Ely Gold Royalties (ELY.V) is probably one of the strongest performing exploration companies this year as the company’s share price has quadrupled to around C$0.40 after having completed a financing at C$0.11 per share in December of last year.

Although Ely should still have a very healthy treasury (as we expect some of the C$0.22  warrants that were issued as part of last year’s placement will also be exercised, resulting in an additional cash inflow), it also entered into a line of credit agreement with Eric Sprott whereby Ely will be able to draw down up to C$6M in convertible debentures.

This financing isn’t cheap. Ely will have to pay 10% per year on the funds that have been drawn down and 2.5% on the undrawn funds so even if the company elects to never draw down a single cent from the facility, it would still be on the hook for C$150,000 in annual stand-by payments. Each drawdown of the credit facility will be structured as a convertible debenture maturing two years after the respective issue dates, and on the maturity date, Sprott can elect to take the repayment in cash or in stock at a pre-determined price of C$0.37/share.

Although Ely doesn’t really need the cash, it looks like the company wanted to maintain a certain level of financial flexibility at a reasonable cost. The main issue would be to repay the debt in cash if A) the entire amount has been drawn down and B) the share price is trading below C$0.37 on the maturity date of the convertible securities.

Ely also got rid of the National Inflation Association after the ‘consultant’ published overpromotional pieces on the company. Surprisingly, the share price has held up well now the promotion has ended.

Disclosure: The author no longer has a long position in Ely Gold Royalties.

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