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Surviving the Global Financial Crisis in the Mining Sector: Strategies for Junior and Mid-Market Companies. Daryl J. Hodges Senior Managing Director Investment Banking. 28 February 2009. - PowerPoint PPT Presentation
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Surviving the Global Financial Crisis in the Mining Sector:
Strategies for Junior and Mid-Market Companies
28 February 2009
Daryl J. Hodges
Senior Managing Director
Investment Banking
2
This presentation is for discussion purposes only and is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by Jennings Capital. Neither this presentation nor part of its contents may be disclosed or used by any other purpose without the prior written consent of Jennings Capital.
The information in this presentation is based upon any management forecasts supplied to us and reflects prevailing conditions and our views on this date, all of which are accordingly subject to change. Jennings Capital’s opinions and estimates constitute Jennings Capital’s judgment and should be regarded as indicative, preliminary and for illustrative purposes only. In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to us by or on behalf of the Company or which was otherwise reviewed by us. In addition, our analyses are not and do not purport to be appraisals of the asset, stock, or business of the Company or any other entity. Jennings Capital makes no representations as to the actual value which may be received in connection with neither a transaction nor the legal, tax or accounting effects of consummating a transaction. Unless expressly contemplated hereby, the information in this presentation does not take into account the effects of a possible transaction or transactions involving an actual or potential change of control, which may have significant valuation and other effects.
Jennings Capital’s policies prohibit employees from offering, directly or indirectly, a favorable research rating or specific price target, or offering to change a rating or price target, to a subject company as consideration or inducement for the receipt of business or compensation. Jennings Capital also prohibits its research analysts from being compensated for involvement in investment banking transactions except to the extent that such participation is intended to benefit investors.
Jennings Capital Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of tax matters included herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone not affiliated with Jennings Capital of any of the matters addressed herein or for the purpose of avoiding tax related penalties.
This presentation does not constitute a commitment by Jennings Capital to underwrite, subscribe for or place any securities or to extend, arrange or provide any other services.
5
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
110.0
120.0
Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09
Rel
ativ
e P
erfo
rman
ce (
%)
SPX - Share Pricing S&P Midcap 400 Sector Indices - Materials Sector Index - Share Pricing
S&P 500 Sector Indices - Materials Sector Index - Share Pricing S&P SmallCap 600 Sector Indices – Materials Sector Index - Share Pricing
Aug 2007 – Credit Crunch News Hits the Eq. Markets
Credit Freeze & Financial Crisis – Markets’ Reaction
Aug 2008 – A slew of Negative News Hits the Markets – Freddie & Fannie
Source: Bloomberg Financial Markets
Jan 2008 – The First Major Sell-Off in the Eq. Markets –
Fed Slashes Rates in Emergency Meeting
Mar 2008 – Bear Stearns Fed
Brokered Deal
Apr-July 2008 – Certain Markets and Commodities
Make New Highs; Small Caps Left out of the Rally
Sept – Oct 2008: Lehman Fails, AIG Bailed Out/ TARP Passes After First Being Rejected,
Panic Takes Over
Feb 2009 – Nov 2008 Lows Retested
6
Liquidity Crisis – Different Toll on Different Metals
Source: Metalprices.com
7
Light Crude Oil (CL, NYMEX)
Source: NYMEX
After an all-time high of US$ 147.27 in July 2008, oil has fallen under US$ 40.00 by January 2009; prolonged recession
expectations coupled with US$ appreciation fuelled the dramatic fall in crude prices
If and when the global economy starts to recover, too many dollars chasing too few barrels will only lead to much
higher oil prices
8
$0.0
$60.0
$120.0
$180.0
$240.0
Global Mining Canadian Mining
Am
ou
nt
(US
$ B
)
2006 2007 2008
$0.0
$250.0
$500.0
$750.0
2006 2007 2008
Am
ou
nt
(US
$ B
)
$622.8B raised 3,283 Issues
$377.9B raised 1,325 Issues
$19.3B raised 184 Issues
$118.4B raised 312 Issues
$209.7B raised 365 Issues
$14.7B raised 74 Issues
$21.5B raised 44 Issues
$194.9B raised 232 Issues
Global Equity Markets
Over the last 3 years, Global, Mining and Canadian Equity Issuance – very strong; exception: 2008
While the overall global equity sales dropped significantly in 2008, it seems Mining issues, while lower, held better than the overall markets
