the Nasdaq listing.
- TRCH will sell its assets or spin them off before the business combination happens; the combined company will get none of TRCH's assets.
- TRCH shareholders will get 25% of the combined company, which at MMATF's market cap, puts TRCH's current value at 35c per share, assuming its assets are worthless.
- At TRCH's current share price, it is trading at a whopping 1050% premium to its arbitrage value.
Metamaterial Only Wants To Merge With Torchlight For The Nasdaq Listing
On 4/29/19, we published a report that stated we believe that Torchlight Energy (TRCH) assets are worthless and that "we do not believe Torchlight will be able to successfully complete the sale of the company or its asset(s)."
The company hasn't made any significant progress since our report with selling or developing any of its oil and gas assets. It did sell its interest in its Winkler Project in November for $450K, but that's not a significant sum.
Torchlight Energy and Metamaterial (MMATF) announced the signing of a definite agreement on 12/14/20 for a business combination. TRCH shareholders will receive a 25% equity interest in the combined company, while MMAT shareholders will receive a 75% interest.
Metamaterial designs, develops, and manufactures advanced materials specializing in nanocomposites, nanofabrication, and machine learning to control light and electromagnetic waves. It's a totally unrelated company to TRCH's oil and gas exploration business. This confirms to us that our analysis on TRCH is correct. Its assets are practically worthless, and the stock is worth a fraction of its current market cap that has runup on the merger agreement.
The purpose of the merger is only so Metamaterial can be listed on the Nasdaq. Therefore, the current value to TRCH shareholders is only 25% of that of Metamaterial's current market cap plus the value of TRCH's oil and gas assets.
As of the close of 2/16/21, Metamaterial was worth $3.01 CAD x 83.6M shares outstanding = $251.6M CAD. That equals $251.6/1.27 = $198M USD.
Assuming that TRCH's assets are worthless, based on Metamaterial's market cap, that values TRCH at $198 x 25% = $49.50M, which equals a share price of $49.5M/143M = $0.35.
At the time of the merger announcement, on the close of 12/14/20, Metamaterial was valued at much less. It has gone up significantly since the merger announcement. Metamaterial closed at only $0.58 on 12/14/20. That gave it a market cap of only $48M. Using that market cap, that puts TRCH's value at only $48M x 25% = $12.12M. $12M is about the value of a clean empty shell Nasdaq listing.
That would bring a per share value to TRCH of $12.12M/143M = ~$0.08.
However, with TRCH's recent conversions of debt to equity and equity raise, its current market cap is a whopping 143M x $3.90 = $558M. It has appreciated substantially. The following is the 3-month chart for TRCH:
TRCH closed at $0.46 on 12/17/20. And that's AFTER the merger definite agreement was announced.
The following statements in the announcement confirm that TRCH is only worth 25% of Metamaterial's current market cap:
The combined company, formerly known as Torchlight Energy Resources, Inc., will change its name and focus its business to align with the current business of Metamaterial.
NASDAQ is the world's premier technology exchange, providing us with the best platform to expand awareness of Metamaterial on the global stage and fully realize the value of our portfolio of innovative, sustainable products." commented Ram Ramkumar, Metamaterial's Chairman.
It has been our goal for META to be a NASDAQ-listed company," stated George Palikaras, President & CEO of Metamaterial. "When the business combination with Torchlight closes, obtaining a national exchange listing in the United States is anticipated to provide META with significant value and increased access to global capital markets.
As shown in Metamaterial's executive statements above, there is no mention at all of any value to TRCH or its assets. Only the Nasdaq listing.
Torchlight's Assets Appear To Be Worthless
MMAT has no desire to keep any of TRCH's assets in the combined company. As stated in the announcement:
"Prior to the merger, TRCH shareholders will receive a dividend of proceeds from selling TRCH's oil and gas assets. If no sales occur, then they will receive an equity interest in a spin-off entity that holds TRCH remaining oil and gas assets."
The original planned business combination PR, on 9/21/20, states:
The Combined Company shall use its commercially reasonable efforts to cause the Torchlight oil and gas assets to be sold by June 30th, 2021.
