IKN

The end section of a note on Novo Resources (NVO.to) in IKN623, out this weekend:

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“Summing up so far, in 3q20 Sprott committed to NVO around U$39m in loan and placement money. From that, Sprott has already recouped around U$9.5m in share sales, fees and, thanks to a 19% effective rate, interest payments that will continue to pay Sprott around U$1m per quarter until loan maturity. You’d surely think that is great business and as a loaner of money, want more of the same. Therefore it’s strange to see Sprott now getting cold feet (11):

“…Novo has renegotiated the second tranche of the Facility to total US$15 million (subject to a lender’s 2% cash discount), inclusive of the US$5 million mentioned above, available to be drawn until September 30, 2021, at Novo’s discretion. The remaining US$10 million available under the renegotiated second tranche is subject to the satisfaction by Novo, or waiver by Sprott, of certain…”

Instead of U$25m, Sprott lent NVO U$5m with another U$10m available assuming certain milestones are met (i.e. they make money), all that at the same usury terms. We agree that Sprott had no obligation to go to U$60m unless it was given a pre-feas and NVO delivered a PEA, so it has valid contractual reasons to step back. However, it’s clear NVO needed the money and wanted more, so the reticence of the financier that knows this company best is another red flag. At this point, we also remind readers how NVO management swore to all and sundry before the ramp into production that it wouldn’t even need to tap the other U$25m before the mine was profitable, instead it has limped to the end of 1q21. We also know NVO needed more money, because less than a week after being refused by Sprott the company announced this (12):

Novo Announces C$22 Million Private Placement Led by Clarus Securities and Stifel GMP

The C$2.55 units are made up of a share and a half warrant with a $3.00 strike over three years. I don’t know how many financial red flags you need, I passed my minimum a long time ago on this stock, including making previous warnings on corporate oversight about a company that has the same non-financial company founder as Chair and President (and for much of its early years, its CEO).

With a pro-forma 240.7m shares out and this weekend’s C$2.31, NVO is a C$556m market cap with a lot of potential downside. I’m fully aware of the polemic and controversial nature of this stock and the story around it, but we’ve seen time and again in this sector how good assets are ruined by bad managers and NVO is another example of the dangers of letting an exploreco run by geologists go into debt with financiers. In this case, a 19% interest loan with heavy fees is the type of loan you take at the last moment, to get the mine up and running and then pay it down and off. That’s clearly not the situation here, about ten minutes with the PEA shows that grades run through the mill to date cannot possibly be economic and until it’s paid off (the placement? If so, extremely improvised), this loan will be a welter burden around the neck of NVO. No matter what your opinion of Beaton’s Creek the project may be, this company has been hobbled badly by financial decisions and is best avoided, at least until it’s on a stable financial footing. By its 1q21 and 2q21 financials we should know whether it runs or fails.