Terraco Gold Announces Acquisition of Royalty Option on the Barrick Gold / Midway Gold Spring Valley Gold Deposit, Nevada

Terraco Gold Announces Acquisition of Royalty Option on the Barrick Gold / Midway Gold Spring Valley Gold Deposit, Nevada and a US$5 million Cash Infusion

Terraco Gold Corp. December 21st, 2011 Press Release 

Terraco Gold Corp. (TSX.V: TEN | US: TCEGF) announced that it has entered into a  three way transaction whereby Terraco will have the option to acquire an interest in a net smelter returns royalty (“NSR”) on part of the Spring Valley Gold Project located in Pershing County, Nevada.  The Spring Valley Project is a joint venture between Barrick Gold Corp. and Midway Gold Corp., Terraco’s 100%-owned Moonlight Project located along strike and adjoins the north of the Spring Valley Project.

Highlights Include:         

• A third party Strategic Investor will acquire 5% of net smelter returns (when gold prices exceed US$700 per ounce and on production greater than 500,000 ounces of gold from the claims covered by the Royalty Vendor’s NSR).
• The Strategic Investor will pay US$20,000,000 to the Royalty Vendor and US$5,000,000 to Terraco.
• Terraco will retain an option to acquire 2.5% of the NSR Royalty (based on gold being above $700 per ounce), for US$12,500,000 from the Strategic Investor for a period of 5 years from the closing of this transaction or within 1 year of a change of control of Terraco.
• Terraco will also issue 4,000,000 shares to the Royalty Vendor for a right of first refusal on all or part of a separate 1% area of interest royalty owned by the Royalty Vendor, also located on the Spring Valley Project.
• As partial consideration for the US$5,000,000 cash infusion, Terraco has issued to the Strategic Investor a 1% net smelter return royalty on its Moonlight Project and a 0.5% net smelter return royalty (and up to a 1.0% net smelter return royalty in certain circumstances) on its Almaden Gold Project in Idaho (“Almaden Project”). The Strategic Investor will also be issued 1,000,000 warrants with an exercise price of CAN$0.35 per share for a period of 5 years, subject to early expiry at the discretion of Terraco if Terraco’s shares trade at CAN$0.70 or higher for 20 consecutive trading days.
• The Strategic Investor specializes in funding the advancement of mining projects. Terraco and the Strategic Investor have structured a right of first refusal to finance Terraco’s Almaden Project and an off-take for 30% of the minerals produced from the Almaden Project during the life of the mine.
• Terraco intends to use the US$5,000,000 proceeds to fund continued exploration programs at both its Almaden and Moonlight Projects.
  

“This transaction affords Terraco the right to acquire a significant royalty on a Barrick-led gold project neighbouring our 100% owned Moonlight Project and gives Terraco the ability to fully fund its 2012 exploration activities without the need for additional shareholder dilution.  Furthermore, this transaction increases Terraco’s presence in the growing Humboldt Range where Coeur D’Alene operates the Rochester mine and Barrick has spent nearly US$16,000,000 towards earning a 60% interest in Spring Valley Project”,

--- Todd Hilditch, President and CEO 

Terraco Featured in Dr. Michael Berry's Morning Notes

Dr. Michael Berry

Wednesday December 21st, 2011

Morning Notes 

"We learned this AM that Terraco Gold (developing the Almaden gold property in Idaho and the Moonlight gold / silver property in Nevada) has just completed a non-dilutive $5 million financing. How can this be, you ask? How does one pull off a non-dilutive financing in this market environment?  In the case of Terraco Gold, management thinks outside the box...  I am certain, this AM, that Barrick must be wondering what happened. After all Barrick should rightly have been in line to acquire the royalty. Such is the tempo in “Good Times at Terraco.”
 

But there is more. Terraco now has a strategic partner. The company reports that the unnamed partner (we will find that identity out soon) has the right to purchase 30% of the off-take from Terraco’s Almaden property and first right to provide development funding for Almaden. The strategic partner receives a 1% royalty on Moonlight and ½% royalty on Almaden.  

