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Accessing Capital Markets for Latin American Mining Projects in Challenging Times Simion S. Candrea Mining Investment Banking Jennings Capital Inc.
Accessing Capital Markets for Latin American Mining Projects in Challenging Times Simion S. Candrea Mining Investment Banking Jennings Capital Inc.
Contents:
1. Our Times
2. Alternate Methods & Recent Transactions
3. Concluding Remarks
Tough Times in Equities Continue, But Good Deals Are Getting Done
November 7, 2012 3 Accessing Capital Markets for Latin American Mining Projects in Challenging Times
Equity Markets Continue to Disappoint Investors
-50.00%
-40.00%
-30.00%
-20.00%
-10.00%
0.00%
10.00%
Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12
S&P/TSX Composite Index (^GSPTSE) - Index Value
S&P/TSX Composite Index Metals & Mining (Industry) - Index Value
S&P/TSX Global Gold Index - Index Value
Themes Over the Past Year 1. TSX & TSX Venture have remained relatively flat, and volatility has been
increasingly high 2. Metals & Mining, Gold Indices have underperformed the benchmark
indices, with both down ~25% 3. Gold stocks, in particular, have significantly underperformed vs. the
underlying commodity, gold, in the last decade
What Are Investors Looking for Today? • Projects with manageable resource bases – not
necessarily massive-scale deposits* • Low capital costs, low financing risk • Low cash-costs • High-grade resource is a necessity • Development and Production stage (i.e. Feasibility
study complete) • Yield (i.e. interest-paying, linked notes, high yield
debt) • Mining-friendly jurisdictions are key**
Recent Successful Equity Offerings
$60 Million Rights Offering
$80 Million Marketed Offering
$100 Million Marketed Offering
$400 Million Initial Public Offering
$34.5 Million Bought Deal Offering
Latin American Specific Equity Financings
November 7, 2012 Accessing Capital Markets for Latin American Mining Projects in Challenging Times 4
YTD Activity – Summer Slow Down, Recent Uptick
10,500
11,000
11,500
12,000
12,500
13,000
Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12
S&P/TSX Composite Index (^GSPTSE) - Index Value
$30 MM March
$30 MM February
$34.5 MM October
$60 MM November
$15 MM August
$8 MM June
$27 MM February
$26 MM March
What’s Happening Overall in Equities? 1. Total equity capital raised on the TSX-V is down 50% year-over-year
($4.3B vs. $8.6B) 2. Total equity capital raised on the TSX is up 20% year-over-year ($37.4B
vs. $31.2B) 3. Number of financings is down 25% and 8% on the TSX-V and TSX,
respectively
Deals are getting done, but they’re less frequent and much harder to sell – alternative means have become necessary
$26 MM November
Alternative Methods to Traditional Equity
Appetite for Bonds Remains Strong
November 7, 2012 Accessing Capital Markets for Latin American Mining Projects in Challenging Times 6
$500,000,000 Senior Unsecured Notes
• 9.5% Interest • 8 years, due 2020
September 2012
$300,000,000 Senior Secured Notes
• 7.0% Interest • 8 years, due 2020
April 2012
Issuers • Investment grade corporations
looking to increase working capital, finance capital costs, make acquisitions, and pay down existing bank debt and credit lines
Investors • Primarily institutions seeking
higher rates of return than they can get from other investment-grade corporate, government, and cash market comparables • Mutual funds, pension
funds, insurance companies, hedge funds
• Strong US based appetite
Gold- and Silver-Linked Notes Allow for Commodity Exposure
November 7, 2012 Accessing Capital Markets for Latin American Mining Projects in Challenging Times 7
$80,000,000
Silver-Linked Notes1
August 2011
Linked-Notes Explained • Allows investors exposure to the commodity markets
through a debt instrument • Intermediate-term debt instruments whose:
1. Value at maturity is a function of an underlying commodity price; or
2. Interest payment is a function of an underlying commodity price
Example: Gran Colombia Gold – Silver-Linked Notes, 2011 $80 million Prospectus Offering • 5% annual interest rate, semi-annual payments • No warrants • Mandatory repayments: 10% on 4th anniversary, 20$
on 5th anniversary, 30% on 6th anniversary, balance at maturity
• Repayment based on greater of: face amount; and imputed value of silver
• Each note has an allocation of 66.7 ounces of silver at an implied price of $15.00 per ounce ($1,000 face value)
What does this mean for the investor? First repayment of 10% on $1,000 note is higher of: 1. $100; and 2. 66.7 * Spot Silver price (~$30/oz) * 10% = $200
$100,000,000
Gold-Linked Notes1
October 2012
$86,250,000
Gold-Linked Notes2
November 2011
High-Yield Debt, Credit Facilities, and Project Loans
November 7, 2012 Accessing Capital Markets for Latin American Mining Projects in Challenging Times 8
