In dire Straits: $120m exit plan

STRAITS Resources is writing a $US120 million ($A118 million) cheque to extricate itself from a costly copper concentrate supply deal from its Tritton copper mine near Nyngan in New South Wales with the metals trading arm of JPMorgan.

By InvestSMART · 21 Sep 2011

By InvestSMART ·
21 Sep 2011

Comments

The terms of the supply deal were entered into by the previous owners ahead of Tritton's float on the ASX in 2002 and have become horribly "out of the money" in that Straits is handing over about one-third of the copper price in treatment and refining charges compared with the industry average of about 5 per cent.

While copper prices have weakened in recent weeks to 11-month lows, the current price of $US3.80 a pound remains at a price well above historical highs, and well above Tritton's current cash cost of production of $US2.13 a pound.

To rid itself of the cash drain, Straits will pay JPMorgan the $US120 million in return for the agreement being terminated and replaced by one more in line with prevailing industry treatment and refining charges. Straits said that the end result was that Tritton finally became a "clean" asset. The mine currently has a mine life of seven years. Annual production is about 25,000 tonnes of (contained) copper. Because of the unfavourable offtake agreement the mine has struggled to make a profit despite bumper copper prices. In the five months to June 30, Tritton posted a net loss of $4.8 million.

Finance for the cost of terminating the offtake arrangement is to be covered by a five-year debt facility with Standard Chartered Bank. In addition, Credit Suisse is providing a $US50 million silver loan facility on the strength of Straits' Mt Muro mine in Indonesia. Straits' managing director Milan Jerkovic said that the market had been aware what a drag the legacy offtake agreement had been on the company.

He said the restructure would "allow Straits to provide a cleaner and more transparent investment opportunity to the market"

Straits shares closed 1? higher at 81?.

Go to Google News, then click "Follow" button to add us.

Share this article and show your support

Frequently Asked Questions about this Article…

What is Straits Resources’ $US120 million exit plan for the Tritton offtake deal?

Straits Resources plans to pay JPMorgan’s metals trading arm US$120 million to terminate a legacy copper concentrate supply (offtake) agreement for its Tritton mine. The termination will be followed by a new agreement aligned with prevailing industry treatment and refining charges, effectively making Tritton a "clean" asset.

Why did Straits Resources decide to terminate the JPMorgan offtake agreement?

The legacy offtake terms, entered into before Tritton’s 2002 ASX float, required Straits to pay about one-third of the copper price in treatment and refining charges—far above the industry average of roughly 5%. That costly structure was a cash drain and left Tritton struggling to make a profit despite high copper prices, contributing to a net loss of A$4.8 million in the five months to June 30.

How will ending the offtake deal affect Tritton mine profitability and investor value?

Replacing the unfavourable offtake with industry‑aligned treatment and refining charges should improve Tritton’s margins and cash flow, since the previous deal took a large share of revenue. Straits says the restructure will provide a cleaner, more transparent investment opportunity, but investors should note the company is taking on debt to fund the exit.

How is Straits funding the US$120 million termination payment?

Straits is covering the cost through a five‑year debt facility with Standard Chartered Bank. In addition, Credit Suisse has provided a US$50 million silver loan facility secured against Straits’ Mt Muro mine in Indonesia to support the company’s financing needs.

What are the key production and cost figures for the Tritton copper mine mentioned in the article?

Tritton has an estimated mine life of seven years and annual production of about 25,000 tonnes of contained copper. The mine’s current cash cost of production was reported at US$2.13 per pound, while the copper price at the time was around US$3.80 per pound.

What exactly were the treatment and refining (T&R) charges under the old contract?

Under the legacy contract, Straits effectively handed over about one‑third of the copper price in treatment and refining charges—substantially higher than the industry average of about 5%—which significantly reduced the company’s revenue from each pound of copper sold.

What role did JPMorgan play in the Tritton supply deal and what will change after the payment?

JPMorgan’s metals trading arm was the counterparty to the concentrate supply deal that imposed the high T&R charges. After Straits pays US$120 million, the agreement will be terminated and replaced by one with T&R charges in line with industry norms, removing the legacy burden.

What should everyday investors consider about the risks and benefits of this restructure?

The benefit is a cleaner asset and potentially improved profitability for Tritton once high T&R charges are removed. The key risks include additional debt from the Standard Chartered facility and the Credit Suisse silver loan, and the fact that improvements depend on execution of the new agreement and market copper prices. Investors should weigh the potential for better margins against the increased leverage.