Thursday, July 21, 2016

Go it Alone

Could Peregrine Diamonds (PGD) actually go it alone and make the Chidliak mine a reality?

Looks like a tough task for a junior miner to raise over CAD$400 million and than some. Closer to CAD$500 million when you add the next couple of years into the mix.

Does Peregrine Diamonds have tools at their disposal that not necessarily everyone has?

To answer these questions, one needs to look at the capital costs, look at the assets of Peregrine Diamonds and look at the resources that it may have at its disposal.

Pre-Construction Capital costs:

$3.2m - Pre-stripping (2020)
$28.4m - Mining Equipment (2020)
$21.0m - Infrastructure/ancillary (2019/2020)
$95.0m - All Weather Road (2018/2019)
$12.3m - Other roadwork and site development (2020)
$65.0m - Process Facilities (2020)
$25.9m - Utilities (2019/2020)
$27.2m - Ancillary facilities (2019/2020)
$51.7m - Indirect costs (2018/2019/2020/2021)
$27.3m - EPCM (2018/2019)
$21.1m - Owners Cost (2018/2019/2020/2021)
$56.7m - Contingency (2021)

Total - CAD$434.9 million

Seems overwhelming?? Split it apart and do items one by the easy ones first.

$28.4 million - Mining Equipment (2020)

How to fund this?

Simple - Equipment manufacturers want your business and they are very, very competitive with other manufacturers. They will finance the equipment that they sell most companies as an option. 
PGD - Get's financing for the equipment and will pay it back with future cash flow. 
Manufacturer - Get's to sell its equipment to Chidliak and associated service contracts, etc.
As a bonus, the manufacturer doing the financing might also be able to get dibs on the All weather road contracted out equipment.
When can this arranged? Now - PGD should get on the phone with Caterpillar and all other manufacturers of equipment and line up a financing loan. The loan starts basically when the equipment is needed and delivered. There can be price protection as well, so an index between now and the estimated time of start can be limited to inflation or 2 or 3%.  This loan can have milestone requirements as one being financing for the rest of the mine must be in place to activate the loan agreement. 
There is sustaining capital required for mining possibility this agreement could be for CAD $40 million.

Sign a deal, let the press and shareholders know and that part of the capital is a done deal!
Remember what Caterpillar says on their website -- "We're at your side" Time to prove it with paper and pen. Heck, the manufacturers are so competitive...they might be able to finance beyond your equipment needs and part of your financing is just that...a financing and a cash contribution to the project.

What is left to finance or raise money for? --  CAD$406.5 million

$56.7 million - Contingency (2021)

How to fund this?

This is a contingency if needed. May or may not be used.
This deserves a credit facility at x % and can be secured by the property if drawn or unsecured.
The interest rate can be quite lucarative as it is a just in case funding mechanism.
It should be place, no doubt about it.
A CAD$60 million Credit facility at 10% annual interest rate to be available starting in mid-2020 through to the final construction phase.
Again, this can be tied to other milestones (other financing's confirmed). But, again, this could be signed today. If other financing/milestones do not occur...then there is no risk to the provider as the credit facility will no longer be an option. If the milestones are met, then there is a good chance they will get a nice 10% interest rate if used. 

Sign a deal  now, let the press know and that part of the capital is a done deal!

What is left to finance or raise money for? -- CAD$346.5 million

95.0 million - All Weather Road (2018, 2019)

How to fund this?

There are couple of  options mentioned recently -- Government Funding -- and these are legitimate possibilities.

The first one is a straight up grant/contribution/tax sponsored funding out of the federal government infrastructure fund. The federal government could easily look at the future tax revenue and determine if it just makes sense to help build a road. The Deep water port was an easier decision as it wasn't just dedicated to a future mine, but had been required for decades from the city of Iqaluit.
Could easily see the federal government chipping in for a 1/3rd of the capital cost in the form of an actual grant or, maybe more likely, an infrastructure loan to Peregrine Diamonds that will be paid by future earnings.
A CAD$35 million infrastructure loan to the Chidliak project payable at 5% interest rate and to be paid back during production years.
The government doesn't just get 5% back annually on this project, but also gets tax revenue out of that $35 million spent to various companies and also gets access to an all weather road for the next 5 decades.

