Strandline Resources USD notes
The Investment Strategy
- Yield to maturity (YTM) of 11% (at 104px)
- Running yield of 12%
- Benefit from a robust security package: first ranking security over the mine plus listed parent STA, cash sweep, DSCR, and forward-looking Loan-Life Coverage Ratio (see full terms in table below)
- Bonds will amortise 50% before maturity in March 2026
- Around 72% of revenues for the first five years of production secured through offtake agreements
- Mineral sands are used for many purposes and can be found in a range of everyday household products
- Backed by NAIF, which is an Australian government-backed entity
We view the Strandline Resources (STA) USD notes as a nice way to get access to a secured bond which funded the ASX-listed Australian mineral sands company (STA AU Equity). Uniquely, this deal was placed in conjunction with an Australian government-backed entity: Northern Australian Infrastructure Facility (NAIF). NAIF has a key objective to fund critical mineral projects such as the mineral sands Coburn mine in Western Australia and aid the region’s indigenous job creation.
Though it is unrated, the credit strengths through government support and a large portion of revenues/cashflows being locked-in with offtakers lends this mining development to being a lower credit risk. The project will begin first production in 18 months (January 2023) and all development capex as well as any contingencies and/or overruns has been fully funded.
Mineral sands are used for many purposes and can be found in a range of everyday household products. Zircon is used in ceramic tiles and in metal casting, as well as in air and water purification systems. Titanium minerals, which include chloride ilmenite, are used as the feedstock to produce pigments for colourants in paints, paper, and plastics.
Credit Fundamentals
STA is an Australian mineral sands company. It has a 100% ownership in the mineral sands Coburn mine in Western Australia – one of the world’s largest mineral sands resources. This mine is a tier 1 asset, 1st quartile on the revenue/cost curve, and ready to begin first production in 18 months (January 2023).
Positively, this mine has scale and existing infrastructure is in place. Conventional mining techniques (open-pit dry) will be used in the place of unconventional mining techniques, so the project also has less risk from a mining perspective.
The resource being produced is zircon and chloride ilmenite, and STA has secured around 72% of its revenue for the first five years of production through offtake agreements with reputable partners around the world. Coburn will supply around 5% of the global zircon market and around 10% of chloride ilmenite with a mine life of 22.5 years.
Mineral sands are used for many purposes and can be found in a range of everyday household products. Zircon is used in ceramic tiles and in metal casting, as well as in air and water purification systems. Titanium minerals, which include chloride ilmenite, are used as the feedstock to produce pigments for colourants in paints, paper, and plastics.
Key Terms
The USD notes will be parri-passu to the NAIF facility. The USD notes are a 5-year amortising bond with a size outstanding of USD60m. Whilst the NAIF facility is a 15-year facility, only amortising after the bond maturity, with a size outstanding of AUD130m. There was also a AUD130m additional equity raise.
These three sources of funding were used to fund the development capex of AUD260m of capex (of which around 75% was secured on fixed price contracts) as well as any contingencies and/or overruns.
Bondholders benefit from a robust security package which is better than other Nordic mining bonds (e.g., Pilbara Minerals). The USD notes will have first ranking security over the mine plus listed parent STA. The bond proceeds will remain in escrow until all cash equity (AUD130m) committed to the development is spent.
Moreover, disbursement of bond proceeds will only be permitted after a cost-to-complete test is signed by an independent technical engineer (with subsequent draw-downs being pro-rata with the NAIF loan). This helps protect bondholders against any contingencies and/or overruns which may impact the credit profile. Additional credit enhancements for bondholders include the cash sweep mechanism, Debt Service Coverage Ratio (DSCR), and a forward-looking Loan-Life Coverage Ratio.
