Yellowhead lines up $8M for Harper Creek

Yellowhead Mining (TSX: YMI; TSXV: YMI) has announced an $8-million convertible debt financing with Calgary-based private firm Matco Investments to continue working on its flagship Harper Creek copper–gold–silver project in southern B.C.

The debt matures on Jan. 31, 2014, and carries a 9% annual interest rate. But it could be fully converted into 35.6 million Yellowhead shares at an exercise price of 22.5¢ apiece — a 50% premium to the junior’s Nov. 18 close of 15¢ — pending shareholder approval.

“We believe the convertible debt financing, which bears an exercise price well above the current share price, is the least dilutive available source of capital, as investment appetite for junior-mining development projects remains poor,” Laurentian Bank Securities analyst Chris Chang writes in a note.

The conversion is expected to take place on Dec. 30, following a special shareholder meeting that day where shareholders can vote on the conversion. If approved, Matco will own 35.91% of Yellowhead, becoming the company’s largest stakeholder.

Chang says that because the explorer had a cash balance of $3 million at the end of September, it would likely convert the debt into equity upon shareholder approval. He says the conversion would dilute Taseko Mines’ (TSX: TKO; NYSE-MKT: TGB) interest in Yellowhead to 10.4%, from 16.2%.

If the conversion doesn’t receive shareholder support, the debt will be due in full on the maturity date, along with the accrued interest and $250,000 funding fee.

But Matco has the right at any time to convert up to $3.6 million of the principal amount into 15.85 million shares at the conversion price. If it does this, Matco will own nearly 20% of Yellowhead.

The Vancouver-based firm intends to use the funds from the financing to complete the environmental assessment on its 100%-owned Harper Creek project, along with general corporate purposes.

Harper Creek — located 150 km north from Kamloops — is a low-grade, volcanogenic sulphide deposit. It hosts reserves of 704.4 million tonnes grading 0.26% copper, 0.029 gram gold per tonne and 1.14 grams silver per tonne.

A March 2012 feasibility study shows it is economic to build a 70,000-tonne-per-day, open-pit mine at the project to produce 3.6 billion lb. copper, 372,000 oz. gold and 14 million contained oz. silver in concentrate over 28 years. Initial costs were pegged at $839 million.

Chang rates the stock as a “speculative buy,” with a 75¢ target price.

As part of the Nov. 19 investment agreement, Ronald Mathison, who controls Matco, joined Yellowhead’s board of directors.