Aviva Corporation (ASX: AVA) will net an initial A$20 million from the sale of its Kenyan gold and base metals to Barrick Gold Corporation’s (NYSE: ABX, TSX: ABX) subsidiary, African Barrick Gold.
ABG is one of the five largest gold producers in Africa. ABG is majority owned by Barrick Gold Corporation, the world’s largest gold producer.
The company has entered into a binding sale and purchase agreement to sell Aviva Mining Kenya to African Barrick Gold, one of the five largest gold producers in Africa. This acquisition represents African Barrick Gold’s first move into Kenya.
The funding from the sale will add to the over $1 million in cash held by Aviva at the end of the June 2012 quarter, and allow the company to assess its strategic growth options for its coal-based projects in Botswana.
Aviva Kenya holds a 51% interest in Special Licence 123 and Special Licence 213, with an option to earn an additional 24% through a joint venture with Lonmin Plc.
It also has the right to earn a 75% interest in Special Licence 265, Special Licence 266, and Special Licence 265 through a Joint venture with Advanced Gold.
Lindsay Reed, chief executive officer of Aviva Corporation, commented: “This transaction will ensure Aviva has a strong balance sheet providing considerable flexibility to pursue growth opportunities for shareholders.
“The company is actively reviewing its strategic growth options in relation to its coal-based projects in Botswana.
“We believe this is a very good deal for shareholders, Aviva has spent approximately $8 million on its Kenyan project and looks set to generate a substantial return on its investment in less than two years.
“The certainty of cash compared to the dilutionary impact of funding our gold aspirations at the company’s current market capitalisation was a key driver as to why it is in the best interest of shareholders to sell this asset for what is a significant premium in current market conditions.”
Terms of the deal
Under the agreement, African Barrick Gold will acquire all of the shares in Aviva Mining Kenya for $20 million.
There is a further payment of $10 million due to Aviva if a National Instrument 43-101 compliant Indicated Resource of 3 million ounces or more is declared over the project areas.
African Barrick Gold will fund all of the costs that Aviva incurs on the Kenyan assets, based on an agreed work program retrospectively from 1 June 2012, until completion of the share purchase agreement. This funding is capped at $1 million but can be increased with African Barrick Gold’s approval.
In addition, African Barrick Gold will fund the US$0.1 million for the exercise by Aviva Kenya of its preliminary option in terms of the joint venture with Advanced Gold.
Botswana coal
Earlier this year, Aviva secured a two year renewal of the Mmamantswe Coal Prospecting Licences, the only coal development project in Botswana with a JORC Reserve.
It was timely given the positive outcome of the Botswana Government’s Coal Road Map Review, which includes preliminary Feasibility Studies into a preferred rail route, and a 400 kilovolt transmission line through the Mmamantswe licenses to a new substation within 30 kilometres of the project.
This second renewal required a 50% reduction in the first renewal area, and the two prospecting licences have now been consolidated into a single licence covering 453.7 square kilometres.
The new prospecting licence encompasses more than 12 times the area of the Mmamantswe deposit and retains access to Botswana’s main infrastructure corridor 40 kilometres to the west.
The project has an 895 million ton reserve, and contains some 200 million tons of export coal and 150 million tons of domestic coal.
Studies have suggested that the Mmamantswe project, which is close to the South African border, could support a 10 million ton per year run-of-mine operation.
Analysis
Cash is king for an explorer, and this level of funding will provide sufficient capital for Aviva to continue advancing its coal projects in Botswana.
With the cash injection of $20 million and the cash in hand at the end of the June quarter of around $1 million, Aviva will be trading above cash backing with a current share price of just $0.085 per share compared to cash of around $0.13 per share.
For investors with a hankering for cash backed stocks, this deal is a significant coup for Lindsay Reed's Aviva Corp., providing it with funding for its key coal project. The cash component tends to place a "floor" under the price of a company, while allowing investors to participate in upside from exploration. It is not trading at a discount to cash backing
Proactive Investors is a market leader in the investment news space, providing ASX “Small and Mid-cap” company news, research reports, StockTube videos and One2One Investor Forums.