The Option:  

Let us assume that Spring Valley comes into production in 2017 – 5 years from now with an annual production of 300,000 ounces of gold. Further that the average price of gold over the following 10 years is $1,000 per ounce and a discount rate of 5%. We assume that Midway and Barrick prove up 3 million ounces of recoverable gold which we believe is a low ball.  

In this case Terraco’s option on 2.5% of the sliding royalty is worth $47 million in present value terms. 

Using the Black Scholes option pricing model for Terraco’s option valuation we have:

C Terraco = S* N(d1) – X* e-rft * N(d2)

C Terraco = 47,000,000*(1) – 12,500,000* (1)*.86

= $36,250,000 (Value of Terraco’s Call option on the sliding royalty)

Terraco’s 5 year call option is worth approximately $36 million today given our assumptions. We think this approximation is conservative. We assume the call ends in the money and it will be exercised (Barrick will bring Spring Valley into production). Since there are 167 million shares out (fully diluted) the option in the deal is worth $.22 alone. This is higher than Monday’s closing price.

 That valuation assumes 3 million ounces proven and recoverable and an average gold price of $1,000 per ounce. 

So management of Terraco has neatly secured financing needs for another year or more (to be determined), avoided the dilution death knell of so many Incubator stocks, aligned itself with a major mining finance group and secured potential future financing and a potential off-take for its Almaden project. 

Here are a few bullets from Terraco on the important points in this transaction: 

1. Terraco has partnered on this transaction with a strategic investor and in a 3-way agreement whereby the strategic investor is buying 5/7ths of a sliding scale royalty on the Spring Valley Project 

2. Terraco has the option to purchase one-half of the sliding scale royalty from the (see below) for USD$12,500,000 any time in the next 5 years or within one year of a change of control 

3. Terraco will receive a non-dilutive cash infusion of USD$5,000,000 

4. Terraco's strategic partner has financed 3 mining projects this year to production and will provide project funding on a first right for the Almaden Project as well as purchase in an off-take 30% of the mineral produced. They will receive from Terraco a 1% royalty on the Moonlight Project and 0.5% on the Almaden Project 

5. Terraco is issuing 1,000,000 share purchase warrants to the strategic partner at 57% premium to the market…$0.35 for 5 year subject to a call provision if the shares of Terraco trade at $0.70 or great for 20 trading days.” 

We are advisors to Terraco Gold and own shares in the company."

--- Dr. Michael Berry

Wednesday December 21st, 2011

Morning Notes  

Johnston-Sequoia Commentary:

Just over two weeks after Rye-Patch Gold & Midway Gold's blockbuster announcements along the evolving Humboldt District (Pershing Country, Nevada) - Todd Hilditch puts together one of the strongest shareholder value creation deals we've seen.  To have the ability for a company the size of Terraco to be essentially carried on an option to purchase a 2.5% NSR royalty on a deposit that has grown by 186% in the past six months to 3,450,000 ounces of gold (still open to the north towards Terraco's Moonlight Project & at depth) is nothing short of outstanding.  In addition, Terraco's Chief tacked on a non-dilutive $5,000,000 financing (which will fully fund Terraco's exploration activity in 2012) and a strategic partner that will have the financial ability and expertise to take Almaden to the next level. Terraco's announcement is yet another a milestone advancement in this evolving district.  

We include a photo of yours truly standing on the Black-ridge Fault (on the Moonlight property approximately 60 feet from Spring Valley).  We shall continue to watch with keen interest the evolution of this Humboldt district. Terraco remains our top overall pick from a pure value investor standpoint. We are advisors of Terraco and own shares of the company.  As always - please do your own due diligence & have a safe and wonderful holiday season.  For your editor - today is my 32nd birthday & I am looking forward to spending the evening with my wife Ali & son Joey.