EXHIBIT 10.26
SUMMO MINERALS CORPORATION
900 DENVER CENTER BUILDING
0000 XXXXXXX XXXXXX, XXXXXX, XXXXXXXX 00000
TELEPHONE: 303/000-0000 XXX: 303/000-0000
May 15, 1997
Xx. Xxxx Xxxxxxxxxxx
President and CEO
St. Xxxx Xxxx & Exploration Company
0000 Xxxxxxx Xxxxxx, Xxxxx 0000
Xxxxxx, Xxxxxxxx 00000
Dear Xxxx:
The purpose of this letter is to outline the basic terms and conditions, agreed
to as of May 1, 1997, whereby Summo Minerals Corporation ("SMC") and its
wholly-owned subsidiary, Summo USA Corp. ("SUSA") and St. Xxxx Xxxx &
Exploration Company and St. Xxxx Minerals Inc. ("St. Xxxx") propose to
restructure the ownership and finalize financing of the Lisbon Valley Copper
Project (the "Project") as described below (collectively the "Proposed
Transaction").
(I) Formation of Lisbon Valley Mining Company ("LVM")
1. LVM will be formed as a special purpose, U.S. domiciled, limited
liability company to own and operate the Project.
(II) SUSA Contributions to LVM
1. SMC will complete a private placement of equity and/or
subordinated convertible debt for at least US$6.2 million and SUSA
will contribute US$3.2 million in cash to LVM.
2. SUSA will contribute all rights to the Project to LVM, including
the associated Mining Contract, the Construction Contract, the
Acid Contract, the Power Contract, all Project permits, and
commitments from ING Capital Corporation and Xxxxxx Financial Inc.
(the "Banks") for a US$45 million senior debt facility (the
"Project Loan").
3. SMC/SUSA will provide a corporate guarantee of the Project Loan.
4. SUSA will contribute all rights to the Champion property to LVM.
(III) St. Xxxx Contributions to XXX
0. Xx. Xxxx will contribute 9,924,093 SMC common shares to LVM.
2. St. Xxxx will contribute US$4.0 million in cash to LVM.
3. St. Xxxx will contribute a US$5.0 million letter of credit for the
benefit of the Banks in satisfaction of the Bank's requirement
that LVM maintain a US$5.0 million Cash Reserve Account for the
life of the Project Loan. St. Xxxx will also provide a US$3.6
million letter of credit for the benefit of the Banks in
satisfaction of the Bank's requirement that LVM maintain a US$3.6
million Project Construction Cost Overrun Reserve account through
completion of the Project. If a letter of credit provided by St.
Xxxx is drawn upon by the Banks, the amount of any such draw shall
be treated as a capital contribution by St. Xxxx to LVM and will
be subject to the provisions of Section VI-3 below.
4. St. Xxxx will contribute its 1.5% NSR in the Champion property to
LVM.
(IV) LVM Capital Calls
1. If LVM requires additional capital, for example to fund Project
construction cost overruns or for Project working capital
requirements, LVM will notify SUSA and St. Xxxx of the amount of
the required capital contribution (a "LVM Capital Call") and their
respective share of the LVM Capital Call, which shall be
calculated in accordance with the sharing ratios described in
Section VI below. It is the expectation of SUSA and St. Xxxx that
each party will fund its respective share of any LVM Capital Call.
2. SMC and SUSA agree, if necessary, to arrange to fund their
proportionate share of any LVM Capital call through the issuance
of a subordinated convertible note to TIC in a maximum principal
amount of $1.5 million (the"TIC Note"). The TIC Note will be
convertible into SMC common stock and repayment of the TIC Note
will be the sole responsibility of SMC/SUSA.
3. If SMC/SUSA is unable to fund its proportionate share of the first
US$8.6 million of LVM Capital Calls pursuant to the provisions of
Section IV-2 above, or otherwise, St. Xxxx agrees to loan SMC/SUSA
its respective share of such capital call(s) for a period not to
exceed 60 days at an annual interest rate equal to the prime rate
plus one percent (A "Capital Call Loan"). Capital Call Loans will
be subordinated to the Project Loan, SMC's US$3.0 million note
obligation to Xxxxx & Root, the TIC Note and pari-passu with any
other senior indebtedness of SMC.
If SUSA does not repay a Capital Call Loan within 60 days, St.Xxxx
and SMC agree that such loan will be extended (an "Extended
Capital Call Loan") as follows:
(a) SMC will grant St. Xxxx with a two-year warrant to acquire one
common share of SMC for each Cdn$2.00 of unpaid principal and
accrued interest converted to an Extended Capital Call Loan.
Such common stock purchase warrants shall have an exercise
price equal to Cdn$1.25 (subject to customary anti-dilution
provisions).
(b) An Extended Capital Call Loan shall have a maximum term of two
years, shall accrue interest at an annual rate equal to 12%
and principal and interest shall be payable monthly.
(c) At St. Mary's option, for a period of two years, the principal
amount of the Extended Capital Call Loan plus accrued interest
shall be (i) convertible (in whole or in part) into SMC's
common stock at a conversion price equal to Cdn$1.25 (subject
to customary anti-dilution provisions), or alternatively, (ii)
exchangeable (in whole or in part) into an additional interest
in LVM which will increase St. Mary's ownership in the
profits, losses and operating cash flows of LVM in accordance
with Section VI-3 below.
