Discovery Silver (TSX: DSV) is set to become the newest gold producer on the market. The company this morning indicated it has entered into an arrangement with Newmont (TSX: NGT) to purchase the Porcupine Complex near Timmins, Ontario.
“The acquisition of the Porcupine Complex is an important step forward as we work to build a highly profitable precious metals producer. Through this acquisition, we are combining growing gold production at Porcupine with tremendous upside, in one of the world’s great gold camps, with our Cordero project, one of the industry’s leading silver development projects based on reserves and expected production,” commented Tony Makuch, CEO of Discovery.
The transaction will see Discovery pay total consideration of US$425 million, via a combination of cash, shares and deferred consideration. Upon closing, Discovery is to pay $200 million in cash and issue $75 million in common shares. The remaining $150 million will be paid in four annual cash payments of $37.5 million, beginning December 31, 2027.
Funding the purchase
Funding for the purchase is to be derived from a massive US$555 million financing package, which includes significant participation from Franco-Nevada Corp (TSX: FNV).
The financing package with Franco will see the the company acquire a 4.25% net smelter return royalty on the Porcupine Complex in exchange for $300 million, which is to consist of two tranches. Franco will also provide a $100 million senior secured term loan that can be drawn on for a period of two years, and will also subscribe for a $49 million investment in a subsequent equity funding round conducted by Discovery.
Under the terms of the royalty arrangement, a 2.25% NSR royalty is to exist in perpetuity on all minerals produced at Porcupine, while a 2.0% NSR on all minerals will be in place until the equivalent of 72,000 ounces of gold are delivered, or a cash payment is made that is equal to a pre-tax annual IRR of 12% is made.
Outside of Franco, Discovery is to conduct a $155 million bought deal financing, under which Franco will provide the lead order, while taking a 9.9% stake in the new gold miner. The financing will see subscription receipts offered at $0.90 per each. Each subscription receipt will convert to one common share of Discovery once certain conditions related to the transaction have been met. Insiders of Discovery are expected to subscribe for $9.0 million in shares under the offering.
Shareholders prior to the transaction occurring are expected to hold just 51.9% of the resulting company.
The Porcupine Complex
The Porcupine Complex, found in Ontario, is currently estimated to have a base case net present value of $1.2 billion based on $2,150 gold. The mine operating mine is expected to average 285,000 ounces of production annually for the next ten years, with 4.9 million ounces of gold expected to be produced over the remaining 22 year mine life.
That production is expected to come at all in sustaining costs averaging $1,504 over the life of the mine, and $1,278 per ounce over the five year period of 2030 through to 2035. The first three quarters of 2024 saw the mine produce 219,000 ounces of gold at an average all in sustaining cost of $1,422 an ounce, making it one of Newmont’s lower cost operations.
After-tax cash flow meanwhile is expected to total $1.3 billion over the first 10 years of ownership, which expands to $1.8 billion over the remaining life of mine.
Discovery Silver last traded at $0.98 on the TSX.
Information for this story was found via the sources and companies mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
