by Steve Timmer

Dec 3, 2013, 1:00 PM

Puppet on a string

I’m Your Puppet! sings PolyMet

Some of you — well, I hope many of you — will recall a story I wrote last week about how PolyMet was saying that it didn’t have anything to do with who owned its shares — it being a public company, and all — and gosh, PolyMet and Glencore/Xstrata were practically strangers. Glencore/Xstrata is the major shareholder of PolyMet and one of the badboys of mining around the world. So you can see why PolyMet was concerned when a KARE-11 reporter starting asking PolyMet spokesters about Glencore.

But here are just a few words about the Polymet/Glencore casual acquaintance from PolyMet’s most recent annual report (at about page 37) to the Securities and Exchange Commission (there is more story below this tome):

Glencore AG (“Glencore”) Financing

Since October 31, 2008 Glencore has entered into a series of financing agreements with us and a marketing agreement with us whereby Glencore committed to purchase all of our production of concentrates, metal, or intermediate products on market terms at the time of delivery, for at least the first five years of production.  We agreed to propose, and shareholders approved, the election of a Glencore senior executive as a director and also appointed a senior member of Glencore’s technical team to our Technical Steering Committee.  As a result of the series of financing transactions and the purchase by Glencore of our common shares previously owned by Cliffs, Glencore’s current and potential ownership of PolyMet comprises:

• 46,967,842 shares representing 25.6% of our issued and outstanding common shares;

• $25.0 million initial principal floating rate secured debentures due September 30, 2014.  Including capitalized interest as at January 31, 2013, these debentures are exchangeable at $1.50 per share into 20,338,440 of our common shares upon us giving Glencore notice that we have received permits necessary to start construction of the NorthMet Project and availability of senior construction finance in a form reasonably acceptable to Glencore or are repayable on September 30, 2014.  The exercise price of the exchange warrants and the number of warrants are subject to conventional anti-dilution provisions; and

• Glencore holds warrants to purchase 5,600,000 common shares at $1.50 per share, subject to conventional anti-dilution provisions, at any time until December 31, 2015, subject to mandatory exercise if the 20-day Value Weighted Average Price (“VWAP”) of PolyMet common shares is equal to or greater than 150% the exercise price and PolyMet provides notice to Glencore that it has received permits necessary to start construction of the NorthMet Project and availability of senior construction finance, in a form reasonably acceptable to Glencore.

If Glencore were to exercise all of its rights and obligations under these agreements, it would own  72,906,282 of our common shares, representing 34.9% on a partially diluted basis, that is, if no other options or warrants were exercised or 32.4% on a fully diluted basis.

On November 12, 2010, Glencore entered into a definitive agreement with us (“2010 Agreement”) to:

• Sell in a private placement to Glencore, 15,000,000 common shares at $2.00 per share for gross proceeds of $30 million (before deducting estimated offering expenses).  Completion of the sale of these shares and funding occurred in the following three tranches:

o Tranche 1 of $10 million (closed on January 17, 2011);

o Tranche 2 of $10 million (closed on July 15, 2011); and

o Tranche 3 of $10 million (closed on October 15, 2012).

• The maturity date of the $25 million in outstanding debentures, plus interest, was extended from  September 30, 2011 to September 30, 2012 (subsequently extended under the 2011 Agreement described below).  The Issued Debentures continued to be exchangeable into our common shares, as agreed to in 2008 and the 2011 Agreement described below;

• Cancellation of Glencore’s commitment to purchase, and our commitment to issue, $25 million of Tranche E Debentures, as agreed to in 2008;

• Cancellation of warrants to purchase 6,250,000 of our common shares at $3.00 per share at any time until September 30, 2011 issued to Glencore in connection with the 2008 Debentures;

• Issuance of warrants (the “2010 Warrants”) to purchase 3,000,000 of our common shares at $2.00 per share at any time until December 31, 2015, issued to Glencore in consideration of the amendments listed above.  The terms of these warrants were amended under the 2011 Agreement described below; and

• Glencore was also granted a right of first refusal to provide all non-equity material financings, subject to regulatory approval as long as it owns 10% or more of our issued and outstanding shares. As long as Glencore owns more than 5% of our issued and outstanding shares, it has the right to participate in any equity-related financing to maintain its partially diluted ownership interest (currently 25.6% of issued and outstanding shares and 32.4% on a fully diluted ownership interest basis).

