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ZYL Limited Books Key $18m Funding For Development Of Anthracite Projects

Near term anthracite producer ZYL Limited (ASX:ZYL) has entered into a term sheet for an $18 million, 35 month term, Convertible Note with a sophisticated investor via a special purpose entity.

While the company has been under the radar in terms of newsflow this looks set to change in the near future.

ZYL is developing high-margin anthracite deposits for domestic and export markets from its flagship Mbila and Kangwane projects in South Africa, located close to rail, port, power and water infrastructure.

A term Sheet has been executed by ZYL and the Investor in conjunction with an Approval Letter for a Term Bilateral Loan for $18 million from a Chinese Bank based in Australia and formal agreements are expected to be executed shortly.

The issue of the Convertible Note is conditional upon execution of final documentation by the parties and the usual regulatory approvals, amongst other things; shareholder approval to allow conversion of the Convertible Notes into ordinary ZYL shares and Foreign Investment Review Board (FIRB) approval.

It is anticipated that these approvals will be obtained in early November 2012 with drawdown shortly thereafter.

In the interim, the Investor has agreed to provide a bridging facility of $2 million, subject to FIRB approval, within approximately one month. This bridging facility is part of and not in addition to the $18 million facility.

CEO Ian Benning said, "We are delighted with the financing and the support provided through this financing. We see this as a major milestone in the advancement of our two principal assets going forward, the Mbila and Kangwane Central projects. Having both Bankable Feasibility Studies complete and a majority interest in our key projects will elevate ZYL to the next level in its project development pathway."

Mbila Project Ownership

ZYL has successfully renegotiated the payment terms of the Mbila acquisition with the Mbila vendors so that the two payments that secure 51% ownership for ZYL totalling $13.6 million (principle payments excluding interest) are now due no later than December 31, 2012.

Part of the proceeds from the Convertible Note will be used to meet this obligation.

The particulars of the revised terms and final payment terms to secure the residual 23% to bring its interest to 74% are detailed in Appendix 2. Further details relating to the mechanics behind the ZYL Mbila project interest and the financial ownership commitments are provided in the quarterly report released to the market on 1 August 2012.

Offtake expressions of interest

Since the beginning of the year the company has received multiple expressions of interest from third parties who have indicated a desire to secure off-take, provide debt finance and/or project funding, and to partner with ZYL.

These discussions have been positive with their progression and subsequent outcome now dependent on the completion of the BFS's.

The Company's focus remains on developing and advancing its projects to production with its respective existing BEE partners. ZYL will consider and evaluate all available options that will lead to achieving this outcome.

In addition to lowering ZYL's share of the capital development expenditure to develop Mbila and Kangwane Central, partnering or off-take agreements with a larger group will enable ZYL to look at increased production rates and enhanced infrastructure solutions.

ZYL will enter into a Product Services Agreement with the Investor. The Investor will provide advice in relation to the marketing and sales of the product and assist in the rail, road and other logistical issues as appropriate.

This agreement does not restrict ZYL from working and negotiating with off-take partners or new project investors, but provides a further avenue to project financing.

It is expected that the Product Services Agreement will require ZYL to pay a service fee of 1.5% of attributable mine gates sales (exclusive of deliver/logistics costs) for the first 3 years of production only. For clarity, only one fee will be payable.

Alternatively, should the Investor arrange or provide financing for one or both mines, then the Investor will be entitled to a fee of 3% of attributable mine gate sales proceeds (exclusive of delivery/logistics costs) payable in respect of life-of-mine production in respect of the mine(s) financed, with such production determined using the BFS.

CEO Ian Benning commented "We are very pleased with this agreement as it provides us with flexibility to work with off-take partners and project investors while at the same time allows for the Investor to work together with the Company and the Bank to provide ZYL with another option for project financing for the development of the projects."

York Acquisition Update

During the second quarter of 2012, ZYL executed a binding heads of agreement to acquire 100% of York Energy N.L.for $12 million in ZYL shares to be issued at approximately $0.18 (less outstanding liabilities).

York owns 7% of Mbila (5% is held in escrow) and can earn up to an additional 23% in the Mbila project via a 'put and call' option for $14 million. In addition to the Mbila project, York has interests and rights in the Marble and Kangwane North projects of 60% & 70% respectively.

In the update to shareholders dated July 18, 2012 on the York acquisition process it was anticipated that the notice of meeting ("NOM") and independent experts report ("IER") would be supplied to shareholders by the end of August.

ZYL has a call option for a two years from the signature date (15 September 2011 until 15 September 2013), subject to payment of the amounts referred to above, to require the sellers to sell a further 23% of Mbila for US$14 million (plus 1% interest for each month that settlement does not occur following the 18 May 2012.

The sellers will have a put option for the final six months of the two year period to require ZYL to purchase a further 23% for US$14 million.

The Share Purchase Agreement between ZYL and York shareholders has been executed and that the NOM & IER are finalised subject to regulatory review. The documents will be supplied to shareholders in advance of a shareholders meeting anticipated to be held in November.

Analysis

The $18m in funding is a key piece of news and a milestone to finalise the Bankable Feasibility Studies (NYSE:BFS) at the Mbila and Kangwane Central projects. It provides maximum flexibility as it develops the projects.

Although under the radar of late, ZYL has two company maker projects which can meet both the domestic and export markets demand for high quality anthracite which is a cost effective alternative to supply-constrained and more expensive metallurgical coal, and its final processed product, metallurgical coke.

The Mbila and Kangwane assets provide ZYL with a strategic holding in the niche global anthracite market. Kangwane offers excellent scope for near term production via a low cost, open pit process in the southern section of the concession.

Signficantly, ZYL has received expressions of interest for some 4 million tonnes of anthracite annually from both Mbila and Kangwane; this is well in excess of the combined annualized production target of 2.5 million tonnes.

We believe that newsflow and catalysts for re-rating of ZYL are near. The re-tracement in share price and market cap. of ZYL provide a significant opportuntiy for investors. ZYL stands to become a strategic player in the niche global anthracite market.