1st half of 2008 saw decent volumes on Iron Ore, Potash and Coal financings
2nd Half of 2008 – NO IPO’s on the TSX
Equity Markets - Mining
$556.6B raised 3,095 Issues
Equity Capital Markets: 3 Year Review
Source: Bloomberg Financial Markets
9
$0.0
$50.0
$100.0
$150.0
$200.0
$250.0
Global Mining Canadian Mining
Am
ou
nt
(US
$ B
)
2006 2007 2008
High-Yield Global Debt Markets saw a sharp drop in 2008 from 2006, 2007 levels
Canadian and Mining specific deal were somewhat more resistant to the downturn
$18.7B raised 73 Issues
$112.7B raised 249 Issues
$199.7B raised 2888 Issues
$14.2B raised 68 Issues
$20.7B raised 39 Issues
$153.4B raised 189 Issues
High-Yield Debt Markets - Mining
High-Yield Debt Markets: 3 Year Review
Source: Bloomberg Financial Markets
10
Over the past few months - global mining stock raised more than US$ 34B in fresh non-bank cash
Largest chunk of that – US$ 19.5B: RioTinto-Chinalco deal (US$ 7.2B convertibles, plus US$ 12.3B in assets/ equity stakes)*
Gold and Silver stocks – very well received
Capital raising by Gold stocks – mainly by way of bought deals – almost US$ 4.0B:
CURRENT PRODUCERS:
Newmont Mining Corp US$ 1.7B public offerings of 34,500,000 shares and US$ 517.5M principal amount of 3.00% convertible senior notes due 2012
Kinross Gold Corp – US$414M
Silver Wheaton Corp – C$287.5M
(ADVANCED) DEVELOPERS:
Osisko Mining Corp – C$402M
Great Basin Gold Ltd – C$125M*
Uranium
Cameco Corp – C$400M*
First Uranium Corp – C$61.5M
Equity Capital Markets: 2009 YTD
*Deals not closed as at Feb 27th, 2009
Source: Bloomberg Financial Markets
11
Semafo Inc. - Share Price Performance(12 Sep 2008 - 25 Feb 2009)
0
1,500,000
3,000,000
4,500,000
6,000,000
7,500,000
25-Feb6-Feb21-Jan5-Jan15-Dec27-Nov11-Nov24-Oct7-Oct19-Sep
Vol
ume
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
Pri
ce (C
$)
Volume Price
Liquidity Crisis – Different Toll on Different Securities
Recently Filed for BankruptcyRecently Announced Very Dilutive Equity Financing
Ongoing Sale of Noncore Assets, Re-negotiating Debt Covenants, Layoffs
Source: Bloomberg Financial Markets
Performed Rather Well, Recently Announced Equity Financing
First Metals Inc. - Share Price Performance(12 Sep 2008 - 25 Feb 2009)
0
600,000
1,200,000
1,800,000
2,400,000
3,000,000
25-Feb6-Feb21-Jan5-Jan12-Dec26-Nov6-Nov21-Oct2-Oct16-Sep
Vol
ume
$0.00
$0.10
$0.20
$0.30
$0.40
$0.50
Pri
ce (C
$)
Volume Price
Mercator Minerals Ltd. - Share Price Performance(12 Sep 2008 - 25 Feb 2009)
0
1,500,000
3,000,000
4,500,000
6,000,000
7,500,000
9,000,000
25-Feb6-Feb21-Jan5-Jan15-Dec27-Nov11-Nov24-Oct7-Oct19-Sep
Vol
ume
$0.00
$1.20
$2.40
$3.60
$4.80
$6.00
$7.20
Pri
ce (C
$)
Volume Price
Teck Cominco Ltd (Cl. B). - Share Price Performance(12 Sep 2008 - 25 Feb 2009)
0
6,000,000
12,000,000
18,000,000
24,000,000
30,000,000
25-Feb6-Feb21-Jan5-Jan15-Dec27-Nov11-Nov24-Oct7-Oct19-Sep
Vol
ume
$0.00
$8.00
$16.00
$24.00
$32.00
$40.00
Pri
ce (C
$)
Volume Price
12
First half of 2008: tough credit, softening commodities
Volatility and liquidity: trading volumes declining and share prices falling
Deal flow showed a sharp decline, transactions were closing under issue price
Second half of 2008: financial collapse, plunging oil and copper
Trading volumes dried up, sellers wanted out - immediately
Selling down on positive news as increased volumes provided a liquidity window
Traditional investors, retail and institutional, fled the market… to cash
Resource equity financings become nearly impossible
Debt market activity shrinks to lowest level in over a decade
Result: share price collapse, severe treasury drain on junior companies
First 2 months of 2009:
Gold is in favour
Base metals still struggling
Junior Natural Resources: The 2008 Meltdown
13
Don’t get a false sense of security from the recent uptick - the panic may be over (Recall ’98-’03)
Treasuries are drained, money is scarce
Shares trading at rock bottom prices, they have rebounded slightly
Industrial commodities – at low prices again
Precious metals weak, but gold and silver is starting to look attractive as the US dollar caps
Producers balance sheets – under increasing strain; start-ups struggling;
Risk re-pricing: analysts and investors – re-rating companies; target prices dropping
Bankruptcy protection for some, extreme dilution for others
Risk re-rating: caused perceived risk to move “up market”
Bank stocks and insurance companies are considered risky – credit ratings are dropping
Juniors resource developers are excluded from many portfolios
RESULT: For many, the cost of capital is the highest we have seen it
Given the chaos in global markets, and the ongoing freeze in debt markets, mining companies are deploying conventional and unconventional ways of raising fresh capital
Where Are We Now?