On November 30, 2011, Glencore entered into a definitive agreement with us (“2011 Agreement”) to:

• Sell in a private placement to Glencore, 13,333,333 common shares at $1.50 per share for gross proceeds of $20 million (before deducting offering expenses) and issue to Glencore warrants (the 2011 Warrants) to purchase 2,600,000 of our common shares at $1.50 per share at any time until December 31, 2015, subject to mandatory exercise if the 20-day Value Weighted Average Price (“VWAP”) of our shares is equal to or greater than 150% the exercise price and we provide notice to Glencore that we have received permits necessary to start construction of NorthMet and availability of senior construction finance, in a form reasonably acceptable to Glencore. Approximately $7.0 million of the proceeds from the sale of these shares was used to repay outstanding notes (including interest) to Cliffs Natural Resources Inc.;

• Extend the term of the $25 million initial principal debentures to the earlier of i) us giving Glencore ten days notice that we have received permits necessary to start construction of NorthMet and availability of senior construction finance, in a form reasonably acceptable to Glencore (the “Early Maturity Event”), and ii) September 30, 2014, on which date all principal and interest accrued to such date will be due and payable.  Upon occurrence of the Early Maturity Event, the initial principal and capitalized interest would be exchangeable into common shares of PolyMet at $1.50 per share.  Alternatively, Glencore has the right to exchange some or all of the debentures at any time under the same conversion terms; and

• Amend the terms of the warrants issued to Glencore in 2010 (the “2010 Warrants”) to conform to the 2011 Warrants, giving Glencore the right to acquire 3,000,000 of our common shares at $1.50 per share at any time until December 31, 2015, subject to mandatory exercise if the 20-day VWAP of PolyMet shares is equal to or greater than 150% the exercise price and we provide notice to Glencore that we have received permits necessary to start construction of NorthMet and availability of senior construction finance, in a form reasonably acceptable to Glencore.

On April 10, 2013, PMI agreed to issue a debenture with the principal amount of US$20,000,000 to Glencore and Glencore agreed to a Standby Purchase Agreement related to a $60,000,000 rights offering by us.  The US$20,000,000 debenture is payable on the earlier of (i) a US$60,000,000 rights offering by us or (ii) May 1, 2014.  The sale of the debenture was consummated on April 11, 2013 [sounds like a marriage, doesn’t it?].  The debenture is guaranteed by us and is secured by the assets of us and our wholly-owned subsidiary.  The debenture carried a fixed interest rate of 4.721% per annum.  The debenture contains certain events of default that are customarily included in financings of this nature.  In the event of default, Glencore may declare all of the then outstanding principal amount of the debenture, including any accrued and unpaid interest, to be due and payable immediately. [emphasis added]

You know, PolyMet, you’re right; I can see how people might be confused that there is a close relationship between you and Glencore/Xstratra.

Now, kids, I know this is not gripping reading. But it is also not a casual conversation between strangers while waiting for the bus. In the Edison Investment Research report described in the earlier story, Edison described PolyMet a “junior mining company” to Glencore.

Really, though, PolyMet is Glencore’s “we can squash you like a bug” mining company. Glencore is PolyMet’s principal shareholder and its first secured creditor. PolyMet execs can’t take a leak without a hall pass from Glencore.

But back to the point of the earlier story. (Here’s a link, just in case PolyMet’s prose put you to sleep.) When PolyMet tells such a transparent fabrication about its relationship with Glencore, who is going to believe a word of the 1,800 page PolyMet EIS due out later this week?

My God, we’ll be complete chumps if we do.