Flinders Mines has entered into a landmark option agreement with a subsidiary of New Zealand-based The Todd Corporation to sell the Pilbara Iron Ore Project (PIOP) for at least Aus$65 million. TIO (NZ) Ltd will pay Flinders $10 million up front to purchase an option over PIOP.
If Todd exercises this option it will be required to pay Flinders a further $55 million and enter into a royalty agreement.
With the significant downturn in the iron ore price adversely affecting the ability of Flinders to both raise the requisite capital for the PIOP and to generate economic operational returns, the Flinders board investigated all options available to it in relation to the best path forward in maximizing the value of the PIOP. Flinders believes a process by which project ownership of PIOP is transferred to Todd and operated alongside Todd’s ownership in the Balla Balla JV, in exchange for future cash and royalty payments, represents the most efficient method of adding value.
Todd Corporation, already a major shareholder of Flinders, has the balance sheet strength that Flinders believes will allow the PIOP the best possible chance of future development.
The agreement is subject to satisfaction of conditions precedent by October 31, 2015.
The terms include:
- An option payment of Aus$10 million to be secured by a bank guarantee until shareholder approval is received and the other customary conditions are satisfied.
- An exercise period from satisfaction of the conditions, up to and including December 31, 2016, during which time Todd will have exclusive access to the PIOP, the right to undertake exploration and feasibility works on the PIOP, and may elect to acquire the project for Aus$55 million and payment of a production royalty.
- Todd may extend the option for a further two periods each of two years subsequent to the initial option period upon payment of an additional $10 million for each 2-year period.
- The production royalty ranges from Aus$0.60 to $1.40 per tonne on a straight line basis between iron ore prices of US$60 and US$80 per tonne (62% CFR price), with a minimum royalty of $0.60 per tonne below this range and a maximum royalty of $1.40 per tonne above this range.
- If Todd has not commenced construction of the project within 2 years of the date the sale completes (following exercise of the option), it must pay Flinders a further $20 million. The future royalties are not affected by this further payment.
- In the event that the option lapses or Todd abandons the option, Flinders retains ownership of the PIOP.
- Conditional on statutory and regulatory approvals (including foreign investment approval), approval by Flinders’ shareholders and relevant third party consents.
The Directors of Flinders will now work towards satisfying the conditions, including commissioning the preparation of an independent expert’s report, and calling a shareholders’ meeting to vote on the transaction.
Flinders’ chairman Robert Kennedy says, “The Flinders team has worked tirelessly in examining every possible project development path with the aim of delivering shareholders the best returns without undue dilution. Todd’s proposal of consolidating project ownership significantly improves overall operating efficiency thus lowering the ore price hurdle that is required to make PIOP an economic success. This, in conjunction with their very strong balance sheet, gives me great confidence that the option agreement will deliver significant benefits to our shareholders.”