a x i u m

1. a x i u m CORPORATE | FINANCE | LAW Rod C. McKeenFounding PartnerAxium Law Group Joseph P. GiuffreFounding PartnerAxium Law Group So You’ve Found an Ore Body – Now What? What Junior Mining Companies Need to Know About Moving to Production

2. a x i u m CORPORATE | FINANCE | LAW Introduction

3. Introduction • Historically … • Exploration companies either sell the whole company or sell the whole project, or … • They enter into a joint venture with a major company for a passive minority interest

4. Introduction • However, recently … • An increasing number of exploration companies are becoming or looking to become active producers

5. Introduction • Picture this … • Assume a scenario where a junior company owns a 100% (or substantial majority) interest in a development stage mineral deposit • A preliminary feasibility study (or detailed scoping study) has delineated the deposit and economic viability

6. Introduction • Picture this … continued • Management wants to be integrally involved in advancing the project to production

7. Introduction • Picture this … continued • Significant additional funding is required to move through the feasibility and construction stages to production

8. a x i u m CORPORATE | FINANCE | LAW Initial ConsiderationsGetting Organized

9. Getting Organized • Make a Plan • You’re looking at a fundamental transition in your company • You need a strategic plan that focuses primarily on access to financing and getting your house in order

10. Getting Organized • Takeover Response Planning • This might be a good time to adopt a “poison pill” shareholders’ rights plan

11. Getting Organized • Confidentiality Agreement • Review and upgrade your existing Confidentiality Agreement for your technical data • Include a standstill provision that would prevent a prospective or actual joint venture partner from acquiring your company for a reasonable time - unless it’s a friendly deal

12. Getting Organized • Be One With Your Deal … • If the property is currently held in a joint venture, consider ways to unitize the interest into one company, i.e. merger or acquisition • This will improve access to financing

13. Getting Organized • Buy Out Existing Royalties • Look at buying out existing property royalties • These additional burdens can be problematic at the financing stage

14. Getting Organized • Know Your Options • Consult with key shareholders and financiers about the feasibility or desirability of the available strategic options • Your choices will basically be: find a joint venture partner or go it alone and seek financing

15. Getting Organized • Assess and Upgrade Your Team • Add key management members and line up key advisers with specific experience, e.g. technical consultants, legal advisors and financial advisors

16. Getting Organized Assess and Upgrade Your Due Diligence Readiness

17. a x i u m CORPORATE | FINANCE | LAW Due Diligence Readiness

18. Due Diligence Readiness • Get technical data organized…. • Set up a data room with all technical information, reports, current permits and licenses and other technical data • The data room should be well organized and comprehensive

19. Due Diligence Readiness • Get ready for legal due diligence review • Prepare a binder of all material agreements and obtain English translations • Get minute books up to date • Pay any assessment and other fees to ensure all mineral concessions are in good standing

20. Due Diligence Readiness • Confirm regulatory affairs, permits and title opinions are in order • Ensure compliance with your continuous disclosure requirements including 43-101 reports • Obtain and/or confirm receipt of required permits • Obtain and/or update title opinions • Address outstanding environmental issues

21. Due Diligence Readiness • Financial affairs need to be in order • Financial statements are be prepared in accordance with GAAP • Books and records are accurate and complete with updated financial and operational reporting • A financial plan and budget is in place for addressing debt/liabilities

22. a x i u m CORPORATE | FINANCE | LAW Letters of Intent / Joint Ventures

23. Letters of Intent • LOI is a tool for negotiations • Letter of intent is a tool used to record the preliminary understandings and substantive terms of a transaction in contemplation of a formal agreement • It provides a structure for negotiation process leading up to finalizing the formal agreement

24. Letters of Intent • Keeps negotiation process moving • Encourages parties to raise difficult deal points early on and try to resolve them before negotiating the formal agreement • Ensures parties adhere to the agreed terms when negotiating the formal agreement

25. Letters of Intent • The types of Letters of Intent • A Letter of Intent can be binding, non-binding or a hybrid with binding and non-binding provisions. • Avoid any confusion by using express language to specify any sections that are binding and those that are non-binding

26. Letters of Intent • What provisions should be binding? • It is common for substantive provisions to be non-binding, as parties will be reluctant to deviate from these agreed terms in negotiation of the formal agreement • Any substantial deviation from agreed substantive terms will likely put the transaction in jeopardy

27. Letters of Intent • Common binding provisions… • Some common binding terms that potential joint venture parties would expect to see in the LOI: • A confidentiality provision to encourage negotiations, allow due diligence investigations and prevent unauthorized use of confidential information

28. Letters of Intent • Common binding provisions… • An exclusivity/non-solicitation clause to restrict negotiations and restrict discussions with third parties while the LOI is in effect • A stand-still clause prevents certain actions outside of the ordinary course of business that may cause an adverse effect on the property or negotiations without prior consent

