In this still oh-so-harsh and selective market for junior financing, it’s hard to argue Atlantic Gold’s (AGB-TSX) debt deals – commitments for $135 million – are a bad deal for shareholders, though they do involve a sizeable forward sale of gold. That is, the $35-million marketcap junior looks to avoid a massive, or imminent, equity washout to fund the MRC gold project in Nova Scotia.
Atlantic Gold inked two tentative agreements: a $115-million debt package with Macquarie Bank and Caterpillar, and a $20-million equipment finance package. The main course here – not yet wrapped in a definitive agreement – comes as a loan with a three-year payback period starting in late 2017, when Atlantic Gold hopes to be ramping up gold production at MRC. The loan is to bear interest set at the Canadian Dealer Offered Rate plus 5%.
As part of the deal, Atlantic Gold enters into a forward sale contract for 215,000 ounces gold at a minimum price of CAD$1,500/oz (or ~USD$1,100 at recent exchange rates.) You could look at this as securing future cash flows if the price of gold falls or limiting the upside from a rising gold price (some years away from now).
Yet, even if it ends up being the latter, capping some potential profit, I’d say it’s a reasonable concession.
For in doing the deal, and assuming a definitive agreement comes, Atlantic Gold avoids having to use equity. If – as we’ve seen in a number of recent debt/equity deals – Atlantic Gold was required to raise cash with its shares, the pain would be excruciating. Atlantic Gold is a $35-million marketcap company. Even to get a third or fourth the money it needs to build MRC – per its feasibility projections – would entail a doubling of the share count or worse.
You don’t mind dodging that.
As for project details. If it all comes together, the money, including the equipment lease, looks to largely cover the $137 million that Atlantic Gold estimates it will cost to get MRC to production. It sees an eight-year mine life and average production of 87,000 ounces gold from two open pits (one requiring 37 km of trucking) averaging 1.44 g/t gold and a 3.73 strip ratio with recoveries, mosty gravity, of 94%.
Assuming $US1,200/oz gold, Atlantic Gold projects a net present value, after-tax, of $168 million with a post-tax IRR of 30%.