Minera Gold (ASX:MIZ) will acquire a fully permitted San Santiago gold-copper mill in southern Peru that will be non-dilutive and earnings accretive to shareholders, and is immediately proximal to Minera's existing gold mines.
Earnings from the current toll treatment operation have an EBITDA of circa US$2 million a year and the deal has the financial backing of SilverStream SEZC.
The San Santiago gold and copper processing plant is located in Otapara. The deal would also see a significant cost saving to Minera from not having to pay US$1 million per annum in lease fees for San Santiago's CIP gold circuit.
For an acquisition price of US$4.5 million cash and assumption of US$1.0 million of existing debt, the binding agreement will also save Minera about US$1 million p.a. on the company's previous lease of CIP circuit.
In fact, the savings are expected to reduce all-in cash costs to a very low US$700 an ounce for the 100% owned Torrecillas gold project.
Which when combined provide highly compelling reasons for the acquisition.
The binding option agreement and acquisition will significantly ensure cost savings at the company's Torrecillas gold project and is due to close in September this year.
Minera will raise US$2.5 million to complete the option exercise commitments but is looking to source this from commodity traders and debt lenders.
Existing Minera backer, SilverStream SEZC, will fund US$3.0 million of the acquisition price through a second streaming deal.
The San Santiago plant being acquired is a three circuit processing complex and comprises the larger milling complex where Minera is currently commissioning the idle CIP circuit under an existing lease agreement.
Which is handy as it is where Minera's first gold output since completing its financial restructure last month would be produced.
Three processing circuits will be available - CIP (gold), flotation (copper sulphides) and vat leaching (copper oxides).
Current toll treatment production is about 3,300 tonnes per annum of contained copper (+gold/silver credits) at an average feed grade of 4% copper.
Minera Gold plans to take full ownership of this output in the short term.
It will also look to expand existing permits to double the mill capacity; which is strategy supported by an additional US$1.5 milion of funding by SilverStream on receipt of permitting.
Targeted completion and full ownership is expected by late September 2014.
SilverStream financial backing
Metal streaming house, SilverStream SEZC will lead the proposed financing (the second with Minera this year) and will inject US$3.0 million into the San Santiago acquisition - minimising any dilution to Minera shareholders.
SilverStream in April this year entered into a US$5 million gold stream agreement with Minera to purchase 10% of the life-of-mine gold produced through the San Santiago mill from the company's high grade Torrecillas gold mine.
Ore from Torrecillas is being used in the current commissioning of the refurbished San Santiago plant from which Minera hopes to achieve an annualised gold production rate of a minimum of 18,000 ounces, by year's end.
The processing plant and mining concessions will be acquired via a number of non-dilutive mechanisms:
- US$3 million injection by Minera Gold, sourced through a conditional term sheet and new streaming transaction with SilverStream SEZC. - - SilverStream will provide Minera with a total of US$4.5 million of new funding, that can be drawn down in two tranches, being US$3 million on exercise of the acquisition option, and a further US$1.5 million on Minera being granted an expanded permit to operate the plant's two copper
circuits at a minimum total of 500TPD.
- US$2.5 million to be sourced by Minera via a concentrate offtake pre-pay arrangement or term debt facility with an established commodity trader. The terms of this portion of the funding are still being finalised and negotiations are ongoing with a number of potential financiers.
Material terms of the new Silverstream term sheet:
1. SilverStream will be delivered equivalent to 100% of the silver produced from the copper circuits at San Santiago for a period of 15 years (it is noted that silver is the third commodity product behind the plant's copper and gold output);
2. SilverStream will be entitled to purchase a minimum of 4,000 ozs of silver per month and up to a maximum of 90,000 ounces of silver per annum at a purchase price of US$6 per ounce. For amounts over 90,000 ounces per annum, SilverStream will be entitled to purchase 50% of the additional ounces at the purchase price of US$6 per ounce; and
3. SilverStream will have senior security over the San Santiago processing plant until such time that the purchase price has been repaid in full via monthly gross margin to SilverStream.
The SilverStream transaction is conditional on completion of due diligence by SilverStream and the exercise of the acquisition option by Minera. In addition Minera will raise US$2.5 million from non-dilutive sources.
Minera Gold managing director, Ashley Pattison said:
"The acquisition of a strong package of copper-silver-gold exploration, development, and production assets is a unique opportunity for Minera.