(d) SMC agrees to provide St. Xxxx, during the period in which an
Extended Capital Loan is outstanding, with a security interest
in SUSA's ownership interest in LVM as well as SMC's other
assets in an amount equal to the outstanding principal and
accrued interest under an Extended Capital Call Loan.
4. The principal amount of St. Mary's letters of credit will be
reduced by the amount of any LVM Capital Call, with exception of a
LVM Capital Call arising from an expansion of the Project.
(V) Distribution of SMC Shares
1. The SMC common shares contributed to LVM by St. Xxxx will be
distributed by LVM to SUSA.
2. SUSA will in turn distribute the SMC common shares to SMC.
(VI) LVM Sharing Ratios
1. In consideration for its contributions to LVM, St. Xxxx will
receive a 55% interest ("St. Xxxx Sharing Ratio") in the profits
and losses, distributions of earnings and profits from operations,
and voting rights of LVM.
2. In consideration for its contributions to LVM, SUSA will receive a
45% interest ("SUSA Sharing Ratio") in the profits and losses,
distributions of earnings and profits from operations, and voting
rights of LVM.
3. Additional contributions to LVM by St. Xxxx or XXXX which are
disproportionate to the original Sharing Ratios set forth in
Section VI-1 and 2 above will receive credit equal to 125% of each
such disproportionate contribution for purposes of calculating
adjusted Sharing Ratios for SUSA and St. Xxxx.
4. The beginning stated capital positions of St. Xxxx and SUSA which
will be used as the base line for calculating adjusted Sharing
Ratios in Section VI-3 above are calculated as follows:
SMC common stock US$ 5,858,531
Property US$ 5,423,233
Cash St. Xxxx US$ 4,000,000
Cash SUSA US$ 3,200,000
Total US$18,481,764
St. Xxxx Beginning Capital Position: US$10,164,970 (55%)
SUSA Beginning Capital Position: US$ 8,316,794 (45%)
Total US$18,481,764
(VII) LVM Operating Agreement
1. SUSA and St. Xxxx agree to enter into a mutually acceptable
operating agreement (the "Operating Agreement") which shall
appoint SUSA to serve as operator of the Project. LVM will
reimburse SUSA for its overhead expenses incurred as operator of
the Project. Such reimbursement will be a fixed amount mutually
agreed to in advance, subject to an annual increase based on the
CPI index, and will be payable monthly. SUSA and St. Xxxx agree
that disputes or an inability to resolve issues requiring a 65%
majority vote under the Operating Agreement pursuant to Section
VII-2 below will be resolved through arbitration in accordance
with a mutually acceptable mechanism to be specified in the
Operating Agreement.
2. The Operating Agreement will provide that affirmative votes
representing at least 65% of the ownership of LVM will be required
to (i) approve LVM's annual budgets, (ii) commence, suspend or
terminate operations of the Project, (iii) authorize the sale or
disposition of the Project (concurrence not to be unreasonably
withheld), (iv) remove the Project operator or appoint a new
operator, (v) incur additional senior indebtedness, or (vi) pledge
LVM's assets.
(VII) Other Matters
1. St. Xxxx and SUSA agree to enter into a mutually acceptable
agreement (the "Option Agreement") whereby St. Xxxx will xxxxx
XXXX a non-transferable, one-year option to acquire up to a
maximum 5.1% interest in LVM from St. Xxxx for a cash payment
equal to US$450,000 per each one percent interest in LVM acquired
by SUSA, up to a maximum of 5.1% interest in LVM for US$2,295,000.
2. SUSA agrees to pay an annual cash fee to St. Xxxx equal to 1% of
the outstanding principal amount of the letters of credit
contributed by St. Xxxx to LVM for the benefit of the Banks. SUSA
further agrees to reimburse St. Xxxx for any legal or
administrative costs incurred by St. Xxxx in arranging such
letters of credit.
This letter does not constitute a binding obligation to proceed with or to
complete the Proposed Transaction. The Proposed Transaction is subject to (i)
the issuance of all required Project permits and resolution of the outstanding
appeal of the Project's permits in a manner satisfactory to both SUSA and St.
Xxxx, (ii) the consent of the Banks, (iii) the written agreement of a majority
of the minority of SMC's shareholders to vote in favor of the Proposed
Transaction, (iv) approval of the Proposed Transaction by all necessary
regulatory and tax agencies including the British Columbia Court, the Ontario
Securities Commission, Revenue Canada and the TSE, (v) approval of the Proposed
Transaction by the necessary majority of SMC's minority shareholders at a
Special General Meeting of such shareholders (vi) SMC's receipt of a
satisfactory opinion as to the fairness of the Proposed Transaction, (vii) St,.
Mary's receipt of a satisfactory independent valuation of its SMC common stock
contributed to LVM, and, (viii) the final approval of the Proposed Transaction
by the respective Boards of SMC and St. Xxxx.
If the foregoing correctly sets forth your understanding, please so indicate by
signing and returning to us an executed copy of this letter. We look forward to
working with you towards the successful completion of the Proposed Transaction.
Sincerely,
SUMMO MINERALS CORPORATION
Xxxxx X. Xxxxx
V.P. Finance and CFO
Accepted and agreed as of the date of this letter agreement:
ST. XXXX XXXX & EXPLORATION COMPANY
-------------------------------------
Xxxx X. Xxxxxxxxxxx
President and CEO
