Fortune Minerals (TSX: FT; US-OTC: FTMDF) is buying 100% of the Revenue polymetallic mine in southwestern Colorado in a staged transaction, putting it a step closer to becoming a junior producer.
“We feel that it’s an accretive and transformational acquisition that accomplishes our near-term goal of becoming a metal producer, with tremendous organic growth opportunities,” CEO Robin Goad said on a conference call.
The transaction provides Fortune with an asset nearing production, Goad says, noting companies with operating assets or cash flow generally trade at a higher multiple. He believes the transaction could also open up Fortune’s shareholder base, particularly to funds in the U.S.
The London, Ont.-based junior has already bought 12% of the silver–gold–lead–zinc–copper mine through its new Colorado subsidiary Fortune Revenue. This gave the previous owners — Silver Star Resources LLC, Star Mine Operations LLC and Revenue-Virginius Mines Corp. — US$2 million in cash and 32 million shares.
Fortune could buy the rest of the Revenue mine by forking over another US$14 million by the end of July and issuing a promissory note to pay up to US$36.8 million in deferred payments over 6.5 years.
The aspiring producer is also obligated to provide two deferred payments totalling US$4.5 million and a 2% net smelter return royalty, capped at US$9 million, to the previous owners of the project.
Goad says the company is making the acquisition in stages to lower equity dilution. He adds that half of the acquisition costs are deferred payments, which he reckons Fortune could fund internally with operating cash flow from the Revenue mine.
Revenue is a fully permitted mining and milling operation that is ramping up to its targeted production rate of 400 tons per day, and has recently produced its first concentrate.
The operation could generate 1.78 million oz. silver a year, along with gold, lead and zinc by-products, over its estimated 13-year life. These by-products should contribute 30% of the project’s total revenue each year.
Fortune has contracts to sell lead and zinc concentrates to Teck Resources’ (TSX: TCK.B; NYSE: TCK) Trail smelter in B.C., and gravity gold to Johnson Matthey. To boost revenue payments, it could produce copper concentrate and sell it to Asia.
The mine has a projected cash cost of US$8.02 per oz. silver and could generate break-even free cash flow at a US$12.42 per oz. silver price, both net of by-products. Average annual earnings before interest, taxes, depreciation and amortization is US$15.5 million a year. “This project generates significant cash flow,” Goad says.
Fortune is the asset’s current operator, while it arranges financing to complete the full acquisition. It has 90 employees on-site.
The Revenue mine contains 16.3 million oz. silver in the measured and indicated categories and another 10.1 million oz. silver in the inferred category. The known resources are contained in the main Yellow Rose and Virginius vein systems.
The project has resource upside from the horizontal and vertical projections of the two main veins. It also has five other mineralized veins that are largely unexplored and 7,000 tons of material in surface and underground stockpiles. Moreover, the company sees opportunities to consolidate the smaller properties in Colorado’s Sneffels silver-mining district.
To fund the Revenue acquisition’s first stage, Fortune raised $4.3 million with the support of its partner, Procon Resources, which owns 19.4% of the junior. Procon bought 5.6 million Fortune shares priced at 40¢ apiece in a private placement for net proceeds of $2.3 million. Procon could buy another 2 million shares for $834,000, pending shareholder approval, to maintain its interest.
Fortune has also extended the term of its $3-million debt facility by two years to August 2016, and has boosted the amount of the facility by $2 million to help fund its obligations under the transaction.
The company intends to add current mine vendor James Williams to its board — pending shareholder approval — at its annual and special meeting on June 24.
Goad adds that while the transaction will help generate cash flow, it will focus on securing funds to develop its NICO gold–cobalt–bismuth–copper project in the Northwest Territories, and advance its Arctos anthracite project in B.C.
Fortune recently closed at 35¢, and has 188 million shares outstanding.
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