With interest rates rising and central banks winding back their free money programs, cash is becoming ever more important to companies both large and small.
And at a time of high inflation, labour costs, rising energy prices and other property prices, keeping as much cash as possible is becoming a key strategy, as we will find in the December quarter and half year reports from Australia, the US, UK and other economies over the next couple of months.
One off ‘wins’ from an asset sale or early debt or other payments will be good news, while unexpected losses, however small, will not make investors happy.
That’s why it was good news when a belated $173 million New Year’s gift for Newcrest Mining was revealed in a short statement from the gold and copper miner to the ASX.
The ‘bonus’ is from Canada’s Lundin Gold via an early repayment of the gold prepay credit facility arrangement between the two companies.
Newcrest picked up the gold prepay credit facility, together with a stream facility and an offtake agreement in respect of Lundin Gold’s Fruta del Norte mine, for $460 million in April 2020.
“With the early repayment from Lundin Gold, Newcrest has now received cash flows of $451 million (net of withholding taxes) from the Fruta del Norte financing facilities since their acquisition, including cash flows of $325 million (net of withholding taxes) from the gold prepay credit facility,” Newcrest interim CEO Sherry Duhe said in a statement to the ASX.
“This represents an attractive return on this investment and provides Newcrest with additional near-term financial flexibility.”
The Fruta del Norte mine is located in south-east Ecuador and is one of the highest-grade, lowest-cost gold mines in the world.
As a lender, Newcrest will receive cash flows from the Fruta del Norte mine, with approximately 34% of free cash flows from the mine estimated to be directed to service the facilities over the next five years.
“The purchase of these gold prepay and stream facilities and the offtake agreement increases our direct exposure to the cash flow generated by the Tier 1 Fruta del Norte mine, in line with our stated growth strategy,” Newcrest then CEO Sandeep Biswas said in a 2020 statement. (He announced his retirement before Christmas from the role at Newcrest).
“The acquisition is expected to be earnings accretive, with the gold prepay and stream facilities expected to provide Newcrest with economic exposure to approximately 400,000 ounces of gold from the mine between 2020 and 2026, he explained ar the time.
“With gold prices at the levels we see today, Newcrest expects to receive significant cash flows which will rank ahead of Lundin Gold’s equity holders.”
Pursuant to the terms of the agreement, Lundin Gold elected to prepay in full the 10 remaining quarterly instalments of its Gold Prepay Facility based on the price of gold near the end of December 2022.
Newcrest is due to release its December quarter and half year production and exploration report on January 25.
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Tuesday also saw Lundin Gold reveal very good December quarter results from Fruta del Norte.
The Canadian company reported 4th quarter gold production of 121,139 ounces (oz.) from Fruta del Norte, taking annual output to 476,329 oz. for the year, topping the high end of the company’s 2022 guidance of 460,000 oz.
“We continue to push the boundaries of what Fruta del Norte is capable of, and noteworthy improvements have been made across the board as compared to last year,” Lundin Gold CEO Ron Hochstein said in the media release issued in Canada.
“Our average throughput of 4,574 tonnes a day this fourth quarter is proof that there is a lot more we can get out of Fruta del Norte, and I’m particularly excited to continue building on our successes in 2023,” he added.
With that sort of performance, it’s no wonder Lundin could afford to make prepayments to Newcrest.