Key Terms
| Issuer | Coburn Resources Pty Ltd, incorporated in Australia, being a wholly owned subsidiary of Strandline Resource Limited |
| Guarantor | Strandline Resources Limited (“the Parent”), to be released on the date of Project Completion |
| Issue Amount | USD 60 million |
| Status | Senior secured, 1st lien |
| Purpose of the Bond Issue | Together with the New Equity and the NAIF Facility, to fund the development and ramp-up of the Coburn Project, and fund operating expenses during construction of the Project including payments of interest of the bonds |
| Maturity Date | March 2026 (5 years after the Issue Date) |
| Coupon Rate | [●]% per annum, quarterly interest payments in arrears on the 20th calendar day in March, June, September, and December each year |
| Issue Price | 100.00% |
| Amortisation | No amortisation until March 2024, then quarterly amortisation of AUD 4.25 million from 20 March 2024 to 20 June 2025, then amortisation of AUD 2.25 million at 20 September 2025 and 20 December 2025. 50% bullet at the Maturity Date |
| Call options | Make Whole until December 2023 thereafter callable (in whole or part) at par plus 40.00% from 20 December 2023 for 12 months, then par plus 20% from 20 December 2024 for 9 months, then callable at 100.0% of par from September 2025 to Maturity Date |
| Security | Comprehensive security package over all assets of the Issuer, including security over the shares issued by the Issuer, ranking on a first priority basis (pari passu with the other Pari Passu Secured Debt) |
| New Equity | The Parent will raise a minimum AUD 115 million in the form of cash equity. The Parent will thereafter inject an amount equal to AUD 130 million either as cash equity or Subordinated Issuer Debt or a combination thereof |
| Cost Overrun Proceeds | AUD 11 million of new equity will be deposited into a cost overrun account to fund any potential cost overrun expenditure incurred |
| Pari Passu Secured Debt |
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| Financial Covenants |
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| Drawdown mechanism | All cash from the Project Equity Proceeds will be deployed prior to any Bonds proceeds being released from escrow and any drawdown is subject to compliance with a Physical Completion Cost to Complete Test and Project Completion Cost To Complete Test to be countersigned by the Independent Technical Consultant. Drawdown from the escrow account will be made pro rata with drawings under the NAIF Facility |
| Cash Sweep | Following Project Completion, 15% of excess cash flow to be applied towards the Bond Refinancing Reserve Account held by the Bond Trustee on behalf of the bondholders. In case one or more of the financial covenants breach the Lock Up Cash Sweep levels, 100% of excess cash flow (shared pro rata between the secured lenders) will be applied towards the Bond Refinancing Reserve Account until the financial covenants once again satisfy the Lock Up Cash Sweep levels |
| Undertakings | Comprehensive undertakings and covenants protocol aligned with the NAIF Facility |
| Dividends | Permitted subject to satisfaction of Distribution Conditions |
| Distribution Conditions | Subject to: (i) no Default, Review Event or Lock Up Cash Event is continuing or would result from the distribution, (ii) after the later of (a) the first scheduled principal repayment under the Bonds and (b) 12 months after the end of the Ramp Up Period, (iii) Project Completion has occurred, (iv) the DSRA are funded to the required balance, (v) the WCP Relocation Reserve Account is funded in full, (vi) no Catch up Sweep Amount remains payable, (vii) the payment of the proposed distribution is made within 15 days after the compliance certificate is provided to NAIF and (viii) the proposed distribution is not more than the balance of the Collection Accounts at the relevant Calculation Date after paying all amounts in accordance with the waterfall provisions and after deducting the Minimum Unrestricted Cash Balance |
| Event of Default | Comprehensive Event of Default protocol aligned with the NAIF Facility |
| Intercreditor Deed | Means the intercreditor deed to be made between, among others, the Parent, the Issuer, the WA Lender, the Intercreditor Agent, the Security Trustee, the Bond Trustee and the WCF Lender |
| Waivers and Consents | The Intercreditor Deed will contain provisions on voting thresholds for waivers of, request for amendments of or other consents amongst the Secured Creditors. Decisions (including consents, waivers or amendments to the terms of the relevant agreement governing the Secured Obligations) made pursuant to the Intercreditor Deed will be binding for all Secured Creditors (for the avoidance of doubt, including the Bondholders) and (to the extent relevant) be implemented with effect on all relevant agreements governing the Secured Obligations, including the Bond Terms |
| Listing | To be listed on Oslo Børs, Nordic ABM or other regulated market within 12 months |
| Common Security Trustee | Global Loan Agency Services Australia Nominees Pty Limited (ACN 608 945 008), as common security agent for Secured Creditors |
| Bond Trustee | Nordic Trustee AS |
| Governing law and documentation | Norwegian law for Bond Terms and Norwegian, Australian or other applicable law for security package. The Bond Terms will be based on the standard Nordic Bond Terms for corporate high yield bonds, adjusted for the agreed term sheet with schedules, including adjustments to the template provisions on quorum for bondholders meeting and consent thresholds for waivers and amendments |
| Joint Lead Managers | ABG Sundal Collier and Pareto Securities |
Source: Strandline Resources Investor Presentation 2021
Chart 1. Key Bond Details
Source: Bloomberg
