Tri-Star Resources PLC / AIM: TSTR / Sector: Natural Resource
3 November 2020
Tri-Star Resources plc ("Tri-Star", “TSTR” or the "Company")
Tri-Star Resources plc (AIM: TSTR), the minerals processing company, announces an update on its investment in Strategic & Precious Metals Processing LLC (“SPMP”), an antimony and gold production facility in the Sultanate of Oman in which the Company is a joint venture partner with the Oman Investment Authority LLC (“IAC”) and DNR Industries Limited (“DNR”), part of Dutco Group in Dubai .
The last 18 months have been a very frustrating period for Tri-Star. SPMP, TSTR’s sole investment, has achieved a number of important milestones but there have been significant delays, costs continue to increase and the funding of SPMP has looked uncertain.
On the positive side, SPMP produced and sold its first batches of antimony metal and of gold dore and has been operating individual parts of the plant for short periods at 50% of capacity. This proved that the plant was capable of producing in small quantities but efforts to ramp up production have been hampered in part by the continued lack of funding for SPMP.
Delays over several years have meant that the total funding required to complete the plant has increased enormously. TSTR has not invested further in SPMP since 2018 and SPMP has been seeking debt finance from both domestic and international institutions from the middle of the year 2019. By the end of 2019 it was clear that SPMP would need to rely upon funding from local banks rather than international ones.
At the end of 2019, a local institution (“Local Bank”) had shown interest and SPMP was actively engaged with the bank to agree terms. However, it transpired that the Local Bank was only prepared to lend on terms unacceptable to SPMP’s shareholders.
At the end of the year and in January 2020, IAC (previously Oman Investment Fund Holding Company LLC) injected a further USD32m in SPMP and DNR a further USD8m (“December 2019 Funding”). It had not been agreed with TSTR the terms on which this funding would be made.
In April 2020, IAC instituted arbitration proceedings in order to try and force the December 2019 Funding to be treated as equity on a valuation to be agreed only after the event. TSTR had a veto right over this and, based on legal advice, the Board were confident that it would prevail.
We continued to negotiate with our fellow shareholders in SPMP in order to find an equitable solution in the knowledge that TSTR was unlikely to be able to provide any future funding for SPMP. Circumstances were exacerbated as the magnitude of the final funding required to complete the SPMP project was uncertain and likely to increase. It was announced in January 2020 that SPMP required further debt funding of cUSD120m comprising USD60m for rectification costs and a further USD60m for working capital, (the “Funding Gap”) in addition to the substantial sums already invested by the shareholders of SPMP.
The Board is pleased to report that we have reached a settlement agreement with IAC, DNR and SPMP (the “Settlement Agreement”), which provides greater certainty of funding for SPMP, redresses the imbalance of the amounts invested by the three shareholders and provides certainty over TSTR’s shareholding going forward with no further need for TSTR to finance SPMP.
It is the Board’s view that this solution, whilst reducing the Company’s equity stake, greatly increases the chances of the shareholders of TSTR achieving a liquidity event in the future. There was ultimately no alternative for TSTR with the possibility of SPMP going into liquidation, at which point the TSTR shareholders would receive nothing. The agreement that we have achieved is, in the Board’s view, a better result than would have been achieved through arbitration which would have cost at least £250,000 in costs and fees; funds that TSTR, absent this Settlement Agreement, does not have.
Investment to date
In January 2020 TSTR announced the Funding Gap referred to above, in addition to the substantial sums already invested by the shareholders of TSTR and an additional equity requirement of cUSD40m. Tri-Star’s inability during 2019 and 2020 to make further investments pari passu with its shareholding in SPMP had led to an imbalance of funding between the shareholders of SPMP. As a result, TSTR’s investment in all forms comprises approximately 16.3% of the total amount invested to date of cUSD206m, the balance being provided by IAC and DNR.
The Settlement Agreement
Over the last few months, Tri-Star and its joint venture partners have been in discussions to find a resolution to the dispute. These concluded on 1 November 2020 with a settlement agreement between the parties embracing a number of constitutional and financial changes. In broad terms, IAC and DNR have agreed to provide sufficient further funding in order for the plant to reach completion, without further equity dilution to TSTR and that all sums invested to date are converted into equity and equity loans (“Equity Loans”) proportionately. The Equity Loans are zero coupon, undated and repayable at the option of SPMP, subordinated but ranking above equity.
