3rd Feb 2016 09:03
LONDON (Alliance News) - Herencia Resources PLC Wednesday struck a deal to add a Chilean mining company as a partner on the Picachos and Pastizal copper projects, but the company warned its financial position is in a very fragile state.
Herencia has signed a binding term sheet with Next Minerals in a deal that will allow Next Minerals to earn into a joint venture arrangement with a series of cash payments to Herencia and investments into the projects to advance both assets in Chile.
The deal could be vital for Herencia as the company is currently scrambling to source some long term funding after conceding Wednesday that it only has enough funds to keep going for one more month as it continues to rely on loans being provided by its directors.
The Picachos project is Herencia's flagship asset and the company executed a right to fully acquire the adjacent Pastizal project last year, which is still in the process of being completed. The deal will lead to a fundamental change of business for Herencia under AIM rules, meaning shareholders will have to approve the deal.
Alongside shareholder approval, the deal is conditional on a three month due diligence period which will see Next Minerals meet "most of Herencia's in-country operational expenses" on the Picachos project.
Once that process is completed, Next Minerals will make an immediate USD2.0 million payment to Herencia and spend a further USD2.0 million on the projects over a 15-month period to earn an initial 70% stake in both the Picachos and Pastizal projects.
Six months after that initial payment is made, Next Minerals will have the option to acquire a further 7.5% stake in the projects by paying a further USD625,000 to Herencia, which would push Next Mineral's overall stake in the two projects to 77.5%.
Next Minerals will then have a further option to make a USD2.5 million payment to Herencia to fully acquire both projects.
If Next Minerals only makes the initial payments but decides not to fully acquire both projects, then Picachos and Pastizal will be operated as a joint venture between the two companies.
On the assumption that Next Minerals will eventually purchase a 100% stake in both projects from the company, Herencia will have been paid a total of USD5.1 million, roughly GBP3.6 million, for the two assets.
The Picachos mine is not generating any revenue and had a book value of GBP1.36 million at the end of June 2015 whilst the Pastizal project does not currently have any book value as Herencia does not formally own the project yet - however, Herencia is expected to pay USD860,000 for Pastizal under the current agreement.
Herencia is still formally completing the deal to acquire the Pastizal project, as the option agreement used to fully acquire the project had to be put on hold whilst negotiations with Next Minerals were ongoing. Herencia will now complete the deal to acquire the asset in order to formalise the deal with Next Minerals.
Herencia is confident it has other opportunities to follow should Next Minerals end up fully acquiring both projects.
"Picachos does not represent all or substantially all of Herencia's activities or assets, so that in the event that Next ultimately acquire 100% of Picachos, Herencia will initially focus its efforts on developing its other key assets - Paguanta and Guamanga, in addition to exploring other opportunities in the natural resources sector," said Herencia.
The Paguanta project in northern Chile is 70% owned by Herencia and contains silver, lead and zinc whilst the Guamanga project, also in Chile, contains copper and gold. Although Herencia wholly owns Guamanga, it has stated previously it was seeking a joint venture partner for the asset.
In other news released Wednesday, Herencia said the proposed joint venture with Chilean copper producer Errazuriz Group will not proceed. The two were set to join forces on the Tambillos copper project in Chile but Herencia said it will not progress the venture "in light of more recent developments".
Herencia is also undertaking a cost reduction programme as the company tries to deal with its weak cash position - as the company is currently relying on loans being provided by the directors. The company's financial position is reaching a dire point, as Herencia conceded Wednesday it only has enough cash to last one more month.
The cost reduction programme will include a 45% reduction in the salaries being paid to the company's non-executive directors and to Managing Director Graeme Sloan. The company has also made job cuts and taken "other cost saving measures", but did not provide more details or reveal how many members of staff have lost their jobs.
"The directors believe the reduction in director and management costs demonstrates the companies desire to see shareholder funds being used to provide additional time to secure the best possible agreement for shareholders," the company said.
The management at Herencia do seem particularly committed to progressing the company as the directors are also providing loans to the company at no interest to keep the company ticking over.
"Notwithstanding the cost cutting measures the company has put in place, its working capital position is constrained and the directors believe that its current working capital position is sufficient to meet operating costs for approximately one month," said Herencia.
The directors have agreed to provide a loan of up to GBP100,000 to the company, of which GBP60,000 has been drawn down to date. Non-Executive Director John Russell and Chairman John Moore advanced GBP30,000 each to supply the initial GBP60,000 to the company.
In addition, Managing Director Sloane plans to advance GBP25,000 to Herencia within the next week, meaning Herencia expects to have drawn down a total of GBP85,000 from the potential GBP100,000 of loans by next Wednesday.
The loan is interest free and has not been secured against the company's assets, and the directors have signalled that they would be willing to extend the repayment schedule for the loan, which is currently expected to be repaid within six months.
In terms of funding for the longer term, Herencia said it has a number of fundraising options that are currently being negotiated, and said it expects to be able to provide an update on the company's funding "very shortly," but warned there was no guarantee a transaction would be completed.
Herencia shares were trading up 2.5% to 0.0410 pence per share on Wednesday morning.
By Joshua Warner; [email protected]; @JoshAlliance
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