10th May 2016 08:08
LONDON (Alliance News) - Herencia Resources PLC shares soared on Monday after agreeing to sell the Paguanta project in northern Chile, but said the proceeds will only keep the company going for a short while as it still has the potential to run out of cash by the end of this month.
Herencia shares were up 55% at 0.031 Tuesday morning, having more than doubled on the news before coming off their highs.
The miner has signed a conditional term sheet to sell the subsidiary through which it holds its 70% stake in the project to Australian-listed Golden Rim Resources Ltd. Herencia will receive between USD1.5 million and USD2.3 million in total for the asset in a potential mix of cash and equity.
Whilst the sale is being negotiated, all of Herencia's other work programmes have been halted or curtailed, including activity at its Pichachos and Pastizal mines, both also in Chile.
The deal is conditional on Golden Rim conducting due diligence work on the asset and on both parties securing the required approvals. Herencia said a formal deal will be signed within 28 days if both parties agree to advance the deal, with the companies currently negotiating the sale in good faith.
A formal deal may be signed at a later date if both parties agree to that.
"The directors believe that this proposal represents a positive development for the company, and assuming the transaction proceeds, it intends to use the proceeds from the disposal to assist with development work on the company's existing projects; for working capital purposes and to assess current and new opportunities for the company," said Herencia.
The sale of Paguanta will provide some much-needed funds and will not leave too big a hole in the company's portfolio. The project is not producing, and therefore not generating any revenue and profit, and is only one of the company's four projects.
Importantly, the subsidiary by which Herencia holds its stake in Paguanta had a current book value of USD12.3 million at the end of June 2015, 81% more than the USD2.3 million offer from Golden Rim, and Herencia said it believes the "actual value to be higher".
Although Herencia has other assets, the sale would constitute a fundamental change to the business, meaning shareholders will need to approve the deal. A meeting will be held shortly for a vote to be cast.
Golden Rim has paid USD120,000 immediately as a deposit and will pay a further USD100,000 if a formal deal is signed.
Looking at the USD2.3 million consideration in more detail, USD1.5 million will be paid in cash and the other USD800,000 will be satisfied by shares being issued by Golden Rim to Herencia.
Importantly, the share consideration will only be satisfied if a "decision to mine" is made at the project within five years of the sale being completed. If mining does not occur in that time, then Herencia will not secure the shares and will have to settle for the cash consideration.
Herencia said it would aim to maintain a stake in Golden Rim if it is issued those shares.
As well as halting its operations, Herencia said it is continuing to cut costs, and said it has renegotiated the payment terms for the option payment that is now due in relation to the Pichachos licence.
Herencia said a USD290,000 option payment will now be paid in two tranches. The first tranche of USD175,000 has been paid Tuesday and another USD115,000 will be paid in three weeks time, the company said.
The second tranche is subject to new payment terms for the Picachos licence being ratified by a court notary.
Herencia said the revised payment schedule and the initial funds from Golden Rim will mean the company has sufficient working capital to last until the end of May.
"There can be no guarantee that the company will be able to continue to trade after that time," Herencia said.
If the second payment is made by Golden Rim, then Herencia could last a little longer until the middle of June, it added.
By Joshua Warner; [email protected]; @JoshAlliance
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