Analysts at the Royal Bank of Canada have backed IGO’s move to sell its 30 per cent stake in the Tropicana gold mine for $903 million to Regis Resources.
Regis and IGO confirmed details of the transaction to the market on Tuesday, with Regis now working on a $650m equity raising at $2.70 per share, an 14.8 per cent discount to the last closing price of $3.17.
Regis will secure $200m by way of a placement $450m through an entitlement offer with help from adviser Bank of America.
It is also raising $300m debt.
“In our view, the deal is attractive for IGO as they have secured full value for the Tropicana asset,” the analysts said in a research note.
The analysts say that the deal will enable IGO to reduce its debt profile following its acquisition of the Greenbushes lithium mine for $1.9bn in December.
IGO has been moving to create a portfolio solely focused on commodities used for clean energy, which prompted the move to sell the interest in the strongly performing Tropicana.
RBC said it valued IGO’s 30 per cent share in Tropicana at $780m, which includes $580m for the current operation and $200m on exploration upside, and as result, the analysts believe that the sale is value accretive to the tune of $120m at a base case.
“The divestment provides a compelling exit story,” RBC said.
“Tropicana is not core to IGO’s strategy, and post divestment, IGO is positioning itself as a pure play battery material company.”
While Tropicana does not fit IGO’s strategy, the asset has historically provided a significant source of cash generation for the Group.
“This deal essentially pulls forward or banks Tropicana cash-flow, allowing IGO to pay down debt used to fund the Greenbushes acquisition and strengthen the balance sheet in the event of further nickel price weakness over the next few years.”
RBC estimates that with the sale, IGO will reduce its debt level from 19 per cent at the end of the 2021 financial year to about 8 per cent, taking its net debt position from about $600m to net cash of $300m.
Tropicana has contributed about 20 per cent to IGO’s earnings before interest, tax, depreciation and amortisation estimates across the 2022 financial year and makes up about 23 per cent of the group’s net asset value.
The transaction remains subject to AngloGold Ashanti not taking up its last right of refusal over up to 60 days.
Should AngloGold choose to take up its rights, IGO will not buy the asset and will consider alternative uses for the equity raised, including returning a portion to shareholders.
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