Talks extensively about arrangement with Sandstorm - also says that they are looking at production in 2013. GLTA.
21 December 2012
I am sure you have been as excited as we have at the positive developments your Board and Management have achieved since I last wrote to you last month.
Since that last Shareholder letter, Mutiny Gold has announced to the market that it has:
• achieved further significant reserve upgrade for Deflector (ASX announcement November 26, 2012);
• completed a US$2 million placement to a strategic investor based in North America (ASX announcement November 28, 2012);
• signed an agreement that allowed for an immediate start-up of design and construction for Deflector (ASX announcement November 30, 2012);
• been granted the “Clearing Permit” for Deflector, one of the last and key permits needed to allow development goahead (ASX announcement December 4, 2012); and
• entered into major project funding agreements for Deflector, keeping the project on target for a 2013 start-up (ASX announcement December 6, 2012).
I hope you agree, that these achievements represent a significant few weeks of development activity in anyone’s books. The last announcement listed above is the one that has really made the market, the media and the local mining sector sit up and take notice. This innovative funding package will change your Company from an up-and-coming miner to a miner that has arrived.
Let me again present you with the highlights of that momentous announcement. The A$102 million Project Finance Package; includes:
• A US$43 (A$41) million funding agreement with Canadian institution Sandstorm Gold Ltd., including a Metals Purchase Agreement (‘MPA’);
• The MPA with Sandstorm Gold Ltd will fund a significant portion of the Deflector capital costs;
• Mutiny’s existing principal lender Credit Suisse, with an existing A$11m loan facility, supports the Sandstorm arrangements and is currently working collaboratively with Mutiny on concluding the debt project finance arrangements for the Deflector project;
• Specifically, a debt finance facility is being negotiated with Credit Suisse for approximately A$50m, whereby it would provide debt finance of A$25m, with the remaining debt to be provided by a leading Australian bank;
• Mutiny’s planned project finance platform for funding Deflector into production will consist of a total of A$102m of funding including:
a. A$50m debt facility with Credit Suisse and second lender;
b. An MPA with Sandstorm totalling A$41m (currently drawn to $6m); and
c. A$11m in plant leasing.
The item which grabbed most of the attention is the MPA signed with Canadian institution Sandstorm Gold Ltd. While Sandstorm has undertaken a number of so called “streaming” mine financing packages in Canada and the US, it is believed that this is the first ever signed for an Australian project.
Under the MPA, Sandstorm has agreed to purchase an amount equal to 15% of the gold produced from Deflector over the life of the mine.
With a lot of assistance from a great note written by Shaw Stockbroking, I will attempt to explain how the MPA between Mutiny and Sandstorm works.
A) In consideration for Mutiny contracting to sell 15% of Deflector’s gold production (the copper is not included) to Sandstorm over the life of mine, Sandstorm will pay Mutiny an up-front cash payment of US$9 million, a further cash payment of US$29 million upon grant of the mining licence and, the lesser of US$500 for each ounce of gold delivered or the prevailing market price of gold. In other words, if gold sells for US$1,000 an ounce Mutiny will receive US$500 an ounce. If gold sells for US$465 an ounce it will receive US$465 an ounce. In addition Sandstorm will subscribe for US$5 million in equity, US$2 million now at the current price and the balance next year at a higher price per share.
B) If Mutiny produces more than 85,000 ounces of gold in a given year, (potential production in Year 2 after ramp up to full capacity is forecast to be around 70,000 ounces), Sandstorm will make a further, one-off payment to Mutiny of US$4 million. This is designed to tie in with a proposed plant expansion in Year 3 of production as supplemental finance.
C) Mutiny has a right, but not an obligation, for a period of 36 months from the date of the second deposit of US$29 million to repurchase whole or in part, up to 50% of the gold stream sold by making a payment equal to the greater of US$24.7 million or the value of 14,742 ounces of gold. In other words, it can reduce Sandstorm’s share of gold production from 15% to 7.5%
A common shareholder query since the announcement has been “why is it more beneficial to the Company to sell gold to Sandstorm for US$500/oz instead of hedging?”.
It is not really a question of why is it more beneficial to the Company to sell gold to Sandstorm for US$500/oz instead of hedging, but rather why did Mutiny sell the gold to Sandstorm?
In a nutshell, Sandstorm is paying Mutiny US$38 million now for gold it is acquiring from future production. This money will allow Mutiny to build the mine. In addition, Sandstorm will also make a further payment of US$500/oz when it receives the gold that it has paid for. However, if Mutiny never produces the gold then Sandstorm will not pay the US$500/oz and will have also lost the US$38 million it will have paid Mutiny under the deal (the risk is all Sandstorms’ until the mine is built and produces gold).
While you may obtain a higher price when you hedge, Mutiny would only be paid for the gold when it is delivered – so there would be no upfront payment to help Mutiny build the mine to produce the gold. Also, if the mine does not produce, or produces less than anticipated, and the gold price has gone up then Mutiny would have to buy that gold at a higher price to deliver it into the hedge.
Critically for Mutiny this package also provides our key financier Credit Suisse and the other major Australian banks, with which we have been in discussions, with significant comfort as they finalise their own financial roles for Deflector.
For Sandstorm, pricing is based on it receiving 60,000 to 80,000 ounces of gold over the life of mine. If it obtains the middle of that range, 70,000 ounces, it has paid US$38 million up front, plus US$500 for the 70,000 ounces, or another US$35 million, for a total of US$73 million or US$1,043 an ounce.
On Mutiny’s side of the equation we are selling only 10% of our Deflector income stream, (remember copper is not included and it may possibly equal as much as 25% of revenue), for that US$73 million, most received in advance. This guarantees the mine will be built, reduces our risks and avoids a huge dilutive share issue.
And there is one critical point on this that I want you to consider. While many companies, large and small, are finding it virtually impossible to raise any funding in this difficult financial climate, your Board and Management has pulled together agreements that theoretically values your company at between A$240 million and A$280 million – a major upgrade from current market cap of just over A$50 million.
I want to take this opportunity to personally thank John and his team, and our advisors Noah’s Rule, for the many, many hours of hard work and hard negotiations that have brought this fantastic financing package together – a package that has put Deflector well on the path to a mine start-up in 2013 and the first step in the creation of a significant Australian mining company.
Dr Frank Lawson, Chairman