14
And the Casualties are Starting to Pile Up… First Metals Inc. “Files Notice of Intention to Make a Proposal Under the Bankruptcy and
Insolvency Act” (January 2009)
Adanac Molybdenum Corporation to “Evaluate Strategic Alternatives Under CCAA Protection”
(December 2008)
Giant metals miner Teck Cominco cuts 1,400 jobs …“A big concern surrounding Teck is its ability
to pay off nearly $10 billion in debt it incurred with the purchase of Fording last fall. This includes a
$4-billion term loan and a $5.8-billion bridge loan.” (Globe and Mail, January 9, 2009)
Rio Tinto commits to reduce net debt by $10 billion in 2009 …Reduces workforce by 14,000 –
(company press release, December 10, 2008)
Boart Longyear misses earnings, reduced workforce by 20%
Anglo American scraps its dividend and cuts 19,000 jobs worldwide
Xstrata’s shareholders to vote its proposed £4.1bn rights issue next week (Mon) – might not pass
15
The “New” Cost of Capital: Yield and Dilution Recent High Yield Debt Issues:
Petaquilla Minerals: USD $60 million (October 3, 2008)
(initial YTM, not including the warrant sweeter – 17.8%)
Northern Star Mining Corp: USD$42 million (September 11, 2008)
(initial YTM, not including the warrant sweeter – 22.4%)
Farallon Resources Ltd: $25 million (September 3, 2008)
(initial YTM, not including the common shares attached – 15.0%)
Recent Equity Financings:
Yamana Gold Inc: $100 million @ $6.00/ sh. (3.00% dilution)
(52-week range: $4.29 to $19.79) Semafo Inc.: $23 million @ $1.20/ sh. (10.00% dilution)
(52-week range: $0.75 to $1.72)
Kinross Corp: US$414 million @ US$17.25/ share (5.00% dilution)
(52-week range: US$7.77 to US$27.00)
Osisko Mining Corp: C$402 million @ $4.55/ share (54.00% dilution)
(52-week range: $1.40 to $6.29)
Farallon Resources Ltd: $10 million @ 0.20/ sh. (14.00% dilution)
(52-week range: $0.10 to $0.84)
Mercator Minerals Ltd.: $23 million @ $0.70/ sh. (56.00% dilution)
(52-week range: $0.29 to $12.94)
16
Surviving the Downturn Two choices:
Hunker down: slash spending, husband cash, and weather the storm
Seek creative, or non-traditional, financing strategies in the secondary market to
continue advancing the company, and prepare for the next upturn Actually, there is only one choice… do both!
