Ann: Corporate Update & Mining Indaba Presentation, page-101

I'll add my two cents to a few of the comments/questions that have popped up on this thread:

1. Payback period is not what we are actually using when it comes to bank discussions. In normal terms, you can pay your home loan back in much quicker time if you eat only what you buy from Coles, don't go on holidays, buy a cheap car or use public transport, and put all your surplus cash into your home loan. But of course, who the f*** wants to live like that? I like going on holidays, and boozing it up over a long lunch, and using some of my surplus cashflow for fun, not debt repayment. Our payback time might be 2.7 year or whatever the financial analysts worked out, but it won't be our actual payback time. We are going to get a longer loan, with smaller repayments, so the cashflow helps the company out. This is doubly important when you have a strategy to grow the production to match the buyer's increased volume requirements, in that you need that additional cashflow.

2. Interest rates will be cheap, but bear in mind we'll have two loans. As a general rule (all other things being equal), the lower the LVR, the lower the risk, then the lower the rate. On a conservative lend for the mine (which is the part KfW will be doing), the interest rate should be quite cheap. A margin of a few percent over LIBOR or something like that. It will be cheaper than your home loan. The slightly more risky bit (the Nedbank part) will be more expensive. I can't quote any ranges, as we don't know the final LVR, but I doubt it will be more than 10% (unless we are in high leverage territory). Overall, it should blend out to be a weighted cost of between 5% & 10%, but this is heavily dependent on the exact final mix, the exact LVR for each lender, and how much margin each are charging for their perceived risk (KfW will be relatively low, given the support of the German government). For example, if KfW suddenly turned around and said they like the deal so much, they want to lend $60m instead of $40m, then the cost would go up for their portion. There are too many moving parts to accurately predict it.

3. People talking about "debt repayments" being a drag on the profitability are financial illiterates who don't understand investing, and are probably right wing political conservatives in the vein of the Tea Party who hysterically and hypocritically think "all debt is bad" while having home mortgages and car loans to enjoy those things in life sooner rather than waiting for old age to have saved up that much cash. It's worth bearing in mind that the likely evolution of the world from bartering was not: 1. barter 2. money 3. debt, BUT was more likely to be 1. barter 2. debt 3. money. So chastising debt for it's own sake merely shows people's ignorance and/or fear.

So, leaving the history lesson for the past, a company has a choice. Do you raise equity, or debt, or mix, to get a mine going. How much will the debt cost you? How much does the equity demand?

When you have a mine that is producing a lot of cashflow, with debt costs of well under 10%, and ROE's of well over 20% for equity, then the logical conclusion is that you have as much debt as your risk profile allows you to have. KNL are in the extremely rare and fortunate position of having a large percentage of it's costs covered by binding, bankable off-takes. That means having higher gearing is available to us (in much the same way that a PAYG engineer or software professional can get a larger home loan than a casual delivery driver, all other things being equal). Why would you willingly choose to raise equity (which therefore dilutes even further, thus driving down equity returns) unless you absolutely had to? I'll give you one answer, which is that you raise equity when you have no other choice. Companies will invariably raise debt where possible, as it's usually the cheapest part of the deal. Those that can't (think SYR) are left in the sorry state of having to raise 100% equity to fund their mines. Sure, they are unlikely to ever go bankrupt as they have no debt (apart from trade terms on ongoing expenses), but it means that you have a lot of equity holders to pay, which means long term investment returns for those people are going to be much lower than anticipated. We (KNL shareholders) have a higher threshold to reach in terms of cashflow (because our first $1 of net income goes to interest, whereas SYR's first $1 can theoretically be distributed to shareholders), BUT, once our threshold is reached, our returns are vastly superior on a per share basis.