Palladon Ventures Ltd. ("Palladon" or the "Company") (TSX VENTURE:
PLL) announces the following update from Dale Gilbert, CEO of CML
Holdings Inc.
CML Holdings Shareholder Update
Dear Shareholder,
I am pleased to provide an update regarding our recent financing
transactions, operations, construction of the plant as well as
providing initial 2012 guidance.
Credit Suisse Loan
On July 25, 2011 CML closed the second tranche of its $45
million loan with Credit Suisse. The commercial terms of the loan
are identical to those previously disclosed and are summarized in
Appendix I. Upon closing, the $20 million of cash collateral
backing the initial tranche of the term loan was released and will
be used to fund the remaining construction of the concentrator.
The facility with Credit Suisse also required the Company to
enter into certain hedging arrangements with respect to a portion
of its 2012 and 2013 concentrate production. The hedges are
cash-settled contracts in which CML has effectively sold forward
the 62% Fe TSI Index as follows:
2012 690,000 metric tons $144 per metric ton
2013 1,200,000 metric tons $136 per metric ton
These hedges will serve to lock in a price for CML for those
tons sold forward as further described in Appendix II. The hedge
counterparties share in collateral with the term loan lenders and
therefore the Company will not be required at any point to post
cash collateral in the event the hedges are out-of-the-money.
Tangshan Investment
I am also pleased to report that CML and Tangshan have closed
the second tranche of the $20mm Tangshan investment. Tansghan
received the necessary government approvals and CML received the
$18mm in two installments (July 8th and July 20th). Tangshan now
owns 10% of the common stock of CML and will have the right to
appoint one of the Company's five directors. In addition, with the
closing of the $18mm investment the concentrate offtake agreement
with Tangshan becomes effective immediately. We welcome Tangshan as
a stakeholder in CML and look forward to their assistance in
building CML's brand in China.
Sources and Uses Update
As of the date of the Tangshan closing, CML has approximately
$46mm of cash on the balance sheet. This cash is net of all
expected closing fees and expenses related to both the Credit
Suisse loan and the Tangshan investment. In addition, the Company
has $25mm of availability remaining under the Credit Suisse loan.
Finally, the Company generates approximately $1mm a month in free
cash flow from the run-of-mine operations. Assuming a January 31,
2012 completion date for the concentrator, CML has approximately
$78mm of available resources on hand inclusive of the expected free
cash flow. We currently estimate the remaining capital expenditures
for the plant will be approximately $45mm(1)(including $5.6mm
contingency), leaving us excess capital of $33mm or $39mm exclusive
of contingencies(2).
Additional Capital Uses
In addition to the construction of the concentrator, CML plans
to spend $5-8mm between now and completion of the concentrator as
described below:
Deposit on SAG Mill for second concentrator $3.0mm - $4.0mm
Drill Tip Top and other mag anomalies; prove up Rex $1.0mm - $2.0mm
Short line rail improvements $1.0mm - $2.0mm
Deposit on SAG Mill for second concentrate
Subject to securing the required logistics, which we hope to
accomplish in the coming few months, CML plans to increase its
concentrate production from 2mm tons to 4mm tons. The longest
lead-time item for this expansion is securing a SAG mill. We expect
to secure the SAG mill in Q3 '11, with the current lead time for a
SAG mill being approximately 12 months. We won't commit other
significant capital toward the second concentrator until the
logistics are in-place for us to ship the incremental capacity, but
given the fungible nature of the SAG mill it makes sense for us to
secure the mill now. Assuming the logistics can be arranged by
year-end, we would hope to have the second concentrator constructed
and operational by the start of 2013. The capital cost for the
second concentrator will be similar to the first concentrator. At
current transactable 2013 forward iron ore prices, the payback on
the second concentrator is less than five months.
(1) The fact that such a high proportion of the total capex
remains to be spent is not an indicator of plant progress. Much of
the outflow of dollars actually occurs in the last few months of
construction, but many of those dollars have already been
committed. The $45mm total to complete includes $5.6mm in
contingency.
(2) CML is required to keep approximately $12mm of this cash in
a restricted account for the benefit of the term loan lenders to
finance any cost overruns with the construction of the
concentrator. Once the concentrator has been built and is ramped to
commercial production, the $12mm of cash (or whatever the remaining
balance may be at the time) will be released to CML Holdings as
unrestricted cash.
Drill Tip Top and other mag anomalies; prove up Rex
We are working to move substantially all of the non-compliant
resources at the Rex (approximately 120mm tons), as well as other
non-compliant resources into a 43-101 proven/probable reserves
state of compliance. This will require twinning 10 historically
drilled Rex holes, with logging of the drill core and geotechnical
analysis to be done by a third-party geologist. We expect the total
cost of putting the Rex into the proven & probable category
will be $750,000-$1,000,000 and we hope to have this completed by
the end of Q4 '11. We can give no assurance at this time however,
to the timing and that such resources will become 43-101 compliant.
