Why is OTPP Financing a Canadian Mining Project?

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Ontario Teachers’ recently announced it is partnering up with Sprott in a US$225 million funding for a world class Canadian mining project:

Ontario Teachers’ Natural Resources group has today partnered with Sprott Resource Streaming and Royalty, a global investment manager specializing in precious metals and real assets investing, in the US$225m issuance of a royalty convertible note by Seabridge Gold’s (TSX:SEA) (NYSE:SA) wholly-owned subsidiary, KSM Mining ULC.

The note will pay a fixed coupon of 6.5% and is to be exchanged at maturity for a silver royalty on a KSM project in northern British Columbia, Canada.

Christopher Metrakos, Managing Director, Natural Resources, at Ontario Teachers’ said: “This investment highlights Ontario Teachers’ growing commitment to invest in the global metals industry, where we can achieve inflation protection, real returns and cash flow diversification. This is an innovative structure that provides excellent exposure to a combination of fixed returns and long-term silver prices.  KSM is a world class Canadian mining project; we are proud that our funding will accelerate its development.” 

The proceeds of this sale will be used to continue ongoing physical works at KSM and advance the project towards a designation of ‘substantially started’ ahead of July 2026.

Seabridge Gold put out a detailed press release going over this transaction:

Seabridge Gold (TSX: SEA) (NYSE: SA) announced today that its wholly-owned subsidiary, KSM Mining ULC ("KSMCo") has agreed to sell a secured note ("Note") that is to be exchanged at maturity for a silver royalty on its 100% owned KSM project located in northern British Columbia, Canada, to Sprott Resource Streaming and Royalty Corp. ("Sprott") and Ontario Teachers' Pension Plan ("Ontario Teachers'") (jointly, the "Investors") for US$225 million (approximately C$285 million at the current exchange rate). The proceeds of this sale will be used to continue ongoing physical works at KSM and advance the project towards a designation of 'substantially started'.

Seabridge Chairman and CEO Rudi Fronk explained: "This fund-raising is intended to move KSM towards accomplishing three main objectives without the requirement for shareholder dilution:

  • Achieve the 'substantially started' designation which ensures the continuity of the KSM project's approved Environmental Assessment Certificate ("EAC") for the life of the project;
  • Complete key tasks which support construction readiness and will shorten the construction period once a construction decision has been made; and
  • Enhance the KSM proposition in our joint venture negotiations by securing the EAC, further de-risking the project, and accelerating the construction timetable."

Key terms of the Note and silver royalty include:

  1. When the Note matures, the Investors will use all of the principal amount repaid on maturity to purchase a 60% gross silver royalty (the "Silver Royalty") upon the first to occur of:
         a. commercial production being achieved at KSM; and
         b. either the 10-year anniversary, or, if the EAC expires and the Investors do not exercise their right to put the Note to KSMCo (described below), the 13-year anniversary of the issue date of the Note.

  2. Prior to its maturity, the Note bears interest at 6.5% per annum, payable quarterly in arrears. KSMCo can elect to satisfy interest payments in cash or by delivering Seabridge common shares.

  3. KSMCo has the option to buyback 50% of the Silver Royalty, once exchanged on or before 3 years after commercial production has been achieved, for an amount that provides the Investors a minimum guaranteed annualized return.

  4. If project financing to develop, construct and place KSM into commercial production is not in place by the fifth anniversary from closing, the Investors can put the Note back to KSMCo for US$232.5 million, with KSMCo able to pay such amount in cash or by delivering Seabridge common shares at its option. This right expires once such project financing is in place. If the Investors exercise this put right, the Investors' right to purchase the Silver Royalty terminates.

  5. If KSM's EAC expires at anytime while the Note is outstanding, the Investors can put the Note back to KSMCo for US$247.5 million at any time over the following nine months, with KSMCo able to satisfy the put in cash or by delivering Seabridge common shares at its option. If the Investors exercises this put right, the Investors' right to purchase the Silver Royalty terminates.

  6. If commercial production is not achieved at KSM prior to the tenth anniversary from closing, the Silver Royalty payable to the Investors will increase to a 75% gross silver royalty (if the EAC expires during the term of the Note and the corresponding put right is not exercised, this uplift will occur at the thirteenth anniversary from closing).

  7. No amount payable may be paid in common shares of Seabridge if, after the payment, any of the Investors would own more than 9.9% of Seabridge's outstanding shares.

  8. KSMCo's obligations under the Note will be secured by a charge over all of the assets of KSMCo and a limited recourse guarantee from Seabridge secured by a pledge of the shares of KSMCo.

  9. Since the KSM project is expected to be operated through joint ownership of KSMCo, the Note and Silver Royalty would thereby become obligations of a future joint venture to develop KSM.

