LeadFX loses $2.93-million (U.S.) in Q3
017-10-24 19:04 ET - News Release
Ms. Jessica Helm reports
LEADFX REPORTS THIRD QUARTER 2017 RESULTS
LeadFX Inc. has released its results for the third quarter ended Sept. 30, 2017. (All dollar amounts are in U.S. dollars unless otherwise indicated . This release should be read in conjunction with the company's unaudited financial statements for the quarter ended Sept. 30, 2017, and management's discussion and analysis found on the company's website or on SEDAR.) In the third quarter, the company incurred a net loss of $2.9-million, or eight cents per share, which is 2 per cent higher compared with the same period in 2016.
As the Paroo Station mine was in care and maintenance in both periods, costs were broadly comparable in both periods except for a lower impairment of inventory, net of reversals related to gas stocks, which were no longer held in the third quarter, and lower management services fees. Foreign exchange is principally incurred on accounts payable balances denominated in Canadian and Australian dollars. Prior to July 19, 2016, borrowings were also denominated in Canadian dollars. Refer to the borrowings section of the corresponding management's discussion and analysis of results of operations and financial condition for the quarter ended Sept. 30, 2017, for further information.
During the third quarter, Sentient Executive GP IV Ltd. (for Sentient Global Resources Fund IV LP) agreed to refinance its outstanding secured and unsecured debt obligations under the bridging facility (as defined below) and notes (as defined below), and extend the maturity date for repayment of the outstanding indebtedness owing to Sentient IV to Feb. 28, 2018, pursuant to the amended and restated bridging facility (as defined below).
On Aug. 29, 2017, LeadFX entered into a binding term sheet (as defined below) with Sentient IV and InCoR Technologies Ltd. and InCoR Energy Materials Ltd. for the issue of up to 3,125,000 common shares of the corporation at 80 Canadian cents per common share by way of a non-brokered private placement for gross proceeds of approximately $2.5-million (Canadian) to close in two separate tranches. On Aug. 31, 2017, the company closed the first tranche of the offering whereby Sentient IV purchased 607,312 common shares and InCoR purchased 642,688 common shares for gross proceeds of $1-million (Canadian). The company anticipates closing tranche 2 of the offering on or before Oct. 31, 2017.
Paroo Station is on full care and maintenance, and, as a result, additional financing will be required to meet the company's strategic growth plans, continuing costs and loan commitments.
Operational
During the third quarter of 2017, the company underwent management and board changes. Robert Metcalfe, Peter Robson, David Ming Qi and Wayne Richardson resigned from the board of directors of the company. The board is currently composed of David Warner (chairman), Michel Marier and David Dreisinger. In addition, on Aug. 18, 2017, Enirgi Group Corp. and Enirgi Group Services Australasia Pty. Ltd., formerly Enirgi Metals Group Pty. Ltd. (EGS), a wholly owned subsidiary of Enirgi Group, provided LeadFX and Rosslyn Hill, respectively, notice to terminate their respective management services agreement, following a transition period of up to 90 days. The transition process is under way and expected to be completed by no later than Nov. 20, 2017. As part of that process, effective Oct. 1, 2017, Andrew Worland was appointed the new chief executive officer and corporate secretary of LeadFX. The company will consolidate its project management, finance, corporate and administrative functions out of its Perth office.
As a result of efforts made in the first quarter, on May 12, 2017, and subsequently updated on June 19, 2017, the company announced that the board approved entering into an arm's-length transaction with InCoR related to the transfer of lead hydrometallurgical processing technologies to LeadFX for the initial development of a lead hydrometallurgical processing facility at Paroo Station pursuant to the terms and conditions of a definitive umbrella agreement dated June 20, 2017, between InCoR and the Sentient group of global resource funds.