"It delivers immediate and material cost savings on the processing of our gold through not having to pay approximately US$1 million per annum in lease fees for San Santiago's CIP gold circuit as we make the transition over the next fortnight from completion of commissioning to steady state gold production.
"This saving represents an estimated drop in all-in cash costs for Torrecillas from A$780/oz to A$700. It will also provide immediate solid cash flow from the current toll treatment of copper through the plant's two copper circuits.
"In addition, the upside benefits, risk mitigation and diversification from owning and optimising the high grade vein copper-gold-silver mining from the acquired mining rights to a very large tract of prospective and productive acreage surrounding the plant can't be ignored. Minera also plans to move to total control of future copper processing at the plant."
Overview San Santiago Processing Plant and Mining Rights
The San Santiago processing plant and mining properties are located in the highly prospective Cobrepampa area surrounding the Acari region, which has been producing copper, gold and silver for more than 40 years.
The area is also host to two large Chinese-owned IOCG deposits, Marcona and Pampa del Pongo. The San Santiago processing plant at Otapara was permitted via an Environmental Impact Assessment in 2006.
The San Santiago processing plant is located in an established mining region, is one of two processing plants operating in Otapara - the other being owned and operated by the local Otapara community. Importantly, the San Santiago plant is operational, with access to:
- the national grid power supply;
- water supply from onsite bores;
- tailings disposal (expansion is required); and
- all environmental permitting and licensing is in place. The processing plant can legally process 350 tonnes per day (TPD) of material through a combination of its three circuits, including:
- 200TPD CIP gold circuit (as currently leased to Minera);
- 250TPD copper flotation circuit; and
- 120TPD copper oxide circuit
Minera and its consultants have already initiated discussions with local authorities to assess increasing the milling capacity at San Santiago. Timing of any such approval is not definitive.
The conditionally agreed access to an additional US$1.5 million of expansion capital from SilverStream, further reduces risk for the project in the medium term.
Current Toll Treatment Operations and Future Mining Plans
San Santiago's copper flotation circuit is currently the plant's primary income generating asset. For the six months to 30 June 2014, the operation averaged throughput of ~7,500 tonnes per month of copper sulphide ore at an average feed grade of ~4% copper, ~2 g/t gold and ~20 g/t silver, producing approximately 1,300 tonnes of quality copper concentrate per month for its customers.
Based on toll treatment charges alone, this operation generated an unaudited EBITDA of US$1.0 million for the six months to 30 June 2014. In addition, each entity being acquired that owns the mining rights receives a profit share on the sale of concentrate in addition to the toll processing fee.
Minera will look to modify pre-existing toll treatment arrangements so that it eventually owns and controls all ore mined and processed from within the concessions and mining rights being acquired.
At current tonnage and grades being processed through the plant equates to approximately 3,300 tonnes per annum of contained copper with additional gold and silver credits.
This concentrate is known to be among the cleanest concentrate available in the Peruvian market. It contains a premium copper grade with gold and silver credits whilst being extremely low in penalty-attracting impurities, enhancing its appeal in metals blending.
Most of the concentrate is primarily sold into the spot market to a number of traders.
The additional copper oxide circuit, used on a batch-only basis currently, is a valuable asset long-term for the company, given the presence of large non-JORC copper oxide resources in the surrounding concessions.
Once the necessary permitting is obtained, it will require some upgrading for it to be utilised on a full time basis once permitting allows.
The acquisition, significantly supported by SilverStream SEZC is non-dilutive and earnings accretive given EBITDA generated from the current toll treatment of copper through the plant's two copper circuits.
Effectively, Minera picks up a current copper toll treatment asset generating cash flow from day 1. i.e. US$2 million pa in EBITDA income. This could be expected to increase in 2014/15 once agreements are restructured and Minera gains control of the asset.
There is a cost saving of US$1 million pa from not having to pay lease fees for San Santiago's CIP gold circuit.
It also serves to reduce all-in cash costs for Torrecillas from A$780/oz to A$700/oz. In all, the acquisition is a corker in immediate financial terms as well as pave the way for increased revenues, margins and profits.
We consider that the acquisition is valuation and hence share price accretive in the short to medium term for Minera.
Our earlier valuation for Minera in the range of $0.007 - $0.012 within 6-9 months may prove conservative.
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