29. Letters of Intent • Common binding provisions… • A good faith clause that requires each party to negotiate the formal agreement in good faith • An access to information clause to allow parties to get access to all necessary information to conduct due diligence

30. Letters of Intent • Common binding provisions… • A deadline clause to set a “drop dead date” when the parties obligations to continue to negotiate the formal agreement come to an end and the parties can enter into discussions with another party

31. a x i u m CORPORATE | FINANCE | LAW Joint Venture Considerations

32. Joint Venture Considerations • Typical mining joint venture • Most often a mining joint venture will take the form of an option/joint venture • One party owns the property and the other party earns in and acquires and interest by providing certain financing or making expenditures to complete work on the property (i.e. a feasibility study)

33. Joint Venture Considerations • What are some of the considerations • When a junior mining company enters into a JV with a major or mid-tier producer the considerations are more complex • The junior is more dependant on the major for expertise, financing and development which result in detailed joint venture negotiations

34. Joint Venture Considerations • Considerations for development and funding • Determine the basis for making a development decision (i.e. positive feasibility) and how funds are to be secured in order to proceed to development (i.e. equity/debt) • The junior partner often does not have or may not have a controlling interest or the financial ability to fund its share of the development program costs

35. Joint Venture Considerations • Engage outside technical and financial advisors early if required • Juniors are typically more dependent on outside technical consultants to assist in negotiating parameters for and reviewing a feasibility study for regulatory compliance and securing financing • Consider the need to engage a financial advisory group to assist in raising your share of development funding within the time required

36. Procedure for Development • Obtain advice for creating the appropriate joint venture structure • Joint ventures can be structured in a variety of ways including general partnerships, a limited partnership, corporate entity, trust, unincorporated joint venture, etc. • Each type of structure raises tax and liability concerns and a certain structure may be required by a project financing lender

37. Procedure for Development • What should be in the feasibility study • It should be comprehensive and deal with all of the various aspects of permitting, construction and operation of a mine including infrastructure • Include social, economic and political considerations

38. Procedure for Development • Ensure the feasibility study is bankable • Make it bankable in order for you to seek third-party financing for your share of costs unless you can negotiate with the major to arrange project debt and your equity participation • Consult with the preparer to fully understand the parameters to be used, including projected costs and required rate of return for the project to be considered “positive”.

39. Procedure for Development • Who will be operator? • Usually the major takes over as operator at feasibility stage but you may be able to negotiate for your technical/operating people’s involvement on the ground • After feasibility, operatorship may be based on who has the largest percentage interest, typically also the major

40. Procedure for Development • How are decisions made? • Most decisions will be through the management committee. The party with the greatest interest controls the management committee • Negotiate for unanimous or super-majority decision making on fundamental joint venture issues

41. Procedure for Development • Seek a right to proceed with the project • Negotiate for the right to make a decision to proceed and become the operator if the operator is not prepared to proceed to feasibility or to production • This can be important if the major has other priorities and decides to put a good project “on the shelf”

42. Procedure for Development • Development funding • A portion of development financing is often done through third-party lenders as project debt to get benefits of leverage • Typically there are equity and debt portions to development financing and the junior participant may want to minimize the equity portion • Try to negotiate for the major to arrange the project debt financing

43. Procedure for Development • Seek a commitment to fund your equity portion • Each participant will usually be responsible for its own share of the equity portion of the project debt unless you can negotiate for the major to provide funding for some or all of your equity share of the development • Try to secure a commitment from the major to provide any required completion guarantees

44. a x i u m CORPORATE | FINANCE | LAW Financing Considerations

45. Financing Considerations • Look at all the options … • Talk to different types of financiers (banks, merchant banks, equity brokers) • Find out what they are looking for and what approval process they will go through

46. Financing Considerations • There is frequently a need to mesh equity and debt financing … • Plan carefully to avoid conflicts, i.e. convertible debt vs. conventional debt and “chicken and egg” scenarios

47. Financing Considerations The Mix of Debt and Equity Will be Driven Primarily by Market Conditions and the Capital Costs of the Project

48. Financing Considerations • The Pain Threshold • There is a point below which the time, cost and aggravation of a conventional project debt financing will not make sense for a junior company • i.e. if you need $20-$30 million and equity markets are good – avoid conventional debt

49. Financing Considerations • Conventional Debt Financing Comes at a Heavy Price • Ancillary costs and fees • Drain on management time • Long-term restrictions (ie. hedging and bank requirements and the bank wanting to, in effect, sit in your board room

50. Financing Considerations • Conventional Debt Financing Comes at a Heavy Price • The relationship with the lender is quite different than with an equity broker. It is more long term, closer and more interventionist.