We believe its oil and gas assets are worthless, or worth very little, and that will be confirmed in time if the company won't be able to sell them, as we expect to happen. We predict the spin-off company will be put into an OTC stock. Effectively, TRCH's business will be extracted from the Nasdaq listing and put aside into an OTC listing where it will go to "die".
If The Merger Happened Today, Torchlight Shareholders Would Suffer A 90% Decline
The merger between TRCH and Metamaterial will likely happen after shareholders vote on it on March 12th, as stated in this PR. Again, assuming that TRCH's assets are worthless and not including any special dividend, if the merger happened today, TRCH shareholders would face a 90% loss on their investment. Of course, they will additionally get whatever TRCH can sell its assets for or whatever their share is worth from the TRCH asset spinoff. We don't think the spinoff will end up being worth much more than what TRCH shares were worth in November, which was about $0.25-$0.40 per share.
A short is more appealing when there's a clear endgame in sight. Once the two companies combine, it will just be Metamaterial. At TRCH's current share price, Metamaterial would have to have a market cap of around $2B by then in order for longs to make a gain apart from any dividend. Whatever value TRCH's oil and gas projects end up being won't be significant in our opinion.
The Reason For the Recent Rally
TRCH has risen as much as 400% since the beginning of the year, and has doubled over the last week. We believe the reason for this is speculation over the merger and sale of the assets. As well as the conversion of the company's debt to equity. As stated in this recent Motley Fool article:
On Feb. 16 Torchlight Energy announced that one of its lenders had converted $1.5 million worth of debt into 1 million shares of the company's stock. That was a huge move for the exploration and production company because it helped to clean up Torchlight's balance sheet. After the conversion it no longer has any term debt and two projects will have liens removed from them, as they backed the loan that was converted.
However, what the MF article doesn't seem to realize, is that the conversion of debt to equity is part of the merger agreement. Metamaterial wants a clean balance sheet for the merger to happen, it has nothing to do with freeing up the debt for TRCH's oil and gas projects.
Risk To The Short Thesis
We believe that it's been proven over time that TRCH's assets are worthless, and that the money received from selling them or the value of a spin-off isn't a risk to short sellers. What could be a risk, is if the merger is called off. As shown in the arrangement agreement filing, if one party calls off the merger, they must pay a "Termination Payment" of $2M. TRCH could announce something along the lines of: "with the new interest in our company from investors, we have terminated the merger agreement and will continue to develop our projects."
Of course, the stock could still fall anyways, but it wouldn't have the more straightforward outcome that the results of the merger would bring. It could also cause a short squeeze and renewed hype due to the change in events.
However, a termination of the merger would likely a be a bad event for Metamaterial's share price, because then it would be stuck trading on the Canadian exchange and would have to find a new Nasdaq reverse merger candidate. It would probably fall on this news, as it has also appreciated significantly over the last few months likely due to the anticipated merger.
Conclusion
As we believe TRCH's assets are practically worthless, we don't believe they will be able to sell them for any meaningful sum. Therefore, they will be spun-off into another company. The process will essentially be TRCH starting all over again with the same assets, but not as a Nasdaq company anymore. It will likely be spun off onto the OTC exchange. Trading on the OTC, TRCH won't be able to command nearly the valuation or attention that it could on the Nasdaq. Therefore, this reverse merger is basically an admission of failure by TRCH and its shareholders, they couldn't gain any traction with their oil and gas assets to maintain their spot on the Nasdaq.
This article was written by
Analyst’s Disclosure: I am/we are short TRCH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (44)
Here's something that nobody who likes TRCH's stock can answer... Even if you really like Metamaterial's future prospects, why would you own TRCH's stock instead of MMAT at their current prices?
