MD&A May 28 2014Financing
Pre-Construction Loan from Resource Capital Fund
On December 19, 2013, the Company entered into a loan agreement with RCF VI that provides a US$50,000,000 secured pre-construction loan (the “Pre-construction Loan”), enabling the Company to commence with detailed engineering studies and road and other preparatory pre-construction activities. The Company drew down US$20,000,000 at closing and an additional US$10,000,000 on May 9, 2014 The remaining US$20,000,000 available under the Pre-construction Loan is expected to be drawn prior to May 30, 2014. The Pre-construction Loan bears interest at the rate of 8 percent per annum and interest is payable quarterly in cash or in common shares of the Company at the option of RCF VI. At closing, the Company issued 27,903,773 common shares to RCF VI at the fair value of $1,314,268 (US$1,250,000) as an establishment fee. The Company incurred an additional $311,176 in cash transaction costs.
The Pre-construction Loan will become convertible debentures on June 30, 2014, if the Company has not completed a Rights Offering of no less than US$175,000,000 plus the amounts then outstanding on the Pre-construction Loan and the New Bridge Loan. All or a portion of this Rights Offering may be back stopped by RCF VI and/or RCF IV. The convertible debentures will be due on December 31, 2014 with a conversion price of $0.055 per common share of the Company.The Pre-construction Loan is secured by a first charge on the assets of the Company on a pari passu basis with the Company’s New Bridge Loan. Project Debt Facility and Strategic Partner Involvement The Company engaged Northcott Capital to identify strategic investors interested in investing at the project level to provide a portion of the funding required for development of the Kitsault Project
The Company engaged Northcott Capital to identify strategic investors interested in investing at the project level to provide a portion of the funding required for development of the Kitsault Project.
On April 19, 2012 the Company entered into a mandate letter with five lenders for up to $640 million of debt financing to develop the Kitsault Project. The lending group is comprised of UniCredit Bank AG, KfW IPEX Bank GmbH, Export Development Canada, Korea Development Bank and Caterpillar Financial (the “Group Lenders”). The mandate letter had preliminary approval of each of the proposed lenders but required final credit approval and negotiation and execution of a loan agreement under Ontario law. The original mandate expired on December 31, 2013, after being extended by the Group Lenders from the original expiration date of March 15, 2013. Discussions continue with the Group Lenders on the debt financing.
On March 12, 2014, the Company announced that Mr. Gordon J. Bogden had been appointed as President and Chief Executive Officer of the Company, following the resignation of Mr. Mark Premo. In addition, Mr. Graham du Preez was appointed Chief Financial Officer of the Company, and Mr. A.J. Ali, the former Chief Financial Officer of the Company, assumed the role of Executive Vice President. Mr. Ali will continue in this role through June 30, 2014, at which time he will retire from the Company. Mr. Jeff Lowe was promoted to the role of Chief Operating Officer for the Company and President of Avanti Kitsault.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s operations consumed approximately $1,783,000 of cash (before working capital items) for the three months ended March 31, 2014. An additional $3,497,000 of cash was spent on the Kitsault Property. The cash requirement was fulfilled from cash on hand at the beginning of the period $9,920,860).
The Company’s aggregate operating, investing and financing activities during the three months ended March 31, 2014 resulted in a net decrease of $4,593,619 in its cash balance of $9,920,860 at December 31, 2013 to $5,327,241 at March 31, 2014. The Company’s working capital deficiency increased by $10,177,681 during the period and stood at a deficiency of $42,293,191 at March 31, 2014. The increase in working capital deficiency was primarily due to Kitsault Project expenditures during the period and increases in liabilities relating to the New Bridge Loan and the Pre-construction Loan. The New Bridge Loan and the Pre-construction Loan are due on December 31, 2014. US$20 million of the Pre-construction Loan facility remains undrawn. The Company plans on drawing down the final US$20 million on May 30th.
The Company will need additional capital for construction of the mine and to repay the New Bridge Loan and the Pre-construction Loan. To achieve that objective the Company has been pursuing its capital funding strategy discussed in the “Outlook” section below. The New Bridge Loan and the Pre-construction Loan are secured against the assets of the Company, including the Kitsault Property. For additional information refer to the going concern note (Note 2) in the unaudited condensed interim consolidated financial statements for the three months ended March 31, 2014.
OUTLOOK
During the remainder of 2014, the Company will be focused on the following activities:
· obtaining the outstanding approvals and permits required to construct the Kitsault Project;
· negotiating cooperation agreements with First Nations in proximity of the Kitsault Project area;
· negotiating a project debt agreement with the Group Lenders;
· evaluating a sale of a minority interest in the Kitsault Project to a strategic investor;
· arranging sufficient equity funding to complete the project financing package for the Kitsault
Project;
· commencing pre-construction activities at the Kitsault Project, including detailed engineering
work and road and other pre-construction activities; and,
· strengthening the management team and implementing systems and processes in
preparation for the commencement of construction activities at the Kitsault Project.
There is no certainty the project debt, any equity offering or strategic partnership will be successfully completed.