A firm commitment probably is not attainable right now..but an intent of interest to be firmed up later is possible. Talk to the government and get a verbal acknowledgement that Chidliak could be eligible for a infrastructure loan of up to CAD$35 million.

What is left to finance or raise money for? -- CAD$311.5 million

 95.0 million - All Weather Road (2018, 2019)

The other option mentioned with respect to the all weather road is a share cost between Peregrine Diamonds and the QEC (Qulliq Energy Corporation). QEC is a crown corporation of the Nunavut territory.

In theory, the QEC is looking to place a hydro project somewhere near Iqaluit. One of those locations is close to Chidliak (15 km's away). If the project went ahead and a location east of Iqaluit was selected, the use of that all weather road would be ideal.

This is a long horizon project and the QEC is far from any firm decisions. There could be a letter of intent or a preliminary agreement indicating that if the QEC selects a site close to the all weather road, than it will contribute part of the capital for that road. Could be anywhere between CAD$5 million and $30 million.
I would say a preliminary agreement of CAD$10 million that has no real weight in the court of law could be hacked out and released to the press. It would show a potential point of capital infusion for Chidliak...but may fall through the good reason to have a contingency.

What is left to finance ? -- CAD$301.5 million

CAD$301.5 million - remaining items (2019/2020/2021)

This will be the core of the pre-construction capital that needs to be obtained by Peregrine Diamonds and will set the stage for many of the milestones in the above items mentioned.

At this point, going to a bank and asking for CAD$300 million loan is probably not attainable, no matter how hard you try.
Asking Robert Friedland for CAD$300 million in debentures? Again, probably not attainable.
This is where creativity must come in. Stornoway Diamonds used creativity all the way to the pre-construction and construction of Renard. It is not unheard of to be creative.

Where can Peregrine Diamonds be creative?
Assets can be  looked at right away.

DO-27 - Lac De Gras

Peregrine Diamonds owns 72.1% of the property that DO-27 is on.
The Technical Report concludes that there are reasonable prospects for eventual economic extraction of the DO-27 kimberlite pipe.
Who would benefit from the pipe? Companies that already have mills and mills that are running out of material in the future. Those two would be the Diavik mine (Rio Tinto/DDC) and Ekati mine (DDC/others)
So, it would either be DDC or Rio Tinto that might be interested in DO-27.
Both Rio Tinto and DDC have big pockets and may be interested in acquiring DO-27.

Could PGD sell it's share of DO-27 to either DDC or Rio Tinto for $10 million, $20 million, $30 million or $40 million?? Negotiations would be tough on both sides and it may end up being no deal at all. Are there other options? Both Rio Tinto and DDC would have a very large treasury at their disposal. They could easily obtain the DO-27 from Peregrine Diamonds in exchange for a Loan with a reasonable interest rate and a royalty on DO-27 on the assumption that they might take it into production. Talk to both companies and see what agreements can be made. Get a loan for CAD$40 million at 5 or 6% (much better then bank interest) and also a 3% royalty that can be reduced in the future with a reduction in loan payment required (eg. $10 million reduction in the loan for a 1% reduction in the royalty).

Total - CAD$40 million @ 5% available and will be paid back by Chidliak cashflow.

Marketing rights - CH-6

CH-6 has an interesting population of yellow stones and a potential for fancy stones.
An agreement with Tiffany's on the CH-6 pipe only could yield a good cash contribution and/or cash/loan contribution. Tiffany's have previous agreements like this in previous projects, so this is not abnormal. Tiffany could contribute a direct contribution to the project of $10 million in exchange for marketing rights of CH-6 (yellows and whites). CH-6 will produce a lot of nice quality stones. PGD can also ask for a financing loan from Tiffany as well in the order $10 to $20 million at a reasonable interest rate (5%)
Let's say $20 million @ 5% and $10 million in exchange for the rights.
This leaves the huge potential of other pipes and other populations still in PGD's hands. That itself has huge upside.

