Forget debt: gold miners bank on equity Robin Bromby March 03, 2006
HIGH commodity prices not only deliver great cash flow, they also relieve new miners of one of their most dreaded tasks: going cap in hand to the banks.
And no banks means no hedging at a time of high prices.
Tanami Gold has become the latest small company to raise all the money it needs from issuing new equity rather than going into debt.
The company will place $20 million worth of new shares to investors here and in Britain and the US to finance development of the Coyote gold mine in the Tanami region of Western Australia.
This follows the decision earlier this week by emerging iron ore player Gindalbie Metals to raise $33.3 million by issuing shares to Australian and international clients of Perth broker Southern Cross Equities.
Gindalbie is planning to produce iron ore from its Karara project, inland from Geraldton, by the second half of 2007.
Two weeks ago, Sino Gold managed to raise $61 million from local and foreign investors to advance its Jinfeng gold project in China.
And even the junior explorers are able to put out their hands for new equity - Gateway Mining said yesterday it planned to issue another $1.2 million worth of shares to finance its drilling program.
No company at a time of high metal prices wants to add to its debt because banks usually require some of the production to be hedged.
While that protects the bank's investment, it means the producer cannot get full exposure to high spot prices.
Tanami executive chairman Denis Waddell said issuing new shares rather than raising a loan meant his company could avoid having to hedge any gold.
"Debt finance by definition means you have to hedge," he added.
It also meant that initial cash flows could be used to finance more exploration rather than be used to repay the bank.
Coyote, with no debt and no hedging, is expected to produce its first gold in June.
The deposit, just west of the Northern Territory border, has a total resource estimated at 572,000oz. Coyote is expected to produce at a rate of 60,000oz a year.
Fat Prophets analyst Gavin Wendt said there was a growing trend for investors to replace banks in providing development capital.
"Shareholders seem to be prepared to put their hands up for specific projects," he added.
So many companies which had raised debt for project development, including major Newcrest Mining, were now paying the price of having some of their reserves locked up in hedging contracts.
"Newcrest is making money but it could be making more if it hