Sprott duo sue Aurcana over canceled $25M silver mine debt financing
Rising silver prices lead Canadian junior Aurcana to cancel debt financing proposal with two Sprott companies - and it gets sued as a result.
Posted: Tuesday , 19 Apr 2011
Halifax, NS -
In a word, two Sprott companies feel used. Sprott Asset Management LP (SAM) and Sprott Resource Lending (SRL, TSX: SIL) allege, in a suit filed in British Columbia's Supreme Court April 15, 2011, that junior Canadian miner Aurcana (TSX-V: AUN) had accepted a financing proposal last year in which their participation in a C$60 million private placement was contingent on a subsequent C$25 million debt financing.
But Aurcana President and CEO Lenic Rodriguez scoffs at Sprott's claims, saying in a telephone interview it would be "totally impossible" for them to convince a court of their position, as the two financings were completely separate and non-binding. "It's black and white," he says.
In court documents SAM and SRL relate their version of events. Back in September 2010, they write, Aurcana was seeking equity financing to the tune of C$60 million, along with C$25 million in debt to fund construction of its Shafter mine in southwestern Texas - where it plans to produce about 3.9 million ounces silver a year starting in May 2012 - as well as to repay outstanding debt and to use as working capital.
In late October SAM and SRL state they proposed to Aurcana that they would subscribe to C$10 million of a C$50 million private placement, and then lend it C$25 million. Six days after they made the proposal Aurcana, they say, accepted the equity and debt arrangement, and SAM and SRL argue it was an enforceable agreement in which the equity financing was contingent on debt financing - a stipulation Rodriguez vehemently denies.
Three weeks later, November 19, 2010, Aurcana announced the C$50 million private placement and it subsequently closed on it December 8, 2010, for gross proceeds of C$60 million, C$12.5 million of which came from SAM and SRL. The C$12.5 million, in the words of SAM and SRL, was "in satisfaction of the Plaintiffs' (SRL and SAM) obligation under the financing agreement to complete the equity financing."
The two Sprott companies then argue it was their lead-subscriber role in Aurcana's equity financing, along with public knowledge of the Sprott debt arrangement, that resulted in the private placement's success. But, SAM and SRL allege, Aurcana knew before the private placement closed in early December, 2010, that it would not proceed with the debt financing.
Aurcana "failed to advise (SAM and SRL) of the decision not to proceed," SAM and SRL write, and as a result, they charge Aurcana "wrongly traded on the reputation and resources of the Plaintiffs and unjustly benefited thereby."
But Aurcana's Rodriguez counters, deriding the allegations are baseless. He say not only was the debt agreement non-binding, but that Aurcana's board of directors never approved it. Aurcana states in a press release its "only obligations to SAM and SRL if (it) did not proceed with the credit facility is privacy, confidentiality, jurisdiction and the payment of legal fees and other out of pocket expenses in connection with the non-binding term sheets."
SAM and SRL, however, are suing Aurcana for payment of standby fees at current silver prices, damages for breach of contract, misrepresentation, and punitive damages.
Aurcana explains that its change of heart on the debt financing stems from the realization that the October covenants were restrictive and not in Aurcana shareholders' best interests. "Silver prices have increased substantially since commencing negotiations on the credit facility in October, 2010," Aurcana states. "Assuming that silver prices remain in the current price range of $35 per ounce, the aggregate cost of the debt facility to (Aurcana) will be approximately US$50M to borrow US$25M over a three year period."
Aurcana had originally planned to close the debt financing by mid-December, 2010. However, given skyrocketing silver prices and what it saw as an increasingly bad deal for its shareholders, Aurcana says it tried to renegotiate the debt financing with SAM and SRL. The negotiations were "very onerous" and "tough" Rodriguez recalls, as "each time the price of silver increased the cost of the financing increased."
Ultimately he says he negotiated the best deal he could with SAM and SRL and presented that to the board of directors, but they in turn would not agree to what they saw as harsh terms.
Rodriguez boils down SAM and SRL's court action to corporate grumpiness. "They're not very happy that they're not going to be making the $50 million when they signed that," Rodriguez says, referring to amount of money SAM and SRL would have made if the proposed debt financing agreement had gone through.
SRL Chief Financial Officer, Jim Grosdanis, says he would not comment on Aurcana's version of events until after SRL issues a press release (or if it does so). But he says he finds "it interesting" Aurcana did not mention details of SAM and SRL's lead involvement in the $60 million private placement in its press release responding to SAM and SRL's allegations.