HVY moves to secure funding via offering royalty interest
Today our minerals sands Investment Heavy Minerals (ASX:HVY) entered a mandate with Foster Stockbroking, who will act as lead arranger for a proposed royalty funding arrangement.
Whilst the details in today’s HVY announcement are limited, royalty agreements generally involve a lump sum of funds going to the company upfront, in exchange for a percentage of future or existing production revenues.
Royalty agreements can be beneficial in a tough funding environment (like the current market for small caps) as it secures funding for the company without dilution - a win for long term shareholders.
The funds will help HVY develop the project and take it into a pre-feasibility study (PFS).
HVY said it will consider a second tranche of pre-paid royalty funding following the release
of the Company’s PFS, which is expected in early 2024.
We have seen royalty agreements pay off in the past - one example is Trident Royalties deal on Lithium America’s Thacker Pass lithium project in the US.
Now Lithium America’s has taken its project into construction.
Royalty agreements can be a good arrangement for both parties:
- Funding party gets a forward revenue stream which works well particularly if they have faith in the project’s ability to go into production.
- The party receiving the funds then has a stronger balance sheet to develop a project, without diluting shareholders. The funding takes it closer to a Final Investment Decision on mine construction and getting into production.
Like any investment, royalty agreements are not riskless for either party and much depends on the final terms - for example the royalty could cap the upside from future funding.
HVY said it is still determining the potential amount of the pre-paid royalty, with more details to follow in the coming weeks.
All up, as long term Investors in HVY, we are pleased that HVY is moving to shore up its balance sheet as it seeks to further develop its primary garnet project, while incurring minimal dilution for existing HVY holders.
For context around HVY’s project, the company is aiming to build a garnet mine. Garnet is an important niche mineral sands product - garnet is leveraged to big industries like the maritime and aerospace industries to allow for rust removal, industrial cutting and anti-corrosive paint to be applied to surfaces. It cannot be easily replaced.
Some of the main reasons we Invested in HVY were the size of its project relative to its market cap and its advanced stage of development with room for improving economics.
