MINING PURCHASE AGREEMENTS (PAs) V

MINING “PURCHASE AGREEMENTS” (“PAs&rdquo VERSUS “JOINT VENTURES” (“JVs&rdquo: A MATTER OF CONFIDENCE..... by Dr DeCosta

(This is a tiny snip-it of an asset valuation paper I’ve been asked to write in regards to Medinah.  Until this weekend I was a thousand times more familiar with mining JVs than mining purchase agreements.  I think that recognizing the differences can add significantly to the due diligence process.  Thanks once again to my various mining mentors!)

In the Medinah deal, the purchase agreement partners receive ZERO ownership interest UNTIL the purchase price calculated is paid in full to Medinah USA (and a like amount to the Quijano family).   I call this an “asset” and rank it #8 of Medinah’s various assets because any partner signing off on this particular term of the agreement stands to lose every penny they put into the deal if they don’t go the entire distance.   Senor Quijano’s insistence on this clause tells me that he knows what he has at the Lipangue property complex and he only wants to do business with those with a similar mindset. 

One might infer that the PA partner has arrived at a very high comfort level with whatever they know and they know a lot more than we know.  When you couple this with whatever the size of the down payment is then you can get a better assessment of how much is at stake for the PA partner.  

The down payment amount of cash by the purchase agreement partners upon closing has yet to be revealed but is now of tremendous diagnostic importance.  A significant amount of cash in the down payment suggests that the drilling at the Gordon Pipe has already proven it to be worthy of acting as a “stand alone” asset.


Between the amount of time and money spent by the purchase agreement partner on due diligence, legal fees and down payment cash one might assume that the partner is already pretty much “pot committed”.  What do they know that we don’t know or perhaps do we already know it but need the actions of those with a better view to confirm it?  Confused?

I go back to the suggested due diligence tasks outlined several times on theminingplay.com.  

STEPS

1)         Recognize that 18 drill holes at the relatively miniscule Gordon Pipe blocked out 180 million pounds of copper, 722,000 ounces of gold and 6.5 million ounces of silver.  This represents about 1.5 million ounces of “gold equivalent”.  The in situ value of this ore is currently about $2.2 billion.  The drilling blocked out 5.3 million tonnes of ore.
2)        Read the Clemente Sepulvada Perez hyper spectral imaging satellite report and pay attention to the approximately “one dozen” intrusives including a copper/gold and copper/moly porphyry extending in a 7Km long swath.  He notes the existence of a “world class” deposit consisting of several hundreds of millions of tonnes of ore.
3)        Read about copper/gold and copper/moly porphyries.  Study the Singer paper and learn that the average copper/gold porphyry when combined with a copper/moly porphyry typically have an average of 500 million tonnes of ore.  This represents about 94 Gordon Pipe “equivalents”.
4)        Do the math and keep in mind the homogeneity of porphyry deposits.

Did this simple due diligence process (plus a whole lot more) get the PA partners to a comfort level high enough to go “all in” on the Lipangue project?  In a JV agreement as opposed to a purchase agreement like this the major partner typically promises to do “X” number of dollars worth of drilling in exchange for “Y”% of the project.  The major then typically has an “option” to do another “X” amount of dollars worth of drilling to earn another “Z”% of the project.  

In a JV structure the major can fall upon hard times and walk away and still retain a significant percentage of the action.  The structure used in this purchase agreement mandates that the partner figure out in advance what exactly is likely to be there in the ground and pay a significant penalty if found to be in error.  In this structure if the major ran into financial difficulties and couldn’t perform as promised then no matter how much he dumped into the project Medinah and Quijano could go back to a combined 100% ownership and benefit from what the major learned during the process. 

My gut is that the partner is either a very large major or a consortium of mid-sized players that should one of the consortium fall upon hard times then the partners could step in and increase their payments and absorb the troubled partner’s share of the action.  In a project wherein the CAPEX might approach $1 billion you have to be able to spread that “risk capital” out.  

Senor Quijano’s biggest paranoia historically has always been hopping in bed with a major that “inventories” the project and takes its sweet time in developing it.  With the 9 month spacing of payments and the strict mandated drilling schedule this is not about to happen with this structure.  

This structure would also cause the partner to want to hit the ground running so that results are in before the 9 month payment is due.  As far as the characteristics of the “ideal” partner I don’t find much difference between a huge major and a consortium of lesser known mid tier firms.  What’s more critical is that the goals of the partner and its shareholders are properly aligned with our shareholders.  

The Medinah shareholder wants to increase VALUE real quickly.  We’re pooped!  I don’t really care if a major enhances the value rapidly and then “flips” the project for a 400 or 500% quick return to a bigger major or if a consortium of smaller guys rapidly enhances the VALUE and then “flips” it to a major.  The key is that either collectively or individually the partners have super deep pockets and are in a hurry.

There’s a lot you can learn from the STRUCTURE of a mining deal in order to assess what those with the most knowledge about the deposit, both Senor Quijano as well as the PA partner, are thinking.