As a result of the Settlement Agreement, TSTR’s investment in SPMP will comprise equity of USD 2.6m (16.3% of total equity) and Equity Loans of USD30.8 million (16.3% of the total Equity Loans). The balance is held by IAS and DNR. Each shareholder of SPMP owns an equal percentage of equity and equity loans.
Tri-Star’s claim to a final USD2m payment due from the assignment of the intellectual property rights to SPMP has been settled by USD500,000 payable in cash and the balance forming part of TSTR’s total funding of SPMP. A further sum of USD100,000 representing settlement for other outstanding amounts will also be paid in cash to TSTR by SPMP.
It is envisaged that future SPMP funding until plant completion will be sought first from third party sources; failing that, shareholders may fund SPMP with subordinated non-convertible debt with a coupon of 20% (“New Loans”). IAC has agreed to fund TSTR’s share thereby avoiding dilution of TSTR’s equity interest. Of the Funding Gap noted above, USD40m has already been provided as equity and equity loans. The balance, and any extra funding needed, is likely to be provided in the form of New Loans at a rate of 20% interest.
TSTR’s interest may only be diluted if shareholders with 75% or more of the voting rights agree (which currently requires at least 2 shareholders): a) that capital is required to expand the project in a material way; b) to apply for a listing on a recognised stock exchange which results in the free float being at least 25% of the issued share capital; c) that an independent third party investor injects equity in the business on an arms-length basis; or d) in order to continue compliance with bank facility covenants, the banks require any of the New Loans to be converted to equity.
In the light of the change in shareholdings, it has been agreed that TSTR will no longer have a seat on the board of SPMP, neither will it have any veto rights over previously reserved matters, which will now require the consent of shareholders holding 75% or more of the voting rights, i.e. at least two shareholders.
The bank guarantee provided by TSTR, IAC and DNR in favour of Bank Nizwa and Alizz Islamic Bank remains in place, although all parties have agreed to seek to renegotiate the terms to ensure that it is released once the plant is commissioned. TSTR’s exposure to the guarantee has been reduced to reflect its decreased shareholding of 16.3%. As a result of the Settlement Agreement, which provides for the ongoing funding of SPMP, it is the Board’s view that the risk of the guarantee being called has been significantly reduced. The current expected date of completion of the plant is in H1 2021 at which point the guarantee should be expunged.
Total exposure to Bank Nizwa and Alizz Bank at 31 December 2020 stood at USD57.3m.
It has been agreed that interest on the Odey loan to TSTR will reduce to 5% on completion of the Settlement Agreement. At 30 September 2020, the loan stood at USD2.3m.
Cancellation of admission to AIM
As a result of the Settlement Agreement, TSTR will become a passive investor in SPMP. Accordingly, the Board is of the view that the costs involved in keeping TSTR admitted to AIM are not warranted. Accordingly, a shareholder circular will be sent shortly to all shareholders recommending that TSTR’s admission to AIM is cancelled. It is intended that arrangements will be made for matched market transactions to take place.
As a result of the Settlement Agreement, TSTR will receive cash of USD600,000. Subject to the cancellation being approved by TSTR shareholders at a general meeting, the current board will resign. A single director will be appointed and running costs will be reduced to a minimum which are expected to be less than £50,000 per annum.
Adrian Collins, Chairman of Tri-Star commented: “I am aware that this may not be the outcome that some shareholders had envisaged, but I do believe that we will have a liquidity event in the foreseeable future and I hope this will give shareholders the opportunity to either receive a cash payment or shares in a listed SPMP.
“I would like to thank our partners, the management team and our shareholders for their dedication, commitment and efforts during this difficult time.”
Certain information contained in this announcement would have been deemed inside information for the purposes of Article 7 of Regulation (EU) No. 596/2014 until the release of this announcement.
For further information, please visit www.tri-starresources.com or contact:
Tri-Star Resources plc
St Brides Partners (Financial PR)
SP Angel Corporate Finance (Nominated Adviser)
finnCap Ltd (Broker)