Loan Providers Typical Investment Criteria Loan Amount: $5 million to $50 million Duration: 6-24 months, with target of 12 months Purpose: Financing for acquisition, production
development/increases Security: Varies depending on borrower’s capital
structure, but general security agreement with clearly defined method of loan repayment or asset sale
Geography: Countries that have demonstrated a long
and consistent rule of law (Mexico, Brazil and Chile have become popular)
Sources: Sprott Resource Lending, Waterton Global Transactions
Location: Mexico Amount: $18 million Term: 18 months Interest: 8% per Bonus: 2%
June 2012
Location: Mexico Amount: $6 million Term: 18 months Interest: 15 per Bonus: - June 2010
Location: Brazil Amount: $75 million Term: 5 years Interest: LIBOR + 5.5% Warrants: 11.5%
October 2011
Rambler - Sprot
(Oct 2011)
Cardero - Sprott
(Oct 2012)
Jaguar - Renvest
(Oct 2012)
Principal Amount $10,000,000 $10,000,000 $30,000,000
Drawn Amount $7,500,000 $10,000,000 $25,000,000
Coupon 9.25% 12.00% 11.00%
Structuring Fee $100,000 $100,000 $550,000
Commitment Fee in Cash (%) 3.00%
Commitment Fee ($) $300,000 $250,000
Drawdown Fee (%) 4.00% 3.00% $550,000
Drawdown Fee ($) (in shares) $300,000 $300,000 $495,000
Maturity 29-Mar-13 1-Nov-13 28-May-14
Total "$ Cost" to Issuer/ Borrower $1,393,750 $1,600,000 $4,595,000
Total "% Cost" to Issuer/ Borrower 18.58% 16.00% 18.38%
Streams, Royalties, Off-Takes & Prepayments
Streams, royalties, off-takes with large strategic partners, and prepayments have become essential to finance large-scale, highly capital intensive projects
November 7, 2012 Accessing Capital Markets for Latin American Mining Projects in Challenging Times 9
Streams – What are they, what are the benefits, and who’s involved?
Streams: • The sale of a right to the future production of a commodity (usually a by-
product of the producing company, i.e. silver for a gold producer) • Allows the mine operator to raise significant capital by selling away it’s non-
core by-products • Sales price paid by the investor is pre-determined for future production, so it
ensures fixed costs for the producer • Provides significant return to investor as pricing is very favourable
Benefits to the Operator: • Immediate monetization of non-core production • Reduces debt requirement, maintains capital structure, providing attractive
alternative to traditional debt or equity funding • Limits covenants on raising further debt or equity
Benefits to the Investor/Purchaser: • Provides lots of upside to increases in commodity prices • Provides a long-term supply of product • Does not require any on-going capital expenditures, exploration expenses, or
any environmental/closure responsibilities
Source: Norton Rose Alternative Financing Presentation, November 1, 2012
Key Risks:
• Dramatic decrease in metals prices, making mine uneconomic
• Credit risk of mine operator • Lack of certainty of deliveries • Inaction of the mine operator • Suspension of operations
Example: Hudbay & Silver Wheaton, September 2012
US$1,000,000,000
Upfront deposit payment of US$500,000,000; and
Further US$250,000,000 in deposits once $1.0 billion in capital costs have been incurred at Hudbay’s Constancia project
Silver Wheaton Receives: 1. 100% of payable gold and silver from Hudbay’s 777 mine
until the later of December 31, 2016 and satisfaction of a completion test at Constancia, and thereafter 50% of payable
gold and 100% of payable silver 2. In addition to the deposit payments, Hudbay will receive cash
payments equal to the lesser of (i) the market price and (ii) US$ 400/oz gold and US$5.90/oz silver
Example: Augusta Resources Corp. In October 5, 2012, Augusta closes an extended US$83m loan facility with RK Mine Finance Trust (initial US$40m) Concurrent: Amended Off-take Agreement – 20% of annual copper con from the Rosemont project
Example: Orocobre Limited In October 17, 2012, Orocobre signs a joint-venture agreement with Toyota Tsusho for development of the Olaroz Lithium Project in Argentina, including: • A comprehensive financing package from Japan facilitated
through Toyota Tsusho and arranged by Mizuho Corporate Bank with total facilities of US$192 million
• Debt package coverage approximately 70% of capex and is guaranteed by the Japanese government’s Oil, Gas, and Metals National Corporation (JOGMEC)
• Effective equity interest at the Project Level becomes 66.5% Orocobre, 25% Toyota Tsusho, and 8.5% JEMSE (Argentina gov’t owned mining entity)
• Toyota has opportunity to discuss off-take agreement for development of hybrid and battery-powered vehicles
Off-Take Agreements
November 7, 2012 Accessing Capital Markets for Latin American Mining Projects in Challenging Times 10
