By Chris Berry
A Major Hurdle Cleared
When I wrote about EMC Metals (EMC:TSXV, EMMCF:OTCBB) last month, the main issue facing the company was clear: raise approximately $2.6 million by the end of June or risk losing control of the Nyngan scandium deposit. This $2.6 million was broken down in two pieces: AUD $1.4 million was due to EMC's former JV partner to complete the buyout of the JV and award EMC 100% ownership of the Nyngan deposit. In addition to this, $1.2 million was outstanding on a promissory note held by investors close to the company. This was due at the end of this month and used Nyngan as collateral. Should EMC fail to raise sufficient funds, they risked losing control of Nyngan.
This would have been significant for a number of reasons including the fact that the deposit is truly world class - a phrase I despise, but I can't think of another way to describe it. Nyngan has a NI 43-101 measured and indicated resource of 12,012,000 tonnes grading 261 ppm. As scandium deposits go, this is high grade indeed. If we assume a price of $3,000 per kg for Sc2O3 (prices are thought to be closer to $3,700 per kg), Nyngan is valued at over $9 billion in-situ.
The entire market capitalization of EMC currently sits at only CAD $25 million.
The company also maintains other scandium assets in Australia and Norway which are conceivably not receiving any value as reflected in the company's market cap. Blue sky potential exists here aside from any potential development upside at Nyngan.
The financing originated with a private investor group in the United States known as Scandium Investments, LLC and is a $2.5 million 18 month term loan facility. The key significance here is that the proceeds of the loan will pay off what EMC owes to its former JV partner and will also pay off the promissory note mentioned earlier.
In short, EMC now owns 100% of the Nyngan deposit. This is important to remember when you think that AT BEST, EMC would have only had 50% of the deposit with their former JV partner. As the investment world wakes up to the importance of scandium in a host of technological applications, the benefits of a more valuable deposit will accrue directly to EMC.
That said, the new lenders do have an opportunity to take a 20% stake and at risk of missing any details, I have added the financing specifics below from the press release announcing the deal:
- Loan interest rate increases in increments from 4% to 12% p.a. over the loan term (18 months)
- Full loan is convertible into an effective 20% JV interest in Nyngan & Honeybugle
- Conversion at lender's option, or automatically, when EMC raises US$3M in equity
- The 20% JV partner has a carried interest until EMC meets two milestones: (1) filing a Feasibility Study on SEDAR, and (2) receiving a mining license, on either JV property
- JV partner becomes fully participating on development and build costs thereafter
- JV partner holds an option to convert 20% JV interest into equivalent value of EMC shares, at market values, rather than participate in construction
- The JV partner's option to convert its project interest to EMC shares is a one-time option, at such time as the partner becomes fully participating on project costs.
The main point here is that the lender has a 20% free carry until EMC raises $3 million in equity. As an addendum to the deal yesterday, EMC also announced that it has received CAD $912,000 in subscriptions towards a recently announced $3 million private placement. So EMC is almost one third of the way to raising the $3 million required to convert the loan to a 20% interest in Nyngan and Honeybugle. Scandium Investments, LLC (the new lender) has subscribed for $250,000.
The topic of dilution is prevalent here as it is in all financings and it would appear that EMC management has structured the deal such that dilution is minimized and control of the project remains squarely in the hands of the EMC management team. This is positive for shareholders.
Here are the significant catalysts EMC realized yesterday: First, the previous debt is extinguished from the balance sheet. Second, EMC maintained ownership of the Nyngan deposit. Rather than a 50% ownership interest (the best they could have hoped for with their previous JV partners) they now own 100% of the asset and will ultimately still maintain 80%. Third, all of the money that the company has or raises will go towards creating a more valuable asset rather than towards fighting legal issues with JV partners.
EMC will now push forward with a feasibility study to be delivered in 2015 and in my opinion is the best positioned scandium development story in the world.
As both institutional and retail investors learn more about the potential for scandium and its role in the fuel cell business and as an aluminum alloy in the aerospace and airline businesses, EMC will emerge as a unique opportunity to participate in the anticipated double digit growth in each of these sectors. With yesterday's announcement, EMC continued to de-risk its attractive profile.
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