South Star Battery Metals Corp. (TSX-V:STS, OTCQB:STSBF) said it has entered into a binding streaming agreement with Sprott Resource Streaming and Royalty Corp (SRSR) for a total cash consideration of up to US$28 million as prepayment for graphite concentrates from the Santa Cruz Graphite project in Brazil.
South Star will act as sales agent for SRSR on the percentage of production subject to the agreement.
"We are delighted to have a long-term strategic partner like Sprott. This financing delivers excellent value for South Star shareholders by minimizing equity dilution while giving the Company a lot of financial flexibility to fund future expansions,” said South Star CEO Richard Pearce in a statement.
“This agreement is the next cornerstone in building South Star into a world-class graphite producer and will provide full funding for South Star to move construction forward on the Santa Cruz Phase 1 operations and partial funding for Phase 2 CAPEX at a very attractive cost of capital compared to available commercial alternatives or additional equity dilution.”
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Pearce added: “The advance loan will allow the company to push construction ahead quickly by ordering equipment, locking in CAPEX values and mobilizing contractors while we complete conditions precedents. South Star looks forward to sticking shovels in the ground and getting Phase 1 built. Commercial production is planned for Q2 of 2023. Thanks to all the South Star team and Sprott team for laying the foundation for a bright future and allowing us to become the first new graphite production in the Americas in more than a decade."
South Star said the Phase 1 Stream payment has a US$10 million cash consideration ("Phase 1 Consideration") to fund 100% of the required Phase 1 CAPEX, which allows South Star to start construction in the next 45-60 days with commercial production scheduled for the second quarter of 2023.
The Phase 2 Stream payment has a minimum of US$9 million and up to US$18 million cash consideration for partial funding of Phase 2 CAPEX (US$27 million), subject to SRSR Phase 2 due diligence as well as investment committee update and approval.
The company added that a US$2 million advance loan payable on signing of the Promissory Note will be used for equipment down payments, land acquisition, contractor mobilization, and engineering support services.
Other highlights of the stream agreement include:
- Minimal shareholder equity dilution for up to US$28 million cash consideration.
- South Star has the option to buy back 100% of Phase 2 Stream.
- Automatic stepdown of 50% of Phase 1 Stream after sales and delivery of 75,000 tonnes of concentrate.
- Excellent post-stream LOM EBITDA margin of 51% (Phase 1 Stream + 100% Phase 2 Stream).
- Compelling combined cost of capital with significantly lower total financing costs compared to other available capital market alternatives.
"We are very pleased to partner with South Star to provide the project build capital for Santa Cruz. SRSR's focus is to invest in near-term cash flowing projects that will have high operating margins and long operation life with expansion and exploration potential,” said Michael Harrison, managing partner of SRSR.
“The fundamental demand for graphite looks to be very exciting, in both the existing and decarbonization markets."
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