Off-Takes & Prepayment Transactions
Off-Take Agreements are agreements between the producer of a resource and the buyer of a resource to sell/purchase portions of the producer’s future production • Oftentimes, off-takers are large corporations with financing capabilities that
come in as strategic partners to assist junior miners in the development stage Benefits to the Producer • Off-take partner acts as the financier (removes financing risk, allows for large
strategic partners to leverage already strong balance sheets) • Often big debt deals (which may seem unmanageable by juniors) are
“backstopped” by partners, allowing for more favourable terms on interest rates and repayment
• Margins on product sale are much thinner in comparison to streaming (5%-10% discount is common compared to a significant discount on streaming deals)
$0.00
$0.75
$1.50
$2.25
$3.00
$3.75
$4.50
Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12
Shar
e P
rice
(A
$)
Orocobre Limited (ASX:ORE) - Share Pricing
ORE and Toyota announce JV – Toyota Tsusho takes 25% interest in Olaroz
ORE and Toyota announce signing of JV agreement and financing package for Olaroz Project
Institutional and Family Offices Private Placements
November 7, 2012 Accessing Capital Markets for Latin American Mining Projects in Challenging Times 11
When the cost of capital becomes too high to go to the public markets (or even “no bid”), private placements with foreign institutions or investors can become the substitute for the public/ international capital markets
• These private placements also increase exposure and “validate” projects and management teams
October 2, 2012: £16.2 million share subscription agreement and US$6 million loan facility to finance start-up of gold production at Palito
• £16.2 million share subscription was by
Fratelli Investments Limited • US$6 million loan provided by Fratelli
Investments at 12% per annum
Fratelli Investments is a private investment company managed by Megeve Investments, a Chilean family fund
October 18, 2012: Up to ~$50 million from Pacific Road Capital Management in two phases for development of the Santa Elena Project in Colombia
• Phase 1 funding of $7.5 million upon
completion of a Drilling Report • Phase 2 funding of $40 million in the
form of an option which can be exercised upon completion of a resource estimate and PEA
May 17, 2012: $2.4 million private placement of common shares with Desafio Minero S.A.C., a private investment fund/ family office in Peru
Rationale & Timing • Strategic partners seek big projects, usually as a means of vertical integration
to secure inputs for their end-market products (this is seen in a big way in the steel, iron, and coal space)
• Large-scale projects require partners to assist all along the way, from exploration to production
Terms & Arrangements • Equity investment at the corporate level or at the project level • Debt financing arrangements with partner or big banks with backing of partner • Off-take, processing, sales agreements • Segmented funding based on investee hitting targets (i.e. completion of a
feasibility study), and even funding for general working capital if additional funds are required
• Free-carried interest for the target
Strategic Partnerships – A Shot at “All of the Above”
And if you’re lucky enough, you’ll find a strategic partner that will finance growth at an early stage, fund feasibility studies and engineering, fund capital costs through development, and then buy all of the product at market prices
November 7, 2012 Accessing Capital Markets for Latin American Mining Projects in Challenging Times 12
Strategic Agreements & Terms
November 6, 2012: Trevali enters into a US$20 million working capital facility with Glencore International for the Santander Mine in Peru
• Glencore currently owns 7.8% of Trevali, completed
through a private placement in March 2012 raising US$18 million in equity
• Magna has a 13% equity position in Lithium Americas, and has the option to purchase 25% of Lithium production at a 5% discount to spot market, that if exercised, would require Magna to provide financial support via interest-free loans
• Mitsubishi Corporation has a 4% equity position in Lithium Americas and the option to purchase up to 12.5% of Lithium production at a 5% discount to spot prices, that if exercised, would require Mitsubishi to provide financial support for the project
Concluding Remarks
November 7, 2012 Accessing Capital Markets for Latin American Mining Projects in Challenging Times 13
• Flexibility
• Long Term Vision/ Mission
• Dilution/ Cost vs. Existentialism
– “Leave your ego at the door”
• Welcome the Challenging Times
Contacts:
Daryl Hodges
President & CEO
416-304-2174
Simion S. Candrea
416-304-2186
416-670-9155