The new lead processing technology has the potential to transform Paroo Station from a relatively short-life, moderate-risk lead concentrate operation to a longer-life, lower-cost, lower-risk lead metal producer. This in turn will provide a significant production platform on which to build a world-class lead resources business through the application of InCoR's oxide and sulphide technology at other mining projects and further development for application for other purposes including lead recycling.
Highlights of the transaction include:
SNC-Lavalin Australia Pty. Ltd. been contracted by InCoR to prepare a definitive feasibility study (DFS) on a lead hydrometallurgical processing facility at Paroo Station at InCoR's sole cost.
Success criteria for the DFS include a near tripling of Paroo Station gross operating cash flow after capital expenditure to $450-million and a mine life of 10 years or more.
There is no cost or dilution to LeadFX if DFS fails to meet the success criteria.
LeadFX will have exclusive right to use and sublicense InCoR's lead processing technologies worldwide.
Following finalization of definitive documentation, on Aug. 14, 2017, InCoR was issued two separate common share purchase warrants to acquire (in the aggregate) up to 28.75 million common shares in the capital of LeadFX with 80 per cent exercisable only on delivery of a successful DFS and 20 per cent exercisable only on securing environmental approvals to construct a hydrometallurgical processing facility at Paroo Station.
InCoR transaction and Paroo Station
Lead hydrometallurgical technology
InCoR holds: (i) an exclusive licence from BASF SE related to patented hydrometallurgical technology for recovering lead from a mixed oxide material; and (ii) an exclusive licence from the University of British Columbia related to patented hydrometallurgical technology for recovering lead from a lead material including lead sulphide, both of which utilize methane sulphonic acid as a leaching agent.
Terms of the transaction
Pursuant to the terms of the agreement, InCoR will undertake and pay for a DFS for the development of a lead hydrometallurgical processing facility at Paroo Station using the oxide technology. SNC-Lavalin will be contracted by InCoR to perform the DFS. The estimated cost of the DFS and associated works is $5-million, which will be financed solely at InCoR's cost.
Pursuant to the agreement, on Aug. 14, 2017, LeadFX issued the warrants to InCoR to acquire (in the aggregate) up to 28.75 million common shares, which, on a pro forma transaction basis, represent approximately 42.9 per cent of the outstanding common shares, expressed on a non-diluted basis. The warrants will be exercisable for no additional consideration, on and subject to the occurrence of the following triggering events:
Eighty per cent of the warrants (23 million common shares) are to be exercisable only on completion of the independent DFS (as described below) fully financed by InCoR. The DFS will be deemed to be completed and successful if, and only if, it meets strict criteria, including: (i) a demonstrable Paroo Station life of mine of no less than 10 years, and (ii) Paroo Station life-of-mine gross operating cash flows minus facility capital expenditures of no less than $450-million. Upon the successful completion of the DFS and the exercise of 80 per cent of the warrants, InCoR will transfer the technology and the rights thereto to LeadFX.
The remaining 20 per cent of the warrants (5.75 million common shares) are to be exercisable only upon receipt of definitive environmental approvals by LeadFX to construct a lead hydrometallurgical processing facility at Paroo Station.
In connection with the transaction, the company nominated an InCoR representative to the LeadFX board, Dr. David Dreisinger, who was elected at the annual meeting of shareholders on June 28, 2017. Following the delivery of a successful DFS, the company will nominate a second InCoR representative to the LeadFX board.
Definitive feasibility study
The DFS is being prepared by SNC-Lavalin, a world-renowned engineering and construction firm independent of the company and InCoR.
As part of the work being performed for the DFS, a drill sampling program has been completed at Paroo Station to test the oxide technology on various ore types. With the drill sampling complete, InCoR also completed variability testing of the oxide technology on the various ore types. InCoR anticipates that the DFS will be completed in the fourth quarter. Until the DFS is complete, the company cannot provide any assurances with respect to the outcomes of the DFS, including whether the construction of a hydrometallurgical processing facility at Paroo Station would be technically or economically feasible or would increase the mine life.