Rudi Fronk, Seabridge's Chairman and CEO, stated: "We are delighted to have Sprott and Ontario Teachers' as partners at KSM. Although KSM is best known for its mineral reserves and resources of gold and copper, the project also hosts a large inventory of silver. In KSM's latest Technical Report, silver accounts for less than 3% of projected KSM revenues, with the transaction representing a very small charge against the project's future total revenues. Furthermore, the transaction does not require share dilution which furthers our long-standing strategy of providing the industry's best leverage to gold as measured by ounces of gold per share."

Michael Harrison, Managing Partner at Sprott, commented: "We are very pleased to enter into this partnership with Seabridge and Ontario Teachers' to provide catalytic capital to advance KSM. KSM is Canada's largest gold-copper-silver development project and an outstanding economic opportunity that we confidently expect to become one of our longest-life silver royalties. Seabridge has done an excellent job exploring, engineering and de-risking KSM, including securing an approved Environmental Assessment and building strong relationships with its local indigenous peoples. We support the plan to continue advancing substantial start activities at KSM while Seabridge secures an operating partner."

Christopher Metrakos, Managing Director, Natural Resources, at Ontario Teachers' said: "This investment highlights Ontario Teachers' growing commitment to invest in the global metals industry, where we can achieve inflation protection, real returns and cash flow diversification. This is an innovative structure that provides excellent exposure to a combination of fixed returns and long-term silver prices. KSM is a world class Canadian mining project; we are proud that our funding will accelerate its development."

Under the B.C. Environmental Assessment Act, a project's EAC is subject to expiry if the project has not been 'substantially started' by the deadline specified in the EAC. However, if the B.C. Minister of Environment and Climate Change Strategy (the "Environment Minister") determines that a project has been 'substantially started' before the deadline, the EAC remains in effect for the life of the project. KSM's EAC deadline is July 29, 2026. In determining whether a project has been 'substantially started', the Environment Minister assesses each project separately on whether sufficient physical work has been completed prior to the EAC deadline.

"We are planning on staying well ahead of the deadline by getting the work done as early as we can," said Fronk. "This financing provides most of the capital necessary to reach this objective as well as having the added advantage of cutting time from the construction schedule once a construction decision has been made."

Examples of B.C. mining projects that have been previously determined to have been 'substantially started' include Galore Creek and Kitsault.

BMO Capital Markets is acting as financial advisor and Blake, Cassels & Graydon LLP is acting as legal counsel to Seabridge in connection with the transaction. Fasken Martineau DuMoulin PPL is acting as legal counsel to Sprott on this transaction.

Closing of the transaction is expected on or about March 15, 2022.

Seabridge holds a 100% interest in several North American gold projects. Seabridge's assets include the KSM and Iskut projects located near Stewart, British Columbia, Canada, the Courageous Lake project located in Canada's Northwest Territories, the Snowstorm project in the Getchell Gold Belt of Northern Nevada and the 3 Aces project set in the Yukon Territory. For a full breakdown of Seabridge's mineral reserves and mineral resources by category please visit the Company's website at http://www.seabridgegold.com.

None of the Toronto Stock Exchange, New York Stock Exchange, or their Regulation Services Providers accepts responsibility for the adequacy or accuracy of this release.

All reserve and resource estimates reported by the Corporation were calculated in accordance with the Canadian National Instrument 43-101 and the Canadian Institute of Mining and Metallurgy Classification system. These standards differ significantly from the requirements of the U.S. Securities and Exchange Commission. Mineral resources which are not mineral reserves do not have demonstrated economic viability.

So, why is Ontario Teachers' investing  US$225m along with Sprott to develop KSM Mining's (a wholly owned subsidiary of Seabridge Gold)  project in Northern British Colombia?

Christopher Metrakos, Managing Director, Natural Resources, at Ontario Teachers' states it clearly:  

"This investment highlights Ontario Teachers' growing commitment to invest in the global metals industry, where we can achieve inflation protection, real returns and cash flow diversification. This is an innovative structure that provides excellent exposure to a combination of fixed returns and long-term silver prices. KSM is a world class Canadian mining project; we are proud that our funding will accelerate its development."

The Seabridge press release outlines the key terms including this one: "Prior to its maturity, the Note bears interest at 6.5% per annum, payable quarterly in arrears. KSMCo can elect to satisfy interest payments in cash or by delivering Seabridge common shares."

This entire deal also adds an inflation protection hedge to Ontario Teachers' because if we enter a prolonged inflationary environment, precious metals will continue to be bid up:

But the way the deal is structured, it offers nice downside protection for the investors -- Sprott and Ontario Teachers' -- and a great upside kicker too once commercial production is achieved and demand remains strong.