It is however, a top priority of the company.
Building off the mag survey work done in 2009 by Palladon
Ventures, CML has identified select drill targets for resource
expansion. The most promising of these targets is the Tip Top area
which has seen limited mining by previous owners. The previous
owners of CML mined approximately 4 mm tons from outcroppings at
surface, but never mined or even drilled beyond the visible
outcroppings. The 2009 mag survey shows strong mag anomalies
covering a wide surface area surrounding and including Tip Top. Tip
Top is situated directly above the Comstock Mountain Lion pit
making it an ideal site from which to mine (overburden could be
pushed into Comstock Mountain Lion pit once that pit is mined out).
We will commence drilling Tip Top in Q4 '11 and will update you on
results as they are received.
Short line rail improvements
The 14-mile spur line from Comstock Mountain Lion to the main
Union Pacific line will require some moderate upgrades/maintenance
this year including new rail ties, track upgrades and rail
stabilization with new ballast in compliance with FRA standards. We
expect the budget for this work to be $1-$2mm depending on the
number of ties/length of track to be replaced.
Operations Update
Operations continue to run smoothly at CML. Shipments in May
totaled 141,067 DMT tons and shipments in June totaled 143,394
tons. With the addition of new rail cars, our total fleet is up to
439 cars. We are now fully ramped in our logistics to an annual run
rate in excess of 2mm tons. This gives us comfort that we will face
few logistical issues when we switch from shipping run-of-mine ore
to shipping 2mm tons of concentrate annually.
Construction Update
Plant construction is rapidly progressing with all major trades
on site performing construction activities. The earthwork, building
and site utilities have been substantially completed. Concrete
crews have nearly completed the grinding area concrete and have
started work on the thickener foundations and the ancillary
buildings (office/storage/bathrooms/break facilities). The main
electrical line has been run from the substation and temporary
power has been pulled from it to use for construction and to power
the building lights and service cranes. The mechanical installation
contractor has commenced installing the ball mill components and
will continue through completion as components arrive on site.
Engineering is nearing completion with the majority of
mechanical work completed and focus moving to the electrical,
piping and instrumentation, which will likely complete within the
next couple of months. All major components have been ordered with
few remaining components to be procured.
Reserve Updates
Robert Cameron, mine engineering consultant for CML Metals
Corporation, recently reviewed drill data and topographic
information pertaining to what is referred to as the Burke
Stockpile, located in the Old Pits area. The data contained assay
information and drill logs for six drill holes that were drilled on
the stockpile in 2009, and a 2-ft contour map of the area, created
in 2009 by Aerographics. By evaluating the information, a total of
2.6mm tons with an average grade of 37% Fe within the stockpile
have been placed into 43-101 Probable Reserve status.
This updates the total Probable Reserves for the Iron Mountain
Property to 37.3 million tons with an average grade of 44.9% Fe.
CML continues to evaluate other potential resources on the site and
perform the necessary work to bring them into compliance.
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Estimated Probable Iron Reserves as of July 11, 2011
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Tons Avg Fe
(millions) Grade
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C-ML pit 25.6 49.6%
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C-ML Low-grade Stockpiles 9.1 33.9%
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Burke Stockpile 2.6 37.0%
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Total Estimated probable Iron Reserves 37.3 44.9%
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2012 Guidance
Our 2012 guidance assumes a February 1, 2012 start date for the
concentrator and a 4-6 week ramp period. Everything under our
control is progressing at the rate required to complete the
concentrator on-time, but the delivery time of certain pieces of
equipment is, to some extent, beyond our control. We maintain
constant dialogue with our vendors; the current expected completion
date represents our best estimate given the equipment delivery date
projections at present.
Production
Run-of-mine sales 300,000-400,000 DMT
Concentrate sales 1,600,000-1,700,000 DMT
-----------------------
Total 1,900,000-2,100,000 DMT
Again, the current 2012 production guidance assumes a February
1, 2012 start date for the plant. If the plant were delayed, we
would expect about 167,000 tons of concentrate to be swapped into
run-of-mine production for every month of delay.
Revenue per ton of sales
Our revenue per ton of concentrate sales is indexed to the daily
spot price for 62% Fe grade iron ore, CFR China. This is a price
published daily by multiple industry sources. We will effectively
receive the average daily price for the past month prior to the
arrival of our ship in China adjusted for penalties and net of
marketing fees paid to our offtake partners. Please see Appendix II
for a more detailed description of the calculation of our per ton
price.