While InCoR is undertaking the DFS, InCoR has convened a committee which includes a representative of LeadFX to meet monthly and hear reports from InCoR on the progress of the DFS and provides other representatives with the opportunity to ask questions about its progress.
Rationale and background to the transaction
The transaction is anticipated to benefit all LeadFX shareholders. If the DFS is positive, LeadFX will hold a significantly more attractive project at Paroo Station, with the opportunity to increase the mineral reserves, extend Paroo Station's operating life, reduce the cost structure, eliminate the sensitivities associated with transporting lead concentrate and reduce the risk of future shutdowns. Additionally, following InCoR's transfer of technology to LeadFX, LeadFX will also hold lead technology rights (through the technology) that have the potential to be deployed on a range of future projects and strategic endeavours, including lead recycling. InCoR is expected to contribute significant expertise in mineral processing that will support the value to be created at Paroo Station and the deployment of the transferred technology for other purposes.
As of the date hereof, Paroo Station remains in care and maintenance. The transaction offers an opportunity to fundamentally alter Paroo Station's life of mine and economics, which, in management's view, would increase the likelihood of a successful and profitable restart and improve the financing options in respect of Paroo Station. Accordingly, a decision on a mine restart using the existing concentrate production technology is expected to be deferred until completion of the DFS.
InCoR shall receive no consideration from LeadFX if the DFS is unsuccessful.
Burgin mine
The company secured a five-year extension to the mining permit at the Burgin mine. The company owns approximately 83 per cent of Chief Consolidated Mining Company, which owns the historical Burgin lead-silver-zinc underground mine near Eureka, Utah. The company considers the Burgin mine to be a potential brownfield development opportunity in the future.
North 67 Alaskan mining claims
The company has undertaken a review of the mining tenements held by North 67 in light of its current financial condition and its priority of supporting the completion of the DFS for Paroo Station as part of the transaction with InCoR. In particular, North 67 is required to pay rental and other prescribed fees by Nov. 30, 2017, to maintain the mining claims for the coming year; otherwise, the claims will be deemed abandoned by operation of law.
Liquidity and financial condition
Operating activities
Cash used in operating activities in the current period was $200,000 (16 per cent) lower than in the third quarter of 2016, primarily due to lower care and maintenance costs.
Investing activities
There have been no investing activities during the third quarter. There were no investing activities during the same period in the prior year, apart from interest received on restricted cash pertaining to bank guarantees for gas supply contracts.
Financing activities
Financing activities were $798 in the current period compared with $986 in the same period in 2016. The 2016 amount pertains to the $1.0 from the notes in the third quarter, partially offset by finance lease payments.
Private placement
On Aug. 29, 2017, LeadFX entered into a binding term sheet with Sentient IV and InCoR for the issue of up to 3,125,000 common shares of the company at 80 Canadian cents per common share by way of a non-brokered private placement for gross proceeds of approximately $2.5-million (Canadian), to close in two separate tranches. Pursuant to the binding term sheet, Sentient IV and InCoR have agreed to purchase no fewer than 607,312 and 642,688 common shares, respectively, under the first tranche of the offering and no fewer than 910,969 and 964,031 common shares, respectively, under the second tranche of the offering.
The first tranche of the offering closed on Aug. 31, 2017, for gross proceeds of $1-million (Canadian), with the second tranche of the offering expected to close on or before Oct. 31, 2017. Proceeds of the first tranche were used for general corporate purposes and working capital needs of the company based on an agreed schedule of budgeted expenditure, and proceeds of the second tranche will be determined by InCoR and Sentient IV pursuant to the budgeted expenditure needs of the company closer to the time of the second tranche closing. The closing of the offering is subject to certain conditions, including receipt of final approval of the Toronto Stock Exchange, and subject to certain exceptions, LeadFX not to issuing any additional common shares for a period of four months after the closing date of the offering without the prior written consent of Sentient IV and InCoR.