Right now MMAT is valued at around $270 million USD. That will get you 75% of the combined company. Right now TRCH is valued at $500 million. That will get you 25% of the combined company plus $13 million in proceeds from the Winkler and Hazel asset sales plus any proceeds from the Orogrande sale.Simple math indicates that Orogrande would have to fetch approximately $400 million for it to make sense to buy TRCH instead of MMAT. There is zero chance that Orogrande is worth anything remotely near that amount given that it is essentially unproven acreage with minimal production.Yeah, looks like it is being talked about a decent amount on Reddit and Twitter. One poster actually assumed that Torchlight could receive prime Midland Basin prices for its Orogrande Basin assets and thus make it worth billions.
Pretty crazy. It is one thing to try to own the stock for a trade. However, anyone expecting a substantial dividend from its asset sales obviously has minimal knowledge of the oil and gas industry.
I came upon this article and trade with no bias and no position.
Considering both the bull and bear thesis on this trade, it is clear that TRCH is dramatically overvalued. Will existing TRCH shareholders receive only .35 cents per share? Actually yes, this is entirely possible. However, existing TRCH shareholders may receive a higher amount in the .50 cent range IF the price of the MMATF can be propped up long enough after the merger. Candidly, this overvaluation is not likely to persist as the price of both companies are clearly overvalued currently. The market is increasingly aware of this extreme overvaluation now and it looks like TRCH will return to $1.50 per share.The real question for traders/investors is whether TRCH can hold the $1.50 level in the next few days. Doubtful. This overvalued situation is now in full view of the street and .50 cents per share for TRCH seems like a fair valuation. The only folks propping this empty shell of a company up are the uninformed retailers who for some strange reason have bought into some convoluted narrative that they don't quite understand. Best for all to protect any recent gains and exit TRCH.Thanks for an excellent article to expose this overvaluation. Excellent research and outstanding communication skills. Highly competent work like this is what makes our markets function properly. A+.@mlefran Excellent question. Full disclosure is that I became a licensed broker in 1986 and learned a lot about how not to trust analysts while working for NYSE-member Oppenheimer & Co. I learned to trust numbers above words, for starters.
A stock chart, or candle chart, is a reflection of what people are actually doing with their money based upon numbers. Volume is also based upon numbers. Take a look at the daily candles. If you are comfortable reading charts, then you know that this is just day 2 of a multi-day correction in a dramatically overbought stock. TRCH was .45 cents on 12/17/21. It traded up to 4.83 just two days ago on 2/16/21. I think reasonable people would agree that better than 10X increase in value is overbought. Even now at $3.45 the stock is insanely overbought. I am a retail trader for quite a while now, so when I use the term "retailer," I am including myself. Only retailers are buying into this idea of the merger being a positive. Why? I have no idea. I am certain either the Canadian outfit, and/or the characters at TRCH determined that pumping the stock was in their best interests. You can see the stock being bought ahead of the announcement if you read the chart. Typical pump and dump action. The companies trading on the Canadian exchanges have been notorious for decades. Good to see that nothing has changed. The Canadian boys could have opted for other means to gain a listing on the Nasdaq, but this chosen route enables the principals to avoid much scrutiny. This alone is very telling, imho.Back to the chart. Volume has fallen off of a cliff for the last 2 sessions, so the momentum and pump is over. You can clearly see the dump is working as is typical. You can also visit social media to see the desperate cheerleading by bulls who either didn't know when to leave the party, or are the chasers who are now newly minted bag holders. The study of group psychology in markets is fascinating in that the same darn pattern repeats over and over, and people never ... I mean never, ever learn. So volume is gone and only the chasers and baggies are left to prop up the stock. If you know your chart patterns then you know that yesterday was a classic breakout failure pattern. One of the most reliable bear signals to sell a stock that is known to mankind... or even primates. Seriously, this chart pattern is so easy to identify that even a caveman can do it. No joking. Yesterday was an obvious sell signal, and the market has sold. Now you have your typical continuation pattern lower that will last some number of days. There will be a trading bounce perhaps at $2.50, or thereabouts... but the direction is clear for the near term, and that direction is lower.Charts often reflect the