Proposed disposal of Ormonde’s 30% interest in the Barruecopardo Tungsten Mine
Ormonde announces that it has entered into a conditional Sale and Purchase Agreement (“SPA”) for the disposal of the Company’s 30% interest in Barruecopardo Joint Venture BV (“Barr BV”), the joint venture holding company for the Barruecopardo Tungsten Mine (the “Mine”) in Salamanca, Spain, to Oaktree Capital Management (“Oaktree”) for a total net cash consideration of €6 million (the “Disposal”).
Summary of the reasons for and terms of the proposed Disposal
· Low initial ore grades and delays to accessing the main orebody, reported by the Mine’s management team and disclosed by Ormonde in recent announcements, have resulted in overall mine production and related revenues being substantially lower than the 2012 feasibility study forecasts for the current stage of ramp-up, which, when coupled with accelerated waste mining and the related increase in mining costs, have led to additional funding requirements for the Mine;
· An additional debt financing of €10 million was announced on 17th October 2019, with initial draws on this facility increasing debt levels in the Barr BV group to €58.8 million, as at 30th November 2019;
· As announced by Ormonde on 25th November 2019, the Mine’s plans were being updated by the Mine’s management team taking account of ore depletion from old mine workings within the southern starter pit. A proposed 2020 budget for the Mine’s continued operations, based on these updated plans, foresees a further cash shortfall by the end of February or during March 2020, and an additional funding requirement, which is currently estimated by the Company to be in the region of €12-15 million;
· This new funding requirement is set against a backdrop of weak tungsten prices, with benchmark prices of ammonium paratungstate (“APT”) currently quoted at US$235-245 per metric tonne unit (“mtu”) versus the US$350 per mtu price used in the 2012 feasibility study;
· Having assessed investment risks, market factors, debt levels and the impact of various financing scenarios on Ormonde’s interests, Ormonde has agreed to sell its 30% interest in Barr BV to Oaktree, the 70% majority owner and 100% debt provider;
· Under the SPA, OCM Luxembourg Tungsten Holdings SARL, a wholly owned subsidiary of Oaktree, will pay €6 million in cash to Ormonde’s subsidiary, Ormonde Mining BV, as net consideration for all shares held by Ormonde Mining BV in Barr BV immediately following completion of the transaction;
· Ormonde shareholder approval at an extraordinary general meeting (“EGM”), to be held on 12th February 2020, is the only condition precedent to complete the Disposal. A circular will be posted to shareholders that will contain further information on the Disposal and intended use of the sale proceeds;
· The Ormonde Board of Directors (the “Board”) considers a cash exit from the Company’s minority interest at this time to be in the best interest of Ormonde shareholders (“Shareholders”) under current circumstances and intends to unanimously recommend the Disposal to Shareholders;
· Should the Disposal not take place, Shareholders should be aware of the possibility that Saloro SLU (“Saloro”) could become in default under the terms of its debt financing by Oaktree (and require a waiver from Oaktree), and the security given by Ormonde over its shares in Barr BV, as part of the 2015 financing, could be enforced. In such event, the Board believes that it would be unlikely that any value would be retained by Shareholders.
Commenting on the Disposal, Mike Donoghue, Chairman and Interim Managing Director said:
“While the disposal of Ormonde’s interest in the Barruecopardo Mine will be a disappointment for many Shareholders, the Mine has encountered significant setbacks during its ramp-up operations, initially resulting in an additional €10 million funding requirement, addressed through an additional loan facility as announced in October 2019, and most recently a further funding requirement estimated by the Company to be in the region of €12-15 million.
Having assessed the options open to Ormonde to address this funding requirement, in light of the performance of the Mine to date, the current tungsten market, difficulties or risks in raising capital and the potential consequences for Ormonde were its share of funding not to be provided, the Board has determined that a sale of its interest in the Barruecopardo Mine is in the best interests of Shareholders and will therefore recommend that Shareholders approve the Disposal at the upcoming EGM. ”
Background to and reasons for the Disposal
The Mine is operated by Saloro, a Spanish company controlled by Oaktree through its 70% interest in the Barr BV group of companies. Initial ore feed grades from the northern starter pit (“Pit 1”) were below forecast, necessitating mining of the southern starter pit (“Pit 2”) being brought forward in the mining schedule and the waste stripping on the east wall cutback (“Pit 3”) accelerated to facilitate access to the main orebody situated below the 80 metre deep historic open pit.
Following an improvement in performance once Pit 2 reached fresher and higher grade ore, as mining operations progressed northwards from Pit 2 towards the main orebody, old, backfilled mine workings were encountered where near-surface, high grade tungsten mineralisation had been modelled and therefore expected.
These factors have resulted in overall mine production and related revenues being substantially lower than the 2012 feasibility study forecasts for the current stage of ramp-up, which, when coupled with additional mining costs, due to the necessity to accelerate waste mining to access higher grade ore sources, have led to additional funding requirements for Saloro and the Mine.