Run-of-mine is a niche product with limited buyers. We negotiate
price with our partners for some deliveries and have fixed a price
on others. We will not provide guidance specific to run-of-mine
price, but see "cost of production" below for an estimate of run-
of-mine margin per ton.
Cost of production
Our current estimate for the fully delivered cost for our iron
ore to China in 2012 is $68- 71 per DMT of concentrate, net of
premium Fe grade bonus payments. This estimate is subject to change
based upon ocean freight rates, diesel costs, Fe grade premiums and
other commodities that affect our operating costs. See Appendix III
for a more detailed description of our concentrate costs.
Our cost of production per ton of run-of-mine is lower than
concentrate given the lower mining costs and lack of milling and
processing costs, but the price we receive per ton of run-of-mine
is substantially lower. We currently make EBITDA of $5-$10 per DMT
on our 53% Fe ROM sales and expect a similar result in 2012.
Capital expenditures and working capital
Outside of the capital spent on the first concentrator and the
capital described in "additional capital uses" above we expect to
incur $2-$3mm in maintenance capital costs in 2012. Should our
Board approve the construction of the second concentrator, we will
update this estimate for the capital costs associated with building
the second plant. We do not expect a significant move positively or
negatively in working capital for 2012.
Operating Goals for 2012
Our primary goal for 2012 is to complete the plant on-time and
on-budget and to quickly ramp to an annual production rate of 2mm
tons. All of our other operating goals are secondary to ensuring
the plant operates at its capacity, produces the optimal end
product, and does so within the cost parameters we have projected
to our shareholders, our lenders, and the Board.
In addition, management has identified two other operating
initiatives for 2012: i) secure additional port capacity to allow
production to increase to 4mm tons and ii) lower operating costs.
We are working with certain ports on the west coast of the US as
well as our rail partners to achieve a complete logistics solution
to allow us increased production capacity. We are optimistic that
we will achieve this result allowing us to start construction on
the second concentrator in 2012, but no assurances can be given at
this time. With respect to operating costs, once these initiatives
are complete we believe $7- $12 per DMT of costs can be taken out
of the business in 2012, reducing our delivered costs per DMT to
$56-64, net of premium Fe grade bonus payments. We will provide
more detail on our cost initiatives in future shareholder
updates.
We have made great strides at CML this past year. Raising $45mm
of project debt from a lender of Credit Suisse's stature is a major
validation for our project. This was a six- month process from
start to finish and involved a level of due diligence few mines of
our size could withstand. We would like to thank Credit Suisse for
all their hard work and their innovation in structuring the loan
and the associated hedge program. This was a unique transaction and
Credit Suisse's ability to tailor a product specific to CML is one
of the reasons this project is succeeding. We're also excited to
have Tangshan as a shareholder as we look forward to building
partnerships with our customers in China.
CML Website
We would also like to direct you to our website at
www.cmlmetals.com where we are posting updates and photos on a
regular basis that highlight construction and our other
activities.
Thank you for your continued support.
Dale Gilbert, CEO, CML Holdings Inc.
Appendix I - CS Term Loan
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Amount: $45,000,000
Rate: 3 mo. LIBOR + 6% until completion of plant
3 mo. LIBOR + 5% post completion of plant
Maturity: Amortizing quarterly through 2014
Mandatory Cash Sweep: 25% of free cash flow
Pre-Payable: Anytime at par
Appendix II - Price Per Ton Calculation
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Start with realized 62% Fe TSI Index price
-Deduct: Penalties + Fees
Impurities over limits (none expected)
Moisture over/under limits (none expected)
Marketing fees + expenses
= Net price for CML
CML price calculation example (2012)
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Hedged Production Open Production
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Volume 690,000 910,000-1,010,000
62% Index (1) $144 / DMT $155/ DMT
Marketing/Expense (i)96% (i)96%
----------------------------------------
Net Price $138 / DMT $149 / DMT
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(1) Index price for "Hedged Production" is the weighted average hedged
price for all 2012 hedged volume. Index price for "Open Production" is
based upon approximate mid-market forward curve prices as of July 11th
for 62% Fe grade ore delivered in calendar year 2012.
CML price calculation example (2013)
------------------------------------------------------------
Hedged Production Open Production
------------------------------------------------------------
Volume 1,200,000 2,800,000
62% Index (1) $136 / DMT $143/ DMT
Marketing/Expense (i)96% (i)96%
----------------------------------------
Net Price $131/ DMT $137 / DMT
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(1) Index price for "Hedged Production" is the weighted average hedged
price for all 2013 hedged volume. Index price for "Open Production" is
based upon approximate mid-market forward curve prices as of July 11th
for 62% Fe grade ore delivered in calendar year 2013.
