Crocodile Gold terminates net cash flow agreement

 Crocodile Gold is one of the junior gold stocks that I watch;it is interesting for a number of reasons.It had one operating mine in the Northern territory of Australia and several sizeable deposits.But in 2012 it bought two almost abandoned mines in Victoria State in Australia from Aurico Gold.It paid a lump sum and got a net cash flow agreement with Aurico Gold to share profits from the two mines.Most investors thought that mine life for these abandoned mines would not be very long because although Crocodile Gold produced 155,000 ounces in 2013 and 210,000 ounces of gold in 2014 the price of their shares rarely went above $.25.In earlier blogs on Blogdaleup (on Blogger) I had advised Crocodile Gold to invest more in equipment and resources to increase production,especially at the Fosterville mine which had a high grade of ore.Now it is clearer that increasing production would not benefit Crocodile Gold that much because of it's net cash flow  agreement.Profits would have to be shared almost on a 50/50 basis until cumulative net cash flow of  C$120 million was reached and thereafter on a 20% basis on an ongoing basis.
    The New Agreement
 Under the old agreement Crocodile had to pay a significant percentage of net cash flow to Aurico Gold.In fact, after $C60 million was reached they had to pay 100% of the next $C30 million.However Crocodile did have a button to push;they could and did take heavy write-offs and reduce net free cash flow.In effect, they could plow profits back into the development of the two mines plus other undeveloped property.So Aurico decided to make a new more effective agreement.They would take $C20 million on the date of the agreement and a 2% net smelter agreement royalty on the Fosterville mine and 1% royalty on the Stawell mine;this is a production royalty.For example,in 2014 the production royalty would give them about $2.5 million on Fosterville production and about $.5 million on Stawell production (assuming $1200 on ounce).This was in comparison to a payment of $2.7 million for 2014 with the old agreement.But now Crocodile  will start to increase production at both mines.This will benefit Aurico also as the royalty will increase as production from the two mines increases.This was not necessarily so under the old agreement.
The size of the mines
  The profitability of the new agreement depends on the size of the resource at both the Stawell and Fosterville mines.The Cosmo mine and the Maud Creek mine are not affected. New production coming out of Fosterville in 2014 barely included any production from the new faults discovered by Crocodile Gold;these faults contained the Phoenix and Lower Phoenix ore bodies.The length of these faults has not yet been discovered by Crocodile Gold.So the total Fosterville deposit could be bigger than 5 million ounces. An earlier blog on Workathon (July 27,2014) predicted that the size of the resource at Fosterville might be as big as 3 to 5 million ounces.Crocodile ,itself, stated in an earlier press release in May that there were about 2.1 million ounces at the Fosterville mine but now this is clearly understated.This new agreement will give more cash to Aurico right away and the amount of cash will increase over the life of the mine.Under the old agreement they would have gotten a bigger percentage of a small amount of net cash flow.It will also increase their production and will give more cash to Crocodile Gold, eventually much more.This will certainly give Crocodile enough money to soon develop it's 100% owned Maud Creek mine.