Ref to Eric Coffin article Traders are reacting well to an announcement after yesterday’s close that LIO has signed an MOU for debt financing and an EPC (engineering, procurement and construction) contract for its Tuvatu high grade gold project in Fiji. The MOU is with Ansteel-CapitalAsia Global Engineering Inc., a subsidiary of China’s largest iron ore miner and third largest steel maker. Amstel clearly sees some value in Tuvatu and probably also views it as an entre into Fiji where there is potential for downstream contracts supplying large volumes of steel for future railroad and port projects. A win-win for both Anstel and LIO shareholders if it works.
Under the MOU, which will need to be replaced with a fully negotiated formal contract, Amstel will
provide all engineering, design and construction services up to and including initial production and
testing of the mine and will provide vendor financing for 80% of the cost of the project, estimated to be
about US$50 million “all in” for construction of a mill and tailings facility and underground development
at Tuvatu. The debt would carry an interest rate of 7% and would be repayable quarterly, starting a few
months after Amstel/LIO complete the commissioning and hand over of the Tuvatu operation. The
term is a little on the short side at 4-5 years but if Tuvatu performs to plan in terms of gold production in
the early years of the operation I don’t think repayment would be a struggle.
The agreement calls for Lion One to provide 20% of the capex in the form of equity. Management tells
me there are discussions well underway with several mainly institutional and mainly US entities that
want in on a placement. Terms are not set yet but I expect a financing in the US $10-20 million range,
at a discount to (today’s) price. Lion One is a deal many have had their eye on, waiting to see an
agreement like the one just announced. I’m one of those “many” of course, having suggested buying
several times at lower levels in advance of just this sort of announcement. I don’t expect LIO to have
any difficulty raising the money. There is a lot of institutional money that wants into the space and their
preferred entry is companies that are in development or production. I will put my hand up for a bit of
the placement but I recognize this won’t be a retail issue and so won’t be offended (well, not much
anyway) if I don’t get it.
Tuvatu would not be a large producer as it’s currently envisaged but it certainly has the potential to be
either larger or longer lived or both. Management made the conscious choice to push towards
production in a much poorer market because it knew the market wouldn’t finance large scale drilling at
what it considered a fair price. Times have changed and management has bargained long and hard as
I knew they would. LIO is unusual for a company with a fully permitted mine in that it still has a small
share count, much smaller float and chairman very much aligned with shareholders as he is by far the
largest shareholder himself. The stock has had a big move on low volume. That move is a function of
lack of supply, not lack of demand. Current shareholders clearly don’t want to part with the stock now
that a long awaited financing announcement has been made.
At current gold prices Tuvatu has an after-tax NPV5 of about US $115 million and after-tax IRR of about
65%, against a market cap as this is written of about US $45 million. My expectation is that LIO will
complete a large placement, say $20 million+, if the demand is there which I think it will be. That will be
enough to satisfy its equity commitment to the EPC contract and, as importantly, position the company
to get back to drilling to increase the resources and extend the mine life and, in particular, extend the
high production period beyond the first three years. That has the potential to have a large impact on
the NPV. This would also position LIO to leverage Tuvatu to either add more project capability in Fiji or
do some shopping for other deals. Lion One’s management are deal makers. I think this
announcement marks the start of the next phase of deal making, not the end. With all that in mind I
think LIO is a buy in this range for advancement of Tuvatu and (hopefully) soon to be renewed
exploration and deal making news