Appendix III Cost Summary for Concentrate
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Cost Item Costs per DMT
-------------------------------------------
On-Site (1) $22-$23 / DMT
Off-Site (2) $38-40 / DMT
Ocean (3) $33 / DMT
Fe Premium Bonus (4) ($25) / DMT
--------------------
Total $68-$71 / DMT
2012 Cost Initiatives ($7-$12) / DMT
--------------------
2013 Cost Goal $56-$64 / DMT
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1) Includes mining, milling, testing, G&A and other
2) Includes all logistics excluding ocean freight
3) Ocean freight to China based on current freight rates and ports of
departure
4) Assumes current Platts Fe Adjustment Factor of $5 per DMT per 1% Fe above
62% and assumes CML product grade of 67%
Appendix IV- Calculation of Premium Bonuses
-- In each of CML's offtake contracts there are provisions that allow the
Company bonus payments for each shipment of concentrate grading higher
than 62%
-- CML expects to produce a 67%+ Fe grade product and therefore expects to
receive significant bonus payments from its offtake partners
-- The calculation of the bonus payments on a per DMT basis is as follows:
-- Bonus payment per DMT = (Actual CML Fe grade - 62)(i) Platts'
Adjustment Factor
-- Platts' Adjustment Factor is a number published daily by Platts that
represents the average premium paid by iron ore buyers on a per tons
basis for every 1% of Fe above the 62% Index price
-- Current Platts' Adjustment Factor is approximately $5 per ton per 1%
Fe above 62%
-- So if CML produces 67% product, we would derive bonus payments =
(67-62)(i) $5 per DMT, or $25/DMT
-- Going forward, CML will report premium bonus payments as a reduction in
cost similar to the manner in which base metals and precious metals
producers show by-product sales as nets to cost
Palladon also announces that it and all other CML shareholders
have entered into an Amended Shareholders Agreement which reflects
the addition of Tangshan as a new shareholder, and which includes a
provision pursuant to which Palladon, Luxor and Tangshan have
placed their CML shares into escrow pursuant to a Custody Agreement
dated July 7, 2011 (the "Custody Agreement") with JPMorgan Chase
Bank, N.A. The purpose of the Custody Agreement is to facilitate,
if required, the enforcement of the Amended Shareholders
Agreement.
John Cutler, CEO of Palladon, commented: "This comprehensive
update from CML adds valuable insight into the operational and
financial dynamics of the Iron Mountain project. CML continues to
execute on their business plan and has made great progress in
advancing the mine, solidifying logistics and partnerships and
moving the concentrate plant ahead on time and on budget. We are
pleased with the closing of the recent financings and look forward
to the commissioning of the concentrate plant in early 2012."
About Palladon Ventures Ltd.
Palladon Ventures Ltd. holds a 19.3% interest in CML Holding,
Inc., which is focused on advancing the Iron Mountain Project, an
iron ore mine located seventeen miles west of Cedar City, Utah.
Disclaimer for Forward-Looking Information:
Certain statements in this release may be forward-looking
statements, which reflect the expectations of management.
Forward-looking statements consist of statements that are not
purely historical, including any statements regarding beliefs,
plans, expectations or intentions regarding the future. Such
statements are subject to risks and uncertainties that may cause
actual results, performance or developments to differ materially
from those contained in the statements. No assurance can be given
that any of the events anticipated by the forward-looking
statements will occur or, if they do occur, what benefits the
Company will obtain from them. These forward-looking statements
reflect management's current views and are based on certain
expectations, estimates and assumptions which may prove to be
incorrect. A number of risks and uncertainties could cause our
actual results to differ materially from those expressed or implied
by the forward-looking statements, including: (1) a downturn in
general economic conditions in North America and internationally,
(2) the inherent uncertainties and speculative nature associated
with mineral exploration and production, (3) a decreased demand for
minerals, (4) any number of events or causes which may delay or
cease exploration and development of the Company's property
interests, such as environmental liabilities, weather, mechanical
failures, safety concerns and labor problems; (5) the risk that the
Company does not execute its business plan, (6) inability to retain
key employees, and (7) inability to finance operations and growth,
(8) other factors beyond the Company's control. These
forward-looking statements are made as of the date of this news
release and, except as required by law, the Company assumes no
obligation to update these forward-looking statements, or to update
the reasons why actual results differed from those projected in the
forward-looking statements.
Neither TSX Venture Exchange nor its Regulation Services
Provider (as that term is defined in the policies of the TSX
Venture Exchange) accepts responsibility for the adequacy or
accuracy of this release.
Contacts: Palladon Ventures Ltd. John W. Cutler President &
Chief Executive Officer 801.521.5252 604.681.4760 (FAX)
info@palladonventures.com www.palladonventures.com