Orion to finance Premier Gold

When it comes to financing companies in the mining sector, private equity firms typically call the shots.

But in a deal announced on May 31, Orion Mine Finance appears to have conceded by agreeing not to collect any standby fees from the US$30 million it says it will loan Premier Gold Mines (TSX: PG).

Instead, the junior will only pay 6% interest on the drawn amount of Orion’s multi-draw, unsecured term facility.

“This is a better deal than what is commonly available in the market, which is 1.5–2% standby fees, in addition to commitment fees,” Rob Chang, a mining analyst at Cantor Fitzgerald in Toronto, said in a research note.

“A lot of people took notice of this, and Orion will get a lot of incoming,” Ewan Downie, Premier’s president and CEO, said in a telephone interview from Thunder Bay.

“I’ve always felt standby fees are a flaw, so I said [to Orion that] if we could draw money and not pay a standby interest on the balance, I’d be all ears.”

In addition to the US$30-million term facility, Orion has committed to a US$15-million private placement at a 7% premium to Premier’s share price before the financing was announced. Orion will acquire 6.4 million shares of the junior at $3.05 per share for a 3.5% stake in the company. Orion also has the right to participate in future equity offerings to keep its proportionate interest.

Under the arrangement, Orion will have the right, under an off-take agreement, to buy up to 20,000 oz. gold a year for 90 months from Premier’s existing projects, or ones it acquires with the help of the private equity firm. (The purchase price for the gold will be no lower than 98.4% of the U.S. dollar London Bullion Market Association (LBMA) p.m. fixed price on the delivery date, and no higher than 99.6% of the U.S. dollar LBMA p.m. fixed price.)

Orion has also agreed to provide Premier with up to US$400 million in financing if the junior mining company expands its projects, or acquires new ones.

“It’s a good partnership or alliance — this provides flexibility to access money if and when we need it,” Downie says.

Premier expects to be in production this year at its 40%-owned South Arturo gold project in Nevada with joint-venture partner Barrick Gold (TSX: ABX; NYSE: ABX), but the funds will come in handy if there are delays.

“While all systems are go at South Arturo and [Barrick] goes for production in late July or early August, it could always get delayed … if there was a delay for some reason we’d need access to capital before the cash came … we wanted to protect ourselves and our shareholders from running into a low balance.

“We don’t foresee the need of a lot of money in the near future because of cash flow from South Arturo, but we do have a number of advanced-stage projects,” Downie continues. “There are three that we’re moving into development — so we’re making sure of our potential financing needs.”

Premier was introduced to Orion by Ebe Scherkus, who used to serve as chairman of Premier’s board of directors, and Downie says his management team and Orion discussed the financing for a year.

“We talked about our five-year plan and how we want to build a real mining company and how, with our previous chairman, we had studied Agnico Eagle Mines [moving] from being a small penny stock to what they are today, and they did that in three years, where they built four or five mines,” Downie says. “We think that we have as good a pipeline of projects as Agnico had in those days — ours might even be better — but that’s going to require financing.” (Scherkus, now serving on the board of Stornoway Diamond [TSX: SWY], spent most of his career at Agnico Eagle Mines [TSX: AEM; NYSE: AEM], where he worked from 1985–2012, including a lengthy term as president and chief operating officer from 2005–2012).

In addition to its South Arturo joint-venture, Premier is advancing its wholly owned Hasaga project in the Red Lake mining district of northwestern Ontario; its 44%-owned Rahill-Bonanza property, also in Red Lake (Goldcorp [TSX: G; NYSE: GG] owns the remaining 56% and is operator); its partly owned Trans-Canada property in Ontario; and its wholly owned McCoy-Cove project along the Battle Mountain-Eureka trend in Nevada.

Under the US$400-million financing agreement with Orion, the parties can work out a deal to expand projects, or acquire new ones.

“Subject to our negotiation for suitable terms that both parties can live with,” Downie says, “we’d have access to up to US$400 million for either acquisitions or the advancement of our project portfolio. While I say we have a great portfolio, we always have our eyes open if there’s something else we think is accretive.”

“We’re always on the lookout … we’ve done a bit of due diligence, and we’ve participated in a few processes,” he says, “but the only one we’ve dipped our toes into was IDM Mining (TSX: IDM).” (Earlier Premier announced it had taken a 6.5% stake in IDM through a private placement.) The company is advancing its Red Mountain project in B.C.’s Golden Triangle.

“It is a prospective Canadian gold project with a resource and underground workings, and if they are successful we’d like to participate,” Downie says. “We could help them get that project across the line. It looked a lot like Cove Resources at a fraction of the market cap, so we viewed it as a good investment.”

News of the May 31 financing sent Premier’s shares up 21¢, or 7.4%, to $3.06. Over the last year the company has traded in a range of $1.64 to $3.80 per share.

Cantor Fitzgerald’s Chang has raised his target price on the company from $4.15 per share to $4.30 per share.

“This agreement provides Premier Gold with ample available capital to take advantage of market opportunities and/or develop existing assets such as Hardrock, McCoy-Cove and Hasaga,” he writes in a research note. “Moreover, it provides the company with wiggle room, should the development of South Arturo be delayed.”