Shore Gold (SGF-T) has signed two big deals covering its mammoth Star-Orion South diamond project in Saskatchewan. Shore has long said that it has been in talks with parties willing to help build its proposed $2-billion mine. While the arrangements will allow the project, essentially stalled since the late 2000s, to lurch forward again, it still leaves uncertain the matter of Shore's financing of its share of the project. That, and the dilution resulting from the deals, leaves Shore's loyal retail shareholders perplexed.
Newmont Mining is selling its 31-per-cent interest in the Fort a la Corne joint venture, which covers Orion South and the western part of Star, to Shore in exchange for 53.8 million shares and 1.1 million share purchase warrants. The arrangement gives Newmont about an additional 15-per-cent interest in Shore Gold, roughly equivalent to Newmont's interest in the entire project. It is a good deal for Newmont, which long ago wrote off its $200-million investment in the project, citing its disappointment with exploration results. (Lately, it has been impossible to reach a single soul in Newmont's offices who was aware the company had invested big in Shore's diamond project.)
With the anchor that was Newmont out of the way, Mr. MacNeill, president and CEO, and Mr. Read, executive vice-president, promptly concluded their long-awaited arrangement with a more willing partner. Rio Tinto PLC can earn up to a 70-per-cent interest in the Star-Orion South project by investing up to $70.5-million in the project over as long as 7.5 years. In its first option, Rio will complete a 10-hole bulk sampling program or spend $18.5-million on exploration. (That amounts to a three-year due diligence program, as it earns no interest.) If the results pass muster, Rio Tinto could then acquire a 51-per-cent interest with another round of bulk sampling or exploration, again with an $18.5-million budget. From there, Rio could increase its interest to 55 per cent through a third round of bulk sampling or exploration, again with an $18.5-million budget. Finally, Rio can increase its share to 60 per cent by taking the project to feasibility, or spending another $15-million.
Retail shareholders rightly point out that the project cleared feasibility years ago and in fact, a substantial update had been promised by the end of last year. Indeed, the work proposed in the deal suggests that, like Newmont, Rio Tinto is skeptical of Shore's work, or at least the conclusions it derived, over the past decade. Assuming Rio Tinto proceeds with the full deal, Shore's shareholders would be left with a 40-per-cent interest in the project, although the dilution of their shares through the Newmont buyout effectively leaves them with a 34-per-cent interest.
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