Metanor Resources (MTO.V) seemed to be on the right track last year when the production rate was relatively steady at 45-50,000 ounces of gold per year, but the output has once again decreased in the past few months. There was also some good news as Metanor has the possibility to extend the maturity date of its convertible debt, removing some of the pressure on its balance sheet.
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The production rate
Metanor’s output sank to just 8,332 ounces of gold in the fourth quarter of calendar year 2014. As this is less than 2,800 ounces per month, the performance could best be described as ‘abysmal’. This was caused by a higher-than expected dilution of the mineralized ore. Some non-mineralized zones collapsed when Metanor was completing a blasting program and this caused the average grade to drop to 4.56 g/t instead of the usual grade of in excess of 5 g/t.
The situation has improved again in January as Metanor announced a production of 3,425 ounces of gold (which is an annualized production rate of just over 41,000 ounces) produced from 21,400 tonnes of ore at a grade of 5.18 g/t. Both the output and grade have been increasing again but we would like to see this improvement to continue towards a sustaining output of around 4,000 ounces per month for 48,000 ounces per year.
On a positive note, the continuously weakening Canadian Dollar is definitely helpful as Metanor is selling the gold based on a price in USD, but incurs the majority of its expenses in Canadian Dollar. This should lower the production cost per ounce and it will be interesting to see the impact of the currency changes.
The extension of the convertible debt
One of our main concerns was the fact that a C$10M convertible bond was due in the third quarter of this year and we feared the company wouldn’t generate a sufficient amount of free cash flow to repay the debt in time. Now the production rate has come down again, the chances of an autonomous and timely repayment were reduced to zero.
Fortunately the vast majority of the debenture holders voted in favor of a 2-year extension, thus providing some relief for Metanor’s constrained balance sheet. As we explained in an earlier blog post, Metanor’s working capital position had turned negative as the convertible debt had to be counted as a short-term liability.
This relief obviously comes at a price and the 24 month extension is contingent on two conditions. First of all, Metanor must raise C$3M in equity in a private placement and secondly, C$1M of that placement needs to be used to repay the debenture holders pro rata.
Together with the renegotiated debt deal, Metanor announced it has engaged Secutor Capital Management and Marquest Capital to conduct a private placement to raise up to C$4M by selling up to 66.66M units at C$0.06/unit. Each unit will consist of one common share and one half of a warrant whereby each full warrant will allow the warrantholder to acquire one additional common share at C$0.075 within 24 months.
The additional cash infusion will be good for the status of the balance sheet, but the dilution factor is quite high as at least 22% new shares will be created, increasing the total outstanding share count to just over 360M.
What’s next for Metanor?
Raising the cash and effectively extending the debt will be an important near-term catalyst as it will allow Metanor to have some more room to breathe. After the recent operating performances it became clear Metanor would have been unable to repay the debt in time so there was no other solution than paying the price needed to extend the debt.
It will be imperative to increase the production rate again as Metanor needs to hit that sweet spot of 4,000 ounces of gold per month to benefit from economies of scale (as the fixed costs can be spread out over more produced ounces, thus reducing the cost per ounce).
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Disclosure: Metanor Resources Inc. is a sponsoring company. Please see our disclaimer for current positions.