Additional funding requirements
As announced on 17th October 2019, additional debt financing of €10 million was arranged to provide liquidity support to Saloro and the Mine. With a portion of this facility having been drawn, debt levels were €58.8 million as at 30th November 2019, with this estimated to increase to over €70 million within the next 12 months (due to draws of the remaining undrawn debt, together with capitalisation of interest on cumulative debt).
Despite the recent debt financing and the commencement of concentrate sales, management of Saloro indicated to the joint venture partners, Ormonde and Oaktree, that the 2020 budget for Saloro’s continued operations, based on updated mine plans, foresees a further cash shortfall around the end of February or during March 2020. Based on this information the Company estimates that an additional funding requirement of €12-15 million will be required (the “Funding Requirement”).
Assessment of Ormonde’s options
Following Saloro management’s recent tabling of updated mine plans, proposed 2020 budget information and considering the related Funding Requirement, Ormonde and Oaktree immediately engaged in discussions to establish the implications for the Mine and the manner in which the Funding Requirement might be met. In tandem with these discussions, Ormonde’s Board has assessed all options available to the Company and their impact on Shareholders’ interests. These options can be best summarised in three possible scenarios.
Firstly, the Board, with the assistance of its advisers, assessed the possibility of raising capital to contribute Ormonde’s share of the Funding Requirement, and has determined it would be highly uncertain given the current performance of the Mine and market conditions, and likely highly dilutive to existing Shareholders. The Board concluded from its assessments that such a funding, even if it were possible, would not be in the interest of existing Shareholders.
Secondly, in a scenario where Oaktree agreed to provide the full Funding Requirement, Oaktree indicated that a debt-for-equity restructuring of Saloro’s accumulated debt would have been completed around the same time. This would have inevitably resulted in a large dilution of Ormonde’s interest, substantially reducing any future upside to Ormonde from the Barr BV group, whilst leaving Ormonde exposed to the operating company and project risks. In addition, given the scale of the financing required and any conversion of debt to equity, dilution of Ormonde’s interest in Barr BV to below 15% would have been likely, resulting in management fees receivable by Ormonde reducing by 50%. This would have left Ormonde with insufficient income and requiring working capital to be raised most likely via the capital markets, further diluting existing Shareholders’ interests. The Board therefore determined that such a dilution of Ormonde’s interest in Barr BV would not be in the interest of existing Shareholders.
Thirdly, the Board assessed the proposed cash exit from the Company’s minority interest in the Mine, taking account of the ore losses to date, high and rising debt levels, the tungsten price environment, accelerated mining rates to deal with these impacts, together with the potential risk and returns from the other scenarios, and has determined that this would be in the best interest of Shareholders under current circumstances.
The €6 million cash consideration is net of:
· a waiver of the €1.36 million deduction which had been due to be made on any exit proceeds received by Ormonde, in relation to a working capital loan provided by Oaktree to Ormonde in 2015; and
· a waiver in relation to the deferred portion of management fees which had accrued to Ormonde over the 2017-2019 period, totalling €0.75 million;
each of which have been waived by Oaktree and Ormonde, respectively, resulting in a net additional benefit to Ormonde of €0.61 million and therefore a gross value of the Disposal to Ormonde of €6.61 million.
The €6 million net cash consideration is to be received by Ormonde in full on closing, currently expected to be around 14th February 2020 (subject to passing of the resolutions at the EGM).
Shareholders should be aware that if the Disposal does not take place, it is possible that Saloro could become in default under the terms of its debt financing by Oaktree (and require a waiver from Oaktree). In such event, the security given by Ormonde over its shares in Barr BV, as part of the 2015 financing, could be enforced. In any scenario were such enforcement action to be taken, the Board believes that limited to no value would be forthcoming to Shareholders.
The Board will therefore be unanimously recommending that Shareholders approve the Disposal at the upcoming EGM.
Additional details of the Disposal
· Ormonde’s investment in Barr BV is deemed to be an associate investment; Ormonde’s share of the loss on the associate investment for the year ended 31st December 2018 was €776,000;
· The value of the associate investment on the Company’s balance sheet as at 30th June 2019 was €15,765,000.
The Disposal constitutes a fundamental change in business of Ormonde pursuant to Rule 15 of the AIM Rules and Rule 5.20 of the Euronext Growth Rules and therefore requires the approval of the Shareholders at an EGM of the Company. A circular, which will contain further details of the proposed Disposal and use of sale proceeds and a notice of EGM containing resolutions to approve the Disposal, will be posted to Shareholders in mid-January and will also be available on the Company’s website at http://ormondemining.com/. The EGM is expected to be held at the Crowne Plaza Hotel, The Blanchardstown Centre, Blanchardstown, Dublin 15 on 12th February 2020 at 11am.
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