Cheni negotiates debt conversion (May 25, 1992)

To clean up its balance sheet, Cheni Gold Mines (TSE) recently reached an agreement with its major creditors for a conversion of most of its outstanding debt to equity.

The company’s parent, Cheni S.A., will accept options to purchase Cheni common shares in return for cancelling principal and accrued interest totalling 26.2 million French francs ($5.6 million).

The deal includes options on three tranches of stock: 3.715 million shares exercisable at 50 cents each until March 31, 1995; 3.715 million shares exercisable at 75 cents each until March 31, 1996; and 3.715 million shares exercisable at $1 per share until March 31, 1997.

Unexercised options in each of the tranches can be carried forward for exercise in the next tranche.

Cheni S.A. currently owns about 7.1 million of Cheni’s 11.1 million outstanding shares, or about 64%. If all the purchase options are exercised, the parent company’s interest could increase to over 80%.

The restructuring agreement also allows for SEREM, a wholly owned subsidiary of BRGM (Bureau de Recherches Geologiques et Minieres), to purchase private placements in Cheni at the greater of 71 cents per share or the Canadian equivalent of 3.333 French francs per share for a total purchase not exceeding 50 million French francs ($10.6 million).

Private placements in Cheni by BRGM will be made only as and when SEREM receives revenue from one of its producing properties. Purchases under the agreement are anticipated to occur in installments in 1993, 1994, 1995 and 1996.

Cheni also reached an agreement with its principal banker, Banque Nationale de Paris. Under the agreement, Cheni must reduce its bank debt to $3.2 million from available cash flow from the Lawyers mine. Draw-downs from the bank line of credit stood at about $6 million at the end of last year although Paul Savoy, president of Cheni, said this figure is somewhat lower now.

The bank agreed to convert the $3.2 million to a long-term credit facility to be repaid with proceeds from the issue of common stock to SEREM. Major trade creditors, owed about $1.9 million at the end of the year, agreed to convert the debt to a long-term facility as well. The loan is based on the same terms as the bank debt, and repayment of the two groups will be made on a pro-rata basis.

As at March 31, 1992, Cheni had a working capital deficit of $11.4 million and long-term debt totalling $3.7 million.

The $3.7-million debt relates to a provincial government assistance loan which is not payable and does not pay interest unless the combined price of an ounce of gold plus 50 oz. of silver is over US$825 per oz. Very profitable initially, the company’s Lawyers underground gold-silver mine in the Toodoggone region of northern British Columbia ran into difficulties in 1990 after ore reserves were downsized.

Remaining reserves and stockpiles at the Lawyers mine are expected to be exhausted by this summer although the company is reviewing the possibility of mining and milling a small, nearby deposit owned by Golden Rule Resources (TSE) and Manson Creek Resources (TSE).

The Mets property is estimated to host a preliminary reserve of about 158,000 tons grading 0.33 oz. gold per ton. Cheni plans to begin an initial phase of underground exploration and evaluation on the project this summer. Savoy said Cheni has lined up the $500,000 required for initial work on the property to determine the feasibility of mining the deposit. He said the company will need an additional $3 million to cover development and mining before the project starts generating cash flow.

Golden Rule and Manson will receive 10% of the bullion produced from the first 75,000 tons of ore and 17% of any additional bullion produced.