OTPP is structuring its commodity deals very carefully here and it should, they swing hard both ways.

When I tell people I obsess over deflation and inflation, there's a reason, if you get it wrong, it will cost you dearly over the long run.

A good inflation hedge is gold and you'll notice gold shares are breaking out here:

I'm less convinced about junior gold miners here although they may be breaking out too:

Will this rally in commodities and precious metals continue or fizzle? Should you buy the breakout or fade the rally?

I have no clue, there's a lot of geopolitical risk driving these commodity moves now, including oil, so it's hard to make a long-term call.

But again, it's critical to understand OTPP isn't betting the farm here and it has structured a nice deal with yield (downside protection) taking into account its long-term liabilities.

Also remember that OTPP has inflation AND deflation hedges as it should have and these investments are part of its inflation sensitive portfolio.

In late January, I discussed how OTPP took direct ownership of approximately 870,000 acres of timberland in throughout the US South. You can read about this deal here. 

Why buy timberland? Why finance a Canadian mining project? It's all part of their inflation sensitive portfolio and in the case of timberland, it adds to the sustainable investing portfolio which is very important to Teachers'.

In other related news, OTPP and Macquarie Asset Management recently completed the acquisition of a stake in Puget Holdings:

 Macquarie Asset Management (“MAM”) and Ontario Teachers’ Pension Plan Board (“Ontario Teachers'”) today announced the closing of an agreement to jointly acquire a 31.6 per cent stake in Puget Holdings (“Puget”) from Canada Pension Plan Investment Board (“CPP Investments”). The close of the transaction comes after approval by regulatory agencies including the Washington State Utilities and Transportation Commission and the Federal Energy Regulatory Commission.

Puget’s primary operating subsidiary, Puget Sound Energy (“PSE”), is the oldest and largest electric and natural gas utility in the State of Washington, serving approximately 1.2 million electric customers and 900,000 natural gas customers.

“We are thrilled to be reinvesting in Puget, a high-quality company with core infrastructure assets,” said David Fass, Head of Macquarie Asset Management, Americas. “Washington State is at the forefront of clean energy policy in the US, and this transaction underscores our commitment to provide our clients with relevant investment opportunities in the green energy transition.”

“We are pleased to close this transaction and become shareholders in Puget, expanding our global portfolio of high-quality core infrastructure assets,” said Kevin Kerr, Managing Director and Head of Americas for Infrastructure & Natural Resources at Ontario Teachers’. “We believe PSE will play a key role in decarbonizing Washington State’s power generation in the coming years, which is consistent with our own efforts to achieve net-zero greenhouse gas emissions by 2050.”  

About Macquarie Asset Management

Macquarie Asset Management is a global asset manager that aims to deliver positive impact for everyone.  Trusted by institutions, pension funds, governments, and individuals to manage more than $US531billion[1]  in assets globally, we provide access to specialist investment expertise across a range of capabilities including infrastructure & renewables, real estate, agriculture & natural assets, asset finance, private credit, equities, fixed income and multi asset solutions.

Macquarie Asset Management is part of Macquarie Group, a diversified financial group providing clients with asset management, finance, banking, advisory and risk and capital solutions across debt, equity, and commodities. Founded in 1969, Macquarie Group employs more than 17,000 people in 33 markets and is listed on the Australian Securities Exchange. For more information, please visit Macquarie.com

As Kevin Kerr, Managing Director and Head of Americas for Infrastructure & Natural Resources at Ontario Teachers’ states:  “We believe PSE will play a key role in decarbonizing Washington State’s power generation in the coming years, which is consistent with our own efforts to achieve net-zero greenhouse gas emissions by 2050.”  

Lastly, OTPP recently announced it took part in a Mubadala led $500M+ equity round into Princeton Digital Group, the leading pan-Asia data center company:

Singapore-based Princeton Digital Group (PDG) has closed an equity investment from Mubadala Investment Company (Mubadala) as a lead investor for $350M. Both existing shareholders in PDG, Warburg Pincus and Ontario Teachers’ Pension Plan Board (Ontario Teachers’), also invested in this round, with the total exceeding half a billion dollars.

Established in 2017, PDG is a leading Pan-Asia data center operator with an unrivalled footprint across key Asian digital economies. PDG has a portfolio of 20 data centers with over 600MW of secured capacity and spanning five countries. The company serves hyperscalers, internet and cloud companies, and financial institutions with scalable and reliable internet infrastructure and world-class data center services to meet their increasing demand across Asia. 

The funds will enable PDG to consolidate its position as the leading Pan-Asia data center operator,  by deepening its presence in Japan, India, Singapore, China, and Indonesia and accelerating its expansion plans into other markets. Asia is one of the fastest growing data center regions in the world, driven by strong market fundamentals such as a large base of internet users, the growth of digitalization, high levels of data usage and an increasing tech-savvy young population.

