New Gold [stock_market_widget type="inline" template="generic" color="default" assets="NGD.TO" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] announced today that they entered into a partnership with the Ontario Teachers’ Pension Plan (OTPP). The fund has agreed to buy a 46% free cash flow interest (interim interest) in the New Afton mine for upfront proceeds of $300 million, payable upon closing.
The High Level
This funding will improve New Gold’s financial flexibility at a time when they are carrying high amounts of debt and working to improve profitability at their mines. Further, this bid of confidence will increase investor visibility while bringing stability to its operations.
Overall we see this as a positive for current shareholders. This move will support NGD’s transition to being a more profitable miner while avoiding serious dilution for shareholders.
The Terms
New Gold will maintain full ownership and operating control over New Afton during the development of the C-Zone as the mine life is expanded.
After an initial four year period, OTPP has a “JV Interest Option” to convert the interim interest stake into a 46% JV interest in New Afton. This would result in the formation of a limited partnership, with New Gold holding the remaining 56% stake.
If the OTPP elects not to convert its JV Interest Option, it will continue to hold a free cash flow interest at a reduced rate of 42.5%.
Further, New Gold holds an overriding buyback option to re-purchase and cancel the interim interest during the JV Interest Option exercise period as well as the right of first offer for the life of the agreements. The purchase price is based on the greater of (i) agreed upon IRR to OTPP and (ii) fair market value fo free cash flow.
The transaction is still subject to approval under New Gold’s credit facility and is expected to close on or about March 31.