fundamental situation. Let's see, TRCH is in such desperate straits that they were willing to take a merger deal for only 25% of a Canadian stock that basically has as much value as a patch of blue sky. "But, but, but... the PR statement!" and the other ingenious hype that is on the Internet, I can hear bulls saying adamantly. Yeah, well from an industry insider of 35 years let's be candid, bulls in TRCH are proof positive that P.T. Barnum was correct.I get it. You hate bearish articles. You hate overly honest comments like this one. You want to debate the shiny buttons, and point to the bells and whistles that you were told to focus on by the people who are doing the manipulating in this stock. Please understand that these hucksters are grasping at straws and desperate to save their marriages, and remain living indoors... they will say and do anything to desperately pull off this white collar swindle. TRCH has drained these people of all their capital for years and they couldn't find anyone simple enough to buy their company (and stock)... until they devised this current scheme. Check the chart and you can see in November when this scheme began for TRCH. The pumpers began buying stock with the idea of finding retailers to dump on in a few months. The plan worked like a charm.Now they are dumping their stock either onto the open market, or they exercised warrants, or they are rolling up their stock into the merger and will cash out as often as possible. Isn't that what you would do, if you had no morals? The book Liar's Poker is a good read. The boys involved in this microcap heist are a smaller version but still same concept. You want to assign value to the assets at TRCH, I know. The value of any asset is only worth what a buyer is willing to pay for it. Clearly TRCH found no buyers willing to pay anything significant for their assets. Otherwise, this .50 cent stock would not be getting rolled up into a Canadian flying carpet company for just 25% of the merged value. C'mon guys, this one isn't that hard to read. Even if you don't like the charts and what the daily numbers on volume and price action are screaming out, even if your don't like the several bearish articles from different authors... and these articles are in the league of "rip your face off kind of extremely bearish" analysis... even after all of this, doesn't anyone recognize the oldest trick in the book here of a classic pump and dump in the valuation of this stock? Please say, "Yes. I see it. I just am in denial because I already spent the money that I hoped to make when the CDN flying carpet company caused my worthless TRCH stock to trade to infinity and beyond." This type of a confession for less experienced retailers would be completely understandable. In fact, it is the exact psychology that the pump and dump conmen at TRCH are relying upon to pull this last ditch, last resort, desperate caper off at your expense.I know you are not happy with my 35 years of experience trying to save you from severe losses on this trade. I very much hope that this effort is helpful. Whether you sell at higher prices now, or at painfully lower prices later, it won't matter to me. I have sold this flaming dumpster fire short today, and I will get paid (alot) on this short no matter what. But hopefully, this post will help a few people to save a few dollars. Of course, there are always the, "I'm going down with the ship!" crew... the "I'm not blanking selling!" guys that saw Leonardo in the movie and like to post his meme on social media. These rocket scientists generally have a painful experience in the market. Anyways, GLTA and hoping that at least one open-minded traders is helped by this comment.@taketake1 Stay classy. Let's not have the SA forums devolve into the worthless stuff you see on other less useful social media.
Disagreement makes a market. Having sellers provides liquidity for buyers. No need to get nasty.Also, have you never been wrong on an idea? Does this mean that all of your ideas are wrong? Of course not. Can't think of a single top analyst on Wall Street who hasn't been wrong. Even Buffet gets a few wrong.Go sing a few rounds of, "Humble and Kind," by Tim McGraw and the world will be a better place.
@DR Alex P If you like MMAT.CN, then you should just buy MMAT.CN. TRCH has about 3x MMAT.CN's market cap, and they'll only get 25% of the combined company. So buying TRCH is the equivalent of buying MMAT.CN at about $25 CAD per share, plus you'll get whatever TRCH sells its assets for.
As far as what TRCH's assets are worth, you can look at my report from 2019 that analyzes this. It's land that no established oil and gas company will pay for more than a pittance. But we'll see who's right in a few months, the conclusion will happen relatively soon on this one.@thaddeusresearch23 There is no arbitrage value for Meta, other than going on the Nasdaq. TRCH will be an empty shell by then, but Meta shareholders will lose 25% of equity that will go to TRCH shareholders. So I expect both TRCH and MMAT.CN to fall prior to the merger, but TRCH will fall more.
