Besra Gold (ASX: BEZ) shares are up 22% today. The cause of this jump in BEZ shares is that they’re received the next $10 million of the advance payment for gold supplies. This is an interesting method of financing their mining plans, it’s a borrowing of the technique common in the lithium industry perhaps. An offtake contract providing that long term capital financing. It’s common enough to finance working capital this way in the gold industry, but not so much the long term requirements.
This funding agreement is valuable for Besra: “The announcement is interesting, essentially that they've gained the necessary finance to be able to make it to the next stage of the proving process of the deposit. This does have value, of course it does, as it reduces uncertainty. Further, above about all money having to be capital at this stage. The money is coming from a mining finance house - Quantum - which has two effects. Firstly, it's claimed at least that this is non-dilutive, which is good for current shareholders. The second is that it's a confirmation of the company's claims. No, it doesn't prove, in the legal sense, anything at all. But that an experienced investor in the sector is willing to advance money does provide and independent proof of sorts of the claims. Again, not that they're wholly true, but that there's at least a chance that they are - the claims being made are sensible that is.” As we say there, it’s both cash and also a validation of sorts of the claims being made.
Besra Gold share price from Google Finance
The value of this was shown when the first payment arrived at Besra Gold: “The specific interest today driving Besra up another 40% is that it has passed another one of those roadblocks to success. Recently it announced that it had gained potential funding. As and when Besra meets certain targets then funding will be released. Today's statement is that the first tranche of that funding has arrived. This might all seem like small beer - $2 million at first, $3 million to follow - but the total agreement is for up to $300 million. Sufficient to get Besra to the next major valuation stage of the gold project.”
So, no grand surprise here, the next $10 million has arrived, this plan is working, BEZ shares rise. There is one little issue for us though: “The Company reminds shareholders that the Facility is not debt, is interest free and is expected to remove the need for dilutive equity financing and project/corporate debt that would otherwise encumber Besra with hedging requirements and/or onerous covenants.” That’s not quite wholly and exactly true. Sure, the words all are, it’s a true statement. But if we look at this in economic terms it is rather like dilutive equity. Quantum gets a special price on that offtake contract in return for the funding. The effect of this is indeed like equity and is therefore dilutive of the long term returns to shareholders.
Note that we don’t say this is a bad deal. Just that it’s not quite being wholly accurately described.Quantum gets some part of the future gold price at the time of production. That’s dilutive.
