Now it's a non-bank gold loan

Century mining's $65m non-bank gold loan highlights the $45bn raised, or being raised, by miners outside the banking system over the past few months.

Author: Barry Sergeant
Posted: Wednesday , 25 Mar 2009

JOHANNESBURG -

Century Mining's recent announcement that it is effectively raising a $65m non-bank loan outside the banking system highlights, once again, the ability of miners to raise capital at a time when a number of countries are using billions (if not trillions) of dollars to bail out various economic subsectors. During the past few months, miners have raised, or are raising, a total of $45bn outside the banking systems of the world.

Century's capital raising is unusual, amounting indirectly to a gold-based debt facility, where the company would raise necessary funding from institutional private investors. Instead of a previous proposal, where Century would have repaid a loan with physical gold from production at the Lamaque mine in Quebec, Canada, the new facility does not require the commitment of any gold ounces.

Century is set to borrow the $65m for a term of seven years, at an interest rate of 8% in the first year, and 6% a year in years two to seven. While the transaction no longer requires committed gold ounces, the nature of the deal struck highlights the general confidence in gold bullion, which retains its status as the world's best price-performing commodity.

Over the past few months, miners have raised $14.3bn from rights issues. Recent examples include First Quantum's sale of 8.1m shares to raise the equivalent of $244m, Quadra's sale of 16.2m share to raise the equivalent of $61m, and Alcoa's sale of 150.0m shares to raise $788m.

The majority of recent rights issues have been from names in the gold and primary silver arenas, but with some major exceptions such as the sale of 1960m shares by diversified miner Xstrata to raise the equivalent of $6bn. Xstrata, along with a number of other major miners, not least Alcoa, has been hampered by very high relative debt ratios. However, the world's two biggest mining stocks by value, BHP Billiton, and Vale, enjoy among the lowest debt ratios in the industry. Freeport-McMoRan, the world's biggest listed copper mining specialist, raised $750m aimed, at least in part, at lightening its debt load.

The single biggest raisings to date, should completion ever be reached, will come from debt-riddled major miner Rio Tinto, which has proposed selling various equity stakes in a number of its key underlying operations for $12.3bn, and convertibles worth $7.2bn to smaller rival, Chinalco, a major aluminium producer backed by the Chinese government.

On December 31, 2008 Rio Tinto's net debt was at $38.17bn; at one stage earlier this year, the group's market value fell to as low as $21bn, but has more than doubled since then as various degrees of confidence have crept back into the direction of the global resources sector. This year so far, Rio Tinto has raised more than $2bn in cash by selling various assets, including Jacobs Ranch (coal), various potash assets, and certain iron ore assets to bigger competitor Vale.

Gold companies, which have been the most prolific of capital raisers, in terms of company counts, have raised straight equity, equity with warrants (a kind of potential future bonus), such as the 100m shares recently sold by Great Basin Gold, to raise the equivalent of $106m, where each sold share also carries a half warrant, and thirdly, as seen in the $517m raised by Newmont selling convertibles, a form of quasi-debt which is convertible to common shares in the company at a future date and set rate.

Corporate bonds have become as rare as proverbial hens' teeth, across all equity subsectors, but the world's biggest diversified resources stock, in the form of BHP Billiton, recently launched a $3.25bn global bond issue, as has the world's biggest gold miner, Barrick, with bonds to the value of $750m.