Lundin Gold secures up to US$450M for Fruta del Norte

The stars are aligning for Lundin Gold (TSX: LUG) at its large, wholly owned Fruta del Norte (FDN) gold project in Ecuador.

On May 30, the company announced a US$400- to US$450-million financing in conjunction with a project update, which highlights that production at FDN could start in late 2019 instead of early 2020.

“We view the financing package as a milestone for Lundin Gold, as it now represents the foundation upon which the project can be built,” GMP analyst Steven Butler writes.

The financing package — arranged with the private equity groups Orion Mine Finance and Blackstone Tactical Opportunities — includes a US$150-million gold prepay facility, a US$150-million stream facility and commitments of US$100 to US$150 million in future equity financings.

Under the gold prepay loan, Lundin will complete the first US$75-million drawdown shortly. It expects to draw down the remaining US$75 million by year-end, Alessandro Bitelli, the company’s chief financial officer, said on a conference call. The proceeds will go towards developing FDN, which boasts a US$684-million price tag.

Repayment should occur quarterly over five years, where Lundin will make 19 cash payments equivalent to 11,500 oz. gold, starting in December 2020. Lundin can defer quarterly deliveries by up to a year, by increasing subsequent deliveries by 1,000 oz. per quarter deferred.

Workers assemble for a daily morning meeting at Lundin Gold’s Fruta del Norte gold project in Ecuador. Credit: Lundin Gold.

Butler says that the repayments total 218,500 oz., or 15% of FDN’s annual output over five years, based on expected gold production averaging 300,000 oz. a year.

The stream facility also includes an upfront advance of US$75 million and another US$75 million until the end of June 2018.

Lundin can repay this facility by providing monthly payments equivalent to 7.8% of gold and 100% of silver produced at FDN (at spot price minus US$400 per oz. gold and US$4 per oz. silver), starting in December 2020. The facility is capped at 350,000 oz. gold and 6 million oz. silver.

“The stream does not require actual physical metal deliveries, but rather cash equivalents of the deliveries,” Butler says.

The company has an option to buy back the first half of the stream in June 2024 for US$150 million, and the other half in June 2026 for US$225 million. Given the hefty price tag, Haywood Securities analyst Kerry Smith says a buy back is “unlikely.”

Smith calculates that “the cost of capital is 12% for the prepay facility, and 16% for the stream, based on a US$1,200 per oz. gold price and US$20 per oz. silver price. While the cost of the facilities is not cheap, they are reasonable based on the jurisdiction and stage of the FDN project,” he contends. 

Meanwhile, Orion and Blackstone have committed to invest a total of US$100 to US$150 million in future equity financings. “This component of the total financing package illustrates the longer-term commitment to not only Fruta del Norte, but also to the future opportunities for Lundin Gold,” Bitelli says.

Lundin has also granted the lenders an offtake agreement for half of FDN’s gold production, up to a maximum of 2.5 million oz., settled using the closing London Bullion Market or Comex gold price around the delivery dates.

In a separate release, Lundin provided a project update, advancing the design and estimates from FDN’s May 2016 feasibility study. The update includes a revised mine plan, a faster ramp-up, site-plan improvements and a self-perform approach, versus the engineering, procurement and construction management approach used earlier.

Lundin’s president and CEO Ron Hochstein notes that contractors began work on the portals in May as planned, and that construction is underway at the mine facilities.

First production should occur in the fourth quarter of 2019 instead of the first quarter of 2020, with commercial production starting in June 2020, six months ahead of the previous schedule, Hochstein says.

Total capital costs have gone up by US$15 million to US$684 million, largely due to “reallocating mine-equipment purchases and moving the paste backfill plant from sustaining capital to initial capital, offset by reductions to change in scope, reduction in equipment quotations and an increase in preproduction revenue,” Haywood’s Smith writes.

Hochstein says the updated capital cost includes all the costs to reach commercial production, whereas the feasibility study’s capital estimate of US$669 million included all the costs up to first production. The more comparable number from the 2016 study would have been US$704 million, he says, adding that compared to that, capital costs have actually gone down by US$20 million.

FDN’s average annual production should exceed 300,000 oz. over 15 years, versus 13 years previously.

Over the mine life, estimated total cash costs are US$561 per oz., up slightly from the feasibility study, while all-in sustaining cash costs have fallen 2.2% to US$609 per ounce.

The project also has better returns. Using the same metal prices of US$1,250 per oz. gold and US$20 per oz. silver as in the feasibility study, the after-tax net present value, at a 5% discount rate, increases from US$676 million to US$717 million. The internal rate of return improves from 15.7% to 16.3%. Capital payback has dropped to four years from four and a half years previously.

FDN is one of the world’s largest undeveloped high-grade gold projects. Located 139 km from the city of Loja, FDN hosts revised probable gold reserves of 4.94 million oz. from 16.7 million tonnes at 9.16 grams gold.