Crocodile Gold has a new agreement
Crocodile Gold announced on December22,2014 that it has a new agreement with Aurico Gold related to it's two mines in Victoria State in Australia.This agreement has been examined in my other blog on blogger called Workathon.But Workathon looked at the agreement from the point of view that the profitability to Crocodile depends on the size of the gold resource at these two mines.This blog will look more closely at the structure of the agreement.
Crocodile Gold reported in March of 2014 that it had new drilling results from the Fosterville mine.These results covered the Phoenix and the Lower Phoenix structures.The release showed drilling assays of 6.00 grams to 12.66 grams per tonne over a small interval for the Phoenix structure and 12.89 grams to 122.35 grams per tonne over a larger interval for the lower Phoenix structure.This is a very high grade of ore.In May, Crocodile says that it had updated it's mineral resource estimate for the Fosterville mine to 2.1 million ounces.But they pointed out that this includes little gold from the Phoenix and Lower Phoenix structures.That is why my blog of July27,2014 in Workathon stated that the ore body at the Fosterville mine could contain 3 to 5 million ounces.But in their March release Crocodile states that extensions south and north of the two faults have not been tested.It is the opinion of this blog that the ore grade will not fall from 122.35 grams per tonne in the fault suddenly to 2.2 grams per tonne in a delineated extension.This likely puts the size of the ore body to bigger than 5 million ounces.So a production royalty will benefit both companies.
Comparison of two Agreements
At the outset it must be stated that the main part of this deal was consumated with a lump sum payment from Crocodile Gold.I believe the amount was greater than C$200 million although I do not have the details now.Secondly Crocodile Gold did not get financing from Aurico.Crocodile Gold did not ever say directly but it appears that they borrowed from Credit Suisse to pay Aurico and at a high rate of interest.Now, finally the loan has been paid off.The net cash flow sharing agreement was only a secondary agreement and the sharing percentage was about 40% until cumulative net cash flow of $C120 million was realized.Thereafter it was set at 20% of net cash flow.But since the agreement was not made in terms of operational cash flow but net free cash flow Crocodile could take cash and non-cash charges in order to reduce net free cash flow.And that was what they did.For example,in 2013 when revenues were $300 million and operating cash flow was $67 million, the net free cash flow paid by Crocodile Gold to Aurico was only $2.7 million.Both parties needed a new agreement!
An example
Because the sharing agreement was on a net free cash flow basis Crocodile was able to plow operational cash flow back into both mines and even into the Cosmo mine and undeveloped mines.So 100,000 ounces from Fosterville mine produced operating income of $20 million;this assumes the price of gold at $1200 an ounce and the all in sustaining cost (AISC) of$1000 per ounce.But Crocodile could take charges of at least $10 million to develop their mines.This would leave $10 million or less to put towards the sharing agreement.In this case a 2% smelter royalty would equal or surpass the cash flow coming from a net free cash flow agreement.I will show some figures from 2013 to prove this point.
The annual report for 2013 showed that Crocodile Gold invested $68,156,000 into their mines.That included $26,662,000 into the Cosmo mine and $35,801,000 into the Fosterville mine and lastly $5,114,000 into the Big Hill project which is a part of the Stawell mine.The net cash flow sharing payment to Aurico was $2.7 million.This is all allowed according to the agreement.
Crocodile Gold reported in March of 2014 that it had new drilling results from the Fosterville mine.These results covered the Phoenix and the Lower Phoenix structures.The release showed drilling assays of 6.00 grams to 12.66 grams per tonne over a small interval for the Phoenix structure and 12.89 grams to 122.35 grams per tonne over a larger interval for the lower Phoenix structure.This is a very high grade of ore.In May, Crocodile says that it had updated it's mineral resource estimate for the Fosterville mine to 2.1 million ounces.But they pointed out that this includes little gold from the Phoenix and Lower Phoenix structures.That is why my blog of July27,2014 in Workathon stated that the ore body at the Fosterville mine could contain 3 to 5 million ounces.But in their March release Crocodile states that extensions south and north of the two faults have not been tested.It is the opinion of this blog that the ore grade will not fall from 122.35 grams per tonne in the fault suddenly to 2.2 grams per tonne in a delineated extension.This likely puts the size of the ore body to bigger than 5 million ounces.So a production royalty will benefit both companies.
Comparison of two Agreements
At the outset it must be stated that the main part of this deal was consumated with a lump sum payment from Crocodile Gold.I believe the amount was greater than C$200 million although I do not have the details now.Secondly Crocodile Gold did not get financing from Aurico.Crocodile Gold did not ever say directly but it appears that they borrowed from Credit Suisse to pay Aurico and at a high rate of interest.Now, finally the loan has been paid off.The net cash flow sharing agreement was only a secondary agreement and the sharing percentage was about 40% until cumulative net cash flow of $C120 million was realized.Thereafter it was set at 20% of net cash flow.But since the agreement was not made in terms of operational cash flow but net free cash flow Crocodile could take cash and non-cash charges in order to reduce net free cash flow.And that was what they did.For example,in 2013 when revenues were $300 million and operating cash flow was $67 million, the net free cash flow paid by Crocodile Gold to Aurico was only $2.7 million.Both parties needed a new agreement!
An example
Because the sharing agreement was on a net free cash flow basis Crocodile was able to plow operational cash flow back into both mines and even into the Cosmo mine and undeveloped mines.So 100,000 ounces from Fosterville mine produced operating income of $20 million;this assumes the price of gold at $1200 an ounce and the all in sustaining cost (AISC) of$1000 per ounce.But Crocodile could take charges of at least $10 million to develop their mines.This would leave $10 million or less to put towards the sharing agreement.In this case a 2% smelter royalty would equal or surpass the cash flow coming from a net free cash flow agreement.I will show some figures from 2013 to prove this point.
The annual report for 2013 showed that Crocodile Gold invested $68,156,000 into their mines.That included $26,662,000 into the Cosmo mine and $35,801,000 into the Fosterville mine and lastly $5,114,000 into the Big Hill project which is a part of the Stawell mine.The net cash flow sharing payment to Aurico was $2.7 million.This is all allowed according to the agreement.
Comments
Post a Comment