High Yield Debt Financing Convertible Debentures Flow-through Shares
Off-take Agreements, Strategic Investors Royalty Agreements Forward Sales M&A
Where to Seek the Funds (Who is Providing Funds) Requirements Deal Structures Recent Examples
Consider which of these could suit your Company, and get advice
17
Most commonly issued for project financing, situations in which banks – not willing to
lend, or conditions too onerous and time is of essence
Broad distribution – multiple buyers/ lenders, can be issued as a private placement or
more broadly under a prospectus:
Market to a wide cross section of equity, debt, and high yield portfolios
Retail demand – strong
Domestic and international exposure
Customize to the majority of lenders, no single party drives the process
Debt instrument is secured (commonly) or unsecured (rarely), provides a high priced
coupon, offered at a discount, and often accompanied by an equity “kicker”
Typically less onerous covenants compared to a classic project financing or bank debt: Full bankable feasibility study not necessary, but assurances of success need demonstration
Metal hedging can take place at a future date, at the Company’s discretion
Less onerous reporting requirements – reasonable financial stress tests
The high coupon and wide distribution can make the situation stressful, if deadlines are
difficult to meet or the issuer needs to negotiate changes to the original deal
Current conditions – leading to extremely costly financings; difficulty in meeting debt
obligations: ALL lenders have become extremely nervous
Use as a bridge loan until other forms of financing are available
Alternative Sources: High Yield Debt
18
Similar application as High Yield Debt, Convertible Debentures: a hybrid debt – equity instrument
Debenture: secured and pays a coupon over its term
Conversion feature: can convert into shares of the company at a future date, usually at a higher price
Distribution: investors view convertible debentures as a trade off between perpetual, low-cost capital
(equity) and time-limited, costly (high yield) form of capital
In the current market it reflects both yield and dilution components of financing and can reduce both
slightly
Terms of coupon and conversion: trade–off between expected equity return, liquidity of underlying
shares, stability of cash flow (if any), and security of underlying assets
In many deals, the short-sellers/ arbs gets involved:
Sell short the underlying shares and buy/ go long on the convertible security (if the stock rises, they convert the
bond to cover the short. If not, they continue to earn % coupon rate)
As with debt the current market conditions are making these products very expensive for issuers and
the providers are very nervous
Alternative Sources: Convertible Debentures
19
Attractive especially to gold companies on the cusp of production
Similar application as High Yield Debt, Convertible Debentures: a hybrid debt – equity instrument
Debenture: secured and pays a coupon over its term
Conversion privilege: Common Shares or physical Gold
Upon Conversion or Maturity - transfers the leverage of increasing gold prices to the investor
With (higher) expected gold conversion, the actual coupon might be lower, helping companies
manage the overall cost, particularly so in the pre-commercial production stage
Also the choice of conversion between shares or gold, puts less pressure on a balance sheet, therefore reducing
the risk of bankruptcy if depressed commodity prices continue
Alternative Sources: Gold-Linked Convertible Debs
20
Canadian exploration and certain development projects: can be funded by FT shares that “flow”
the exploration tax deductions, normally claimed by corporations, “through” to investors
Funds must be spent on specific allowable tasks (drilling, surveying, etc) and are thus restricted
Flow through funds, and retail investors: main purchasers
Issuer must be a Canadian company, and
Projects must be in Canada
Additional provincial tax credits can be available
Not really a new alternative, since these have been available off and on for twenty years, but
traditionally confined to exploration Co’s and strictly to the ones having Canadian properties/ assets
More mid–cap companies may need to explore this avenue for exploration financing
Deals typically done around year-end but also whenever a fund raises capital (which is becoming more
difficult)
Pricing is market dependant; many companies expect premiums, given the tax advantage inherent
For exploration companies this is often the only method of financing
Many investors buy flow through for the tax advantage with no concern for the underlying issuer or its
project
The shares often re-enter the market as soon as the investor can sell
Alternative Sources: Flow-Through Shares
21
Mostly done by European, Asian smelter companies/ or metal trading houses
The company must have a mining project with measurable production expected
Usually companies get an up-front cash payment, plus fixed price on the metals/minerals
Overseas strong financial partner providing both equity/ debt financing, combined with an off-take
contract, represents pure relationship business (essentially important in bear markets):
Mitsubishi Materials Corp. purchased 25% equity interest in Copper Mountain Project (CUM: TSX) for
$28.75m, arranged a $250m project loan, and contract to purchase all the copper con from the mine for 10 yrs
Korea Resource Corp (KORES) 30% acq. of Baja Mining Corp. (BAJ: TSX) for US$435m of project funding
and 30% Off-Take Rights on Commercial Terms & 30% Completion Guarantee on Project Debt
Tata Steel Global Minerals purchased 19.9% of New Millennium Capital Corp. for $23.5 million and an option
to acquire 80% equity interest in the DSO project, by paying 80% of cost, investing a further $300 million in
exchange for 100% off take
