It is a very odd situation.
I have no idea what is in the JV agreement in the fine detail, but the COB Prospectus, and the updates given in public, show no mechanism of dilution available to BPL. They set COB on a course, like a windup toy, to deliver COB a DFS by 2019, and give BPL a royalty (money for nothing....) and a $8.5M sweetener (chips for free). They also, like Frankenstein's Monster, gave COB free will and independent thinking, which appears to be the mistake. Now they are in Dire Straits.
The dilution clause which, realistically, you find in most JV agreements, acts like a safety valve for the vendor. Companies vend out to JVprojects they either lack the technical capacity, financial capacity or logistical capacity to progress themselves. If you lack financial capacity, you put in a duilution clause so that the incoming JV partner can earn their way to 100% with a residual royalty, so that the vendor can skip out on having to pay the bills if it is unable to afford them.
BPL seems to have missed this, and COB did not miss this. When faced with the Wood PLC report, it seems COB went into 4D chess mode and very quickly came to a series of conclusions;
- The JV Agreement was unworkable
- The JV Agreement favors the majority partner (COB)
- The earn-in period and milestone goals were unfavorable to COB because they imposed Dire Straits level idiocy
- Lack of dilution for BPL was a massive risk to BPL, but massive leverage for COB
- COB could force BPL into a corner via ending the earn-in period, maintain a 70/30 arrangement, and impose the 30% costs on BPL which was unable to pay and unable to dilute out (on spec)
- This would provide an opportunity to clarify and amend either the earn-in milestones, or institute a dilution clause, allowing COB to earn toward 100% with residual royalty for less money and at a more sensible rate of knots, than carrying on
BPL should wake up and smell the napalm in the morning, and just tidy this up. My advice, as unsolicited as it is;
- Renegotiate the Earn-In and JV Agreement
- Institute a dilution clause such that BPL gets a DFS in a reasonable time (end-2020?) and COB has to spend the budgeted $30M to get there and get 100% with residual royalty, or spend $15M to get 90% and free carry to decision to mine
- Give up on the $8.5M cash splash; it gone.
This would de-risk the situation for BPL. Trangie Johnson and pals really are not showing their nous here at the moment, IMO, and need to defuse this time bomb. DO they think they can claim a standstill because as 30% partner they think they can convince a judgethat all decisions need to be unanimous? That is like saying they think their 30% trumps the 70% COB has.
And yes, unfair contracts are a thing. But it's not sure whether a judge would decise it's unfair on COB or BPL...because it could be argued it's unfair on COB from the beginning.