Total - CAD$20 million @5% and CAD$10 million straight up

A lot of the items mentioned above can be acted on or agreed in principal to, etc.
But some of the bigger loans (CAD$100+ variety) will probably need the study to move to a PFS or FS level before finally committing...but it is a far cry from the $1 billion that Renard (Stornoway) needed for it to move to construction.

Other creative financing

Stornoway came up with some creative financing before it headed to the big financing.
This was back in 2012:

May 4th, 2012 - $20 million
The loan will bear interest at a rate of 12% per annum, payable 100% in cash or 50% in cash and 50% in Stornoway shares prior to commencement of commercial production, and 100% in cash thereafter. Principal is to be repaid in equal monthly instalments commencing approximately one month following the date of commercial production at Renard, but not before May 3, 2016 and not later than May 3, 2017. The final maturity is May 3, 2021. In connection with the loan, Stornoway’s subsidiary has granted the Lenders a 1% contingent secured royalty interest in the Renard Project which is only triggered upon the occurrence of certain specified events, such as a payment default or a default following a change of control of Stornoway, in each case capped at an amount equal to the aggregate value of the principal and interest then outstanding on the loan. The loan agreement contains additional representations, covenants and commitments customary for a facility of this nature.

It was quite an interesting set up, steep interest rate...but it wasn't expected to be paid back until commercial production occurred...but it was a quick infusion of $20 million for SWY that it probably needed.

Could look at this steep financing and raise a CAD$20 million in the near term to pay for the next big step toward PFS or FS. This could be an option.

Another option is a debentures. A lot of debentures are assigned to convertible shares...which adds dilution to current shareholders. This may be an option at higher share prices when the convertible rate is much higher and less dilutive.

Where do we sit:

Sign agreements or intents (based on milestones):
CAD$40 million - Equipment manufacturer
CAD$60 million - Credit facility for contingency if needed. Tied to milestones
CAD$35 million - Federal infrastructure loan @ 5%
CAD$10 million - preliminary agreement with QEC. May fall through...but show it as potential.
CAD$40 million - Ratio of Loan/payment from DDC or Rio Tinto for rights to DO-27 pipe.
CAD$30 million - Combination payment/loan from Tiffany's for CH-6 marketing rights.

Total --  CAD$215 million that can be signed now.

Available in the short term when needed - CAD$70 million from DDC/Rio Tinto and Tiffany's.
Available later -- CAD$145.

What is actually needed?

2017 (1st half) - CAD$15 million
2018 (1st half) - CAD$15 million
2018 (early summer and beyond) - Road construction starts (CAD$35 million Loan infrastructure)
2019 - Finish Road construction (CAD$60 million)
2020 - Bring big materials on port to site - Significant capital - (CAD$255 million)
2021 - Equipment and contingency (CAD$85 million)

So, the immediate funding and the infrastructure loan  and the QEC pays for all money required through to the end of 2019. Approximate.
2021 is also set up (debt facility and equipment financing) that leaves the bulk of the CAD$255 million for financing in 2020.

CAD$255 million could be raised by a partial equity financing and 2 or 3 loans from various banking and financial institutions.

If some of these agreements highlighted above (Equipment financing, Government infrastructure loan, Tiffany's deal, DDC/Rio Tinto deal) all come into play in the next 12 months, the stock price should react quite favourably and then raising money by equity will be much less dilutive and a reasonable option.

Sometimes you have to get the simple agreements out of the way (no matter if they don't pay for years) to help make an equity financing reasonable.

Robert Friedland could also commit to a debentures agreement for 2019/2020 for 10's of millions of dollar as well.

This is one vision of how PGD could go it alone and adding significant value to the existing shareholders.

First step for PGD - Do the easiest one first -- Talk to the equipment manufacturers who absolutely want to talk to you. Negotiate a future deal now and let the press know. Then move onto the next item. Negotiations with Government/Rio Tinto/DDC, jewellery's like Tiffany's or Chow Tai Fook. Work them all over. They want your business/assets/opportunities. Chidliak wants money to fund a mine.

Seems over-simplified and it is to a point...but if one can start unraveling each step, one by one, the shareholders investors confidence in PGD will grow and grow.

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