Following completion of the offering, Sentient IV and InCoR will hold approximately 82.3 per cent and 3.9 per cent of the issued and outstanding common shares of LeadFX, respectively.
Borrowings
Amended and restated bridging facility
On Jan. 29, 2013, the company entered into a $20-million (Canadian) secured loan facility with Sprott Resources Lending Partnership, bearing interest at 12 per cent per annum secured by the assets of Paroo Station.
On Dec. 18, 2015, Enirgi Group, Sprott and the company entered into an agreement pursuant to which Enirgi Group paid Sprott the outstanding balance owed by the company to Sprott under the Sprott facility resulting in the company owing Enirgi Group $9.6-million (Canadian) ($7.0-million). Pursuant to the agreement, all of the company's obligations to Sprott were extinguished, and Enirgi Group assumed all of Sprott's rights including Sprott's security over Paroo Station. Effective July 19, 2016, Enirgi Group assigned the bridging facility to Sentient IV. The bridging facility was further amended on July 19, 2016, to convert the outstanding principal and accrued interest payable from $10.3-million (Canadian) to $7.9-million (U.S.).
As a result of the decision to place Paroo Station on care and maintenance on Jan. 16, 2015, events of default were triggered under the bridging facility. On June 21, 2016, Sentient IV agreed to forbear from enforcing its rights under the bridging facility until June 30, 2017, and on June 29, 2017, Sentient IV agreed to forbear from demanding repayment of: (i) the principal and accrued interest under the bridging facility, and (ii) the principal amount of $6.5-million under four non-interest-bearing unsecured promissory notes issued by the company to Sentient IV, until July 31, 2017.
On Aug. 1, 2017, Sentient IV entered into an amendment and restatement of the bridging facility with the company, which, among other things: (i) cancelled the notes and added the principal amount of the notes to the outstanding balance owed under the bridging facility with interest accruing on the new principal amount at the pre-existing interest rate of 10 per cent per annum; and (ii) extends the forbearance period and maturity date for repayment of principal and accrued interest to Feb. 28, 2018.
As at Sept. 30, 2017, the company owed $15.5-million under the amended and restated bridging facility to Sentient IV. The amended and restated bridging facility, which is secured against the assets of Paroo Station, bears interest at the rate of 10 per cent with a maturity date of Feb. 28, 2018.
A copy of the amended and restated bridging facility has been filed at SEDAR and is available at SEDAR.
Capital resources, liquidity and working capital requirements
As at Sept. 30, 2017, the company had a working capital deficit of $24.6-million, which included $15.5-million owing to Sentient IV under the amended and restated bridging facility, with a maturity date of Feb. 28, 2018. Neither Paroo Station nor the Chief properties are operational or generating revenue.
Notwithstanding the gross proceeds of the offering received by the company during the third quarter of 2017, the company has limited cash available, other than to meet near-term obligations, and will require additional financing in the near term. The company's ability to continue as a going concern is dependent on a number of factors, including, but not limited to, the company's ability to either: (i) refinance the amended and restated bridging facility, (ii) raise additional funds to meet its debts and obligations as they fall due, or (iii) undertake further transactions which may realize the value of the company and its assets. The company will need to raise funds to pay for its continuing costs of operations and undertake at least one of these aforementioned actions to service its working capital deficiency, meet its commitments to lenders, meet the costs of care and maintenance, meet the costs of any potential future restart of Paroo Station, and meet the costs of bringing the company's mineral projects into production. The amount of any financing requirement will be dependent on several factors, including, but not limited to: the nature of any refinancing of the amended and restated bridging facility, the nature of any additional transactions undertaken by the company, the outcome of further negotiations with the company's lenders, the costs and duration of care and maintenance, the timing and cost of any potential future restart of operations at Paroo Station (subject to a successful DFS), any decision to pursue a hydrometallurgical processing facility at Paroo Station, and the cost of bringing the company's mineral projects into production.
