Mr. Nicholas Mather reports
SOLGOLD AGREES A ROYALTY FINANCING PACKAGE OF US$100M WITH UPSCALE TO US$150M FROM FRANCO-NEVADA FOR THE ALPALA PROJECT
Solgold PLC has entered into a $100-million (U.S.) net smelter return financing (NSR financing) agreement with Franco-Nevada Corp., with an option to upsize the financing to $150-million (U.S.) at the company's election, with reference to the company's flagship Alpala copper-gold project and the remainder of the Cascabel licence in northern Ecuador.
Concurrently with the entering into of the NSR financing agreement, Solgold and Franco-Nevada have also entered into a $15-million (U.S.) secured bridge loan agreement (BLA) of immediately available funds as an initial advance prior to closing the NSR financing agreement. The full amount of the advance will be disbursed by Franco-Nevada to Solgold today.
The advance provides Solgold with short-term financing at an interest rate of 12 per cent per annum for a four-month period, with an option to extend the maturity for another four months. The advance is in any event repayable with interest upon closing of the NSR financing.
Franco-Nevada and Solgold have each received all required corporate approvals for entering into the transactions.
Highlights of the NSR financing agreement
- Solgold and Franco-Nevada have entered into a binding NSR financing agreement for up to $150-million (U.S.).
- For the first $100-million (U.S.), Franco-Nevada will receive a perpetual 1-per-cent NSR interest from Solgold calculated with reference to net smelter returns from the Cascabel licence area.
- The NSR financing agreement can be upsized at Solgold's election by $50-million (U.S.) to a 1.5-per-cent NSR interest within eight months from the date of the agreement.
- For clarity, neither Exploraciones Novomining SA (ENSA) nor the minority shareholder in ENSA will be liable for the royalty.
- Key features of the NSR financing agreement include:
- A 50-per-cent buyback option exercisable at Solgold's election for six years from closing at a price delivering Franco-Nevada a 12-per-cent internal rate of return;
- An NPV neutral option in favour of Franco-Nevada to convert the NSR interest into a gold-only NSR interest, available for six years from two years after operation start;
- Franco-Nevada is entitled to receive certain minimum royalty payments of $10-million (U.S.) from 2028;
- The inclusion of an NSR interest top-up mechanism in the event that actual mine production (measured on a copper equivalent basis) is less than 85 per cent of planned production, as stated in Solgold's most recent publicly filed technical report.
- Conditions precedent to the NSR financing are expected to be satisfied soon after COVID-19-related travel restrictions are lifted.
- Franco-Nevada has indicated its interest, subject to further studies, to participate in the financing of Solgold's share of the mine development at Alpala via a gold stream. Solgold expects that, due to the gold-rich nature of the Alpala porphyry, the project can support up to $1-billion (U.S.) of precious metals stream financing.
Commenting on the financing, Nicholas Mather, Solgold's chief executive officer, said: "Solgold is immensely excited to further progress Alpala in the run up to final feasibility and a development decision, and for Franco-Nevada's endorsement of the Alpala project. The $100-million (U.S.) of funding generated, plus the option to upscale the royalty by $50-million (U.S.) for an additional 0.5-per-cent NSR at Solgold's option, will see the rapid advancement of the Alpala project."
Paul Brink, president and chief executive officer of Franco-Nevada, commented: "Alpala is an exceptional orebody and one of the most attractive block cave development projects globally. We would welcome the opportunity to provide a gold stream financing as part of the construction financing of the project."
Executive general manager of corporate finance, Ingo Hofmaier, commented: "Solgold received and considered a broad range of funding options and the decision to proceed with Franco-Nevada is based on various factors, including the size of investment, the permanent nature of this financing, Franco-Nevada's experience and understanding of Latin America and the competitive cost of capital. In Solgold's opinion, a 1- to 1.5-per-cent NSR will not constrain the debt capacity of the project; on the contrary, we believe this financing increases the confidence in Solgold's ability to fund the development, further affirming the overall quality of the Alpala deposit.
"With BHP, Newcrest and now Franco-Nevada having exposure to the project, there should be no doubt as to the quality of Alpala or Ecuador as a sovereign mining destination for project development capital. Franco-Nevada is the largest royalty and streaming company by market capitalization, has a history of investing into world-class assets, and has invested $3.1-billion (U.S.) in Latin America since 2015, with Solgold being Franco-Nevada's first financing in Ecuador."
Proceeds of the NSR financing will be used by Solgold to finance the costs to complete the feasibility study and any surplus will be used for Solgold's share of the development of Alpala pursuant to agreements with the minority shareholder of ENSA, Cornerstone Capital Resources Inc.
Cornerstone's share to completion of the feasibility study of Alpala is debt financed by Solgold and postfeasibility study, Cornerstone must contribute to all expenses and capital costs. If Cornerstone's equity stake in ENSA is diluted below 10 per cent, its equity stake will be converted to a 0.5-per-cent NSR which Solgold can then acquire for $3.5-million (U.S.) at any time. Solgold's debt financing to Cornerstone accrues interest at London interbank offered rate plus 2 per cent per annum and is to be repaid from 90 per cent of Cornerstone's distributions of earnings or dividends from ENSA or the Cascabel concession. Currently Cornerstone's indebtedness to Solgold is $30.5-million (U.S.). The latest budget indicates that this liability is expected to reach $52.0-million (U.S.) in the period to completion of the feasibility study.
Under the NSR financing agreement, following closing, Franco-Nevada will have the right to appoint an observer to the Alpala project advisory committee. Although this committee will not have formal decision-making power, it can nonetheless advise Solgold's board of directors on strategic, financial and technical matters regarding the project.
Solgold places utmost importance on its social and environmental initiatives and is delighted that Franco-Nevada has agreed to contribute $150,000 (U.S.) for three years toward environmental and social initiatives in Ecuador in the direct zone of influence of the Alpala project via joint projects.
With regard to certain conditions to closing of the NSR financing:
- Franco-Nevada commenced due diligence on Solgold and Alpala in late 2019. Franco-Nevada's studies of the project have been completed satisfactorily, except for a site visit. Temporary COVID-19 travel restrictions have delayed completion of Franco-Nevada's on-site due diligence, which is a key condition precedent to closing the NSR financing.
- The site visit is expected to take place as soon as travel restrictions are lifted. Both parties will adhere to appropriate health and safety measures in order to mitigate potential risks of COVID-19 infection to the personnel of Franco-Nevada, Solgold employees as well as the communities in and around the Alpala project area.
- As a backup measure, both parties are also investigating alternatives to a conventional site visit.
- In the event that the conditions precedent are not fulfilled or waived by a long stop date, the NSR financing agreement will terminate.
Solgold's field operations are currently on care and maintenance due to COVID-19 social isolation rules and respect for communities in the area in an effort to reduce the potential transmission of the virus. The Ecuadorean mining authorities have requested the company's plans for reactivation of operations, pending the full agreement from local county authorities. Solgold continues to actively monitor all its employees as health and safety are top priorities for the company. Solgold will continue supporting its employees and local communities where possible in its effort to curtail the spread of the virus.
Scientific and technical information in this report relating to the Alpala project and Cascabel concession is based on data reviewed by Jason Ward ((CP) BSc, Geol), the chief geologist of the company. Mr. Ward is a fellow of the Australasian Institute of Mining and Metallurgy, holds the designation FAusIMM (CP), and has in excess of 20 years of experience in mineral exploration and is a qualified person for the purposes of the relevant London Stock Exchange and Toronto Stock Exchange Rules. Mr. Ward approves the information in the form and context in which it appears.
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