Virginia Mines (TSX: VGQ; US-OTC: VGMNF) has sealed a deal with three institutional funds in Quebec that will help finance a $28-million accelerated exploration program on its Coulon project, a copper–zinc–lead–silver deposit in the James Bay region of northern Quebec.
Under the arrangement, Virginia Mines will spin out the Coulon project into a new subsidiary called Mines Coulon Inc., in return for $42 million of common shares in the new company until 2017. Virginia and the institutional shareholders will subscribe to $28 million worth of the new entity’s shares.
Sodémex Développement, a subsidiary of the Caisse de dépôt et placement du Québec, the Fonds de solidarité des travailleurs du Québec jointly with the Fonds régional Nord-du-Québec and SIDEX Limited Partnership are all involved in the deal.
Subscriptions will be taken by yearly installments of $7 million, with the breakdown being Sodémex, $2 million; the Fonds, $2 million; SIDEX, $1 million; and Virginia Mines, $2 million. The financial commitments will give Sodémex an 11.4% stake in Mines Coulon; the Fonds, 11.4%; SIDEX, 5.7%; and Virginia Mines, 71.5%. Virginia will be the operator of the project.
The institutional shareholders also have the right to exchange 75% of their investment in Mines Coulon into common shares of Virginia Mines under various conditions that include the sale of Virginia Mines’ royalty on Goldcorp’s (TSX: G; NYSE: GG) Éléonore project, which is on target for first production in late 2014 (Virginia owns a 2.2% to 3.4% sliding-scale production royalty); any change of control of Virginia; the failure of Virginia to subscribe in Mines Coulon or the sale of Mines Coulon.
If Mines Coulon is sold, the shareholders also agree to a royalty structure that would give the first 0.5% to Virginia and the remaining balance divided between the shareholders based on their ownership stakes.
The Coulon project has an indicated resource of 3.68 million tonnes grading 3.61% zinc, 1.27% copper, 0.40% lead, 37.2 grams silver per tonne and 0.25 gram gold per tonne. Inferred resources tally 10.16 million tonnes grading 3.92% zinc, 1.33% copper, 0.19% lead, 34.5 grams silver and 0.18 gram gold.
The project is made up of 498 claims across nearly 250 sq. km. It host eight lenses and, according to Virginia Mines, is part of one of the most important felsic volcanic belts ever discovered in Quebec. (The belt is larger than 70 sq. km.)
Last year, Virginia discovered No. 257, the richest lens to date, where drilling returned intercepts of 9.5% zinc, 3.1% copper and 46.16 grams silver per tonne over 15.7 metres and 14.7% zinc, 2% copper and 35.83 grams silver per tonne over 7.4 metres.
“This deal funds the asset toward further resource discovery or a sale with only minimal dilution to VGQ shareholders,” Pierre Vaillancourt and Duncan Lai of Macquarie Equities Research write in a research note, adding that they have bumped up their 12-month target price on the stock from $9 per share to $14.50.
“We are revaluing VGQ as a royalty company, as we project its Éléonore gold mine 2.2–3.5% production royalty will come into fruition in fourth-quarter 2014.”
The analysts reason that Éléonore is a “coveted royalty” that is “likely near or at the top of the royalty M&A shopping list for most of the royalty players.” They also maintain that they consider Virginia Mines “as one of the most defensive precious-metal stocks” they cover, because it operates in a safe jurisdiction [Quebec] — but also because management is “very strong” and there is “significant exploration upside.”
As of Nov. 30 2013, Virginia had working capital of $40.4 million and no debt.
The company has 33 million shares outstanding, and over the last year has traded in a range of $7.55 to $14.05. At press time it was trading at $13.95 per share.
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