Commenting on Mubadala’s investment in PDG, Khaled Abdulla Al Qubaisi, Chief Executive Officer, Real Estate and Infrastructure Investments at Mubadala, said: “We are thrilled to be the lead investor in PDG’s fundraise and partner with the company on its growth journey. PDG is a leading data center infrastructure platform operating in an attractive market with strong tailwinds and catering to rising demand from the hyperscale segment and more broadly Asia’s digital economies. We look forward to working with PDG’s management team to capitalize on the growth opportunities and create not only sustainable, long term value creation, but also support Asia’s digital infrastructure development as a vital enabler to economic progress.”

“We are excited to have a leading sovereign fund Mubadala as another blue-chip investor in PDG. Mubadala’s track record of long-term investments combined with extensive know-how in the digital infrastructure space makes it a great partner as we continue to scale our business. We are also heartened by the continued trust and confidence placed by both Warburg Pincus and Ontario Teachers’ in PDG,” said Rangu Salgame, co-founder, Chairman and CEO of PDG.

“Since making our initial investment we have been very impressed with the management team’s ability to successfully execute a highly differentiated strategy and focus on value creation. We are pleased to make a second investment in PDG to help accelerate their growth and look forward to partnering with Mubadala and Warburg Pincus on this journey,” said Ben Chan, Senior Managing Director for Asia-Pacific at Ontario Teachers’.

“Since backing the founders in PDG’s formative days, we have been impressed by their leadership and execution of a strong thesis. We are excited to continue to be part of PDG’s journey and believe that the company is best poised to take advantage of a truly transformative market opportunity.” said Ellen Ng, Managing Director, Warburg Pincus.

About PDG

Princeton Digital Group (PDG) is a leading investor, developer and operator of Internet infrastructure. Headquartered in Singapore with presence and operations in China, Singapore, India, Indonesia, and Japan, its portfolio of data centers powers the expansion of hyperscalers and enterprises in the fastest-growing digital economies across Asia. For more information, visit www.princetondg.com or follow us on LinkedIn.

About Mubadala Investment Company 

Mubadala Investment Company is a sovereign investor managing a global portfolio, aimed at generating sustainable financial returns for the Government of Abu Dhabi.  

Mubadala’s $243.4 billion (AED 894 billion) portfolio spans six continents with interests in multiple sectors and asset classes. We leverage our deep sectoral expertise and long-standing partnerships to drive sustainable growth and profit, while supporting the continued diversification and global integration of the economy of the United Arab Emirates. Mubadala’s Digital Infrastructure unit invests in physical assets around the world underpinning the global trend of digitalization and increasing demand for connectivity, data storage and compute power.

Headquartered in Abu Dhabi, Mubadala has offices in London, Rio de Janeiro, Moscow, New York, San Francisco and Beijing. For more information about Mubadala Investment Company, please visit: www.mubadala.com  

About Warburg Pincus

Warburg Pincus LLC is a leading global growth investor. The firm has more than $73 billion in assets under management. The firm’s active portfolio of more than 235 companies is highly diversified by stage, sector, and geography. Warburg Pincus is an experienced partner to management teams seeking to build durable companies with sustainable value. Founded in 1966, Warburg Pincus has raised 20 private equity and 2 real estate funds, which have invested more than $100 billion in over 1,000 companies in more than 40 countries. The firm is headquartered in New York with offices in Amsterdam, Beijing, Berlin, Hong Kong, Houston, London, Luxembourg, Mumbai, Mauritius, San Francisco, São Paulo, Shanghai, and Singapore. For more information please visit www.warburgpincus.com. Follow us on LinkedIn.

Data centers are huge business around the world right now and this one is strategically placed in Asia:

Established in 2017, PDG is a leading Pan-Asia data center operator with an unrivalled footprint across key Asian digital economies. PDG has a portfolio of 20 data centers with over 600MW of secured capacity and spanning five countries. The company serves hyperscalers, internet and cloud companies, and financial institutions with scalable and reliable internet infrastructure and world-class data center services to meet their increasing demand across Asia.
This is a great long-term investment for OTPP and its partners which include Mubadala, one of the preeminent investors in that region.

Alright, let me wrap it up there.

Below, Caroline Donally, Managing Partner, Sprott Resource Streaming & Royalty, John Dorian, Investment Manager, Orion Resource Partners, Roland Yameogo, Senior Investment Officer, IFC Julian Treger, Executive Director & CEO, Anglo Pacific, discuss mining finance, ESG considerations and more in this panel discussion that took place a year ago.

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