Trafigura Beheer BV Amsterdam, off-take agreement with Farallon Resources Ltd. (FAN: TSX)
Chinalco, Jinchuan and Glencore AG are cashed up and currently making strategic investments in base
metals producers
Alternative Sources: Off-Take / Strategic Investors
22
Company gives up a portion of future income or revenue stream – exchange for current financing
Usually completed just in front of production, but are not unusual on exploration projects
Often used in early “prospector” transactions, so very important to search for lingering or multiple royalties on
title, since a royalty is most commonly recorded as a lien against a property
Typical royalty: Net Smelter Royalty (“NSR”) of 2% of the proceeds net of smelting and refining
charges
Net Profits Interest (“NPI”) of 10% to 15% is paid after all expenses from operations are deducted
Generally royalties are considered non-dilutive, but equity investors are not keen on them, and often
they do not raise that much money relative to the payout stream
Typical NSR deals would have been struck at anywhere between 1.25% to 2.00%, recent negotiations
have started @ 2.00%, with a sliding-scale NSR, that could reach as much as 3.25%-3.50%
Royalty Companies are not very fond on NPIs, even though mining companies were willing/ ready to
do deals in the range of 10%-15% NPI participation/ profit interest
Recent Transactions: International Royalty Corp. (IRC: TSX) $2.85m acq. of additional gold royalties from Barrick/ Atna Resources Franco-Nevada Corp. (TSX: FNV) $103.5 m acq. of 7.29% NSR on the Gold Quarry Royalty Property/ Nevada
International Royalty Corp. (IRC: TSX) $2.6m acq. of additional Skyline Coal Mine royalties located in Carbon and Emery Counties, Utah
Alternative Sources: Royalty Sales
23
Company sells forward portion of future revenue stream, usually by-product at a pre-
determined price, in exchange for current financing
An excellent way to monetize future minor revenue from a project
Can be made to downstream consumers (i.e. smelters), but more recently specific gold
and silver companies have been purchasers of metal from would–be or existing
producers: Silver Wheaton, and Gold Wheaton
Usually completed just in front of production, usually done on by product precious metals
Generally forward sales – considered non-dilutive; equity investors and analysts –
satisfied with them, provided negotiated metal prices – not too deeply discounted
Typical gold or silver deals would involve a substantial pre-payment in exchange for
most of metal revenue, with residual revenue stream
Recent examples include: Silver Wheaton purchase of Mercator Minerals’ silver stream at Mineral Park US$42m
Gold Wheaton purchase of 50% of FNX’s gold, platinum and palladium: C$175m in cash, 350m Gold Wheaton shares & C$50m in Gold Wheaton warrants
Gold Wheaton purchase of 25% First Uranium’s 2.1m Ozs gold stream: C$125m in 2 tranches, C$75m due Feb 27/ ‘09
Silver Wheaton purchase of 75% of Farallon’s silver stream from Campo: C$80m in several tranches
Alternative Sources: Forward Sales
24
Alternative Sources: Mergers and Acquisitions Many companies – shrunk to puny market caps, well below many institutional investors’
thresholds
Risk re-rating has resulted in funds drying up and a reluctance to finance juniors
The current order of least to most likely to get financed is:
Early stage exploration – pre drilling: pass the hat!
Pre – resource drilling: difficult and only superb results attracting attention (area where good
news has caused sales on liquidity)
Resource drilling and pre – production: equity very difficult, pro-forma economics must be
robust, must be in “safe” jurisdiction, will be financed by existing investors or “value
investors”, debt very difficult, expensive and typical plant and equipment are being marked
down extensively as collateral
Production: can get financed, especially to take advantage of “vulture opportunities”, but
capital IS expensive (excluding dealer commissions!)
This is the time for companies to look at preparing for next recovery and metal cycle:
Create critical mass that investors will want to own
Those with cash and healthy balance sheets to look for opportunities
Those with weakened balance sheets to face reality
25
Alternative Sources: Mergers and Acquisitions What the market wants to see, and how to position for that:
Cash on balance sheet: find a partner with a healthy balance sheet, and be extremely stingy
with that cash,
Explorers with good projects should seek those trading below cash value
Limited debt on balance sheet: beware of leverage, unless its manageable
Stable cash flow: find a partner with robust operations, and a track record
Reduce operating risk: make multiple, quality, producing assets a priority CRITICAL MASS – annual production and market caps
100,000 + oz gold, 5 – 10 mm oz silver
50,000 tonnes copper, zinc, 10,000 tonnes nickel
$50 million market caps as a minimum
Growth opportunities: find assets that have upside, not retreads
Growth opportunities: find quality exploration properties
Strong management: find management teams with proven success
Strong board: find board members with depth and success
Sell your assets (projects, or future revenue/income)
Sell your company – give your investors flexibility
26
Funds are scarce and expensive
Budget with care – watch every non-essential expenditure, and at a last resort, wind down or
temporarily close production/ operations
Consider the financing alternatives suggested, how does your Company’s profile fit?
Consider strategic partnerships – either with private pools of capital (NovaGold) or state backed
enterprises (Chinalco)
Merge with or acquire cashed up shells or other cash rich(er) companies
It may be necessary to sell assets, or all of the business
Even with all these different options, some of the current juniors will be extinct by the time the
bottom in equity and commodity markets is over
Conclusions: