Equity-royalty deal lands True Gold a cool $23.5M

VANCOUVER — Money may be tight right now, but True Gold Mining (TSXV: TGM) is demonstrating that there is funding available for companies with advanced projects that are willing to be a bit creative.

True Gold added $23.5 million to its coffers through a strategic two-part deal with Liberty Metals & Mining Holdings, a subsidiary of Boston-based Liberty Mutual Insurance. The lion’s share of the investment is a straightforward private placement that will see Liberty spend $17.4 million to acquire 52.8 million True Gold shares at 33¢ apiece. Upon closing Liberty will own 19.95% of True Gold. 

The deal gives Liberty managing director Christopher Noel Dunn a seat on True Gold’s board and grants Liberty the right to participate in future financings to maintain its ownership stake. That being said, True Gold should not need to raise more funds any time soon, as the new funds will bring its cash balance to $38 million, enough to complete feasibility work at its flagship Karma gold project in Burkina Faso.

The second part of the deal will see Liberty buy a 2% net smelter return royalty (NSR) on Karma, for slightly more than $6 million. True Gold can repurchase half of the royalty after three years of commercial production at Karma, for fair market value. The company has the right to buy back the rest of the NSR on March 31, 2014, for US$12.5 million. 

An investment that combines a private placement with the purchase of a royalty is somewhat unusual in the mining sector. However, today’s difficult conditions call for flexibility, and that is precisely what True Gold chairman Mark O’Dea says Liberty brought to the table.

“They’re a creative bunch — it’s long-term creative money looking to deploy in ways that aren’t necessarily constrained to regular equity investments,” O’Dea says. “They’re opening to streaming agreements and royalty deals, and we all found this structure to be pretty beneficial.”

The cash is certainly helpful to True Gold, which has to fund another year or so of work to prepare Karma for a development decision. For Liberty, O’Dea says True Gold and Karma simply fit the bill.

“They have two principal criteria: they want to back management teams they know and trust, and they want to get involved with projects that are close enough to a production decision that, from their perspective, the projects are sufficiently de-risked that they can quantify what the upside looks like,” he says. “We’ve been getting to know Liberty — and they’ve been getting to know us — for about 18 months now, and at the same time the project was coming along at its own pace, and so it was a confluence of those things.”

Liberty is the second group to invest in True Gold in recent months: in May Teck Resources (TSX: TCK.B; NYSE: TCK) bought 30.3 million True Gold shares at 33¢ apiece, for  $10 million. O’Dea says the two investments are milestones for the company.

“Not only are they strong endorsements of the project and the team, having these two cornerstone investors in the company, but the money has come at a good time,” O’Dea says. “What this effectively enables us to do is keep the momentum within our timeline, without having to take a hiatus to go out and raise money at what would inevitably be the worst point in the project’s schedule.”

The plan is to release a feasibility study for Karma in the fourth quarter of the year. O’Dea says it’s on track, and investors should not expect any major surprises.

“With this feasibility study, we’re honouring the preliminary economic assessment (PEA) in almost every respect, other than the size and throughput of the operation, which will likely be scaled up slightly,” he says. 

The Karma PEA, which came about a year ago, outlined an open-pit, heap-leach operation processing 9,000 tonnes of oxide and transition ore a day to produce 70,000 to 90,000 oz. gold annually over a 10-year mine life. The study estimated Karma’s capital costs at US$125 million and predicted the mine could produce an ounce of gold for US$525. At a gold price of US$1,350 per oz., the study shows an after-tax net present value of US$192 million and a 37% after-tax internal rate of return. 

The 856 sq. km Karma project is 25 km east of the city of Ouahigouya and is home to five closely spaced deposits. Together, the deposits host 56.5 million indicated tonnes grading 1.07 grams gold per tonne, plus 15.4 million inferred tonnes averaging 1 gram gold. 

The area around Karma is inhabited, so developing the planned mine would require True Gold to relocate some residents. A few days before releasing news of the Liberty deal, True Gold announced that it has achieved government and community approval for that relocation plan. 

“From construction through the initial four years of production there are approximately 40 people who would need to be relocated,” O’Dea says. “Having that approval, with the blessing of the communities and with the blessing of our community liaison committee, has been a pretty pivotal milestone. Having the committee buy in to what lies ahead with respect to relocation is a big de-risking factor.”

It seems the market agrees that Karma is on the right track. Since hitting a 52-week low of 21¢ at the beginning of July True Gold shares have climbed 10¢ in a few weeks to hit 31¢. TGM shares were worth as much as 76¢ last September. 

The company was known as Riverstone Resources until changing its name in February. It had 212 million shares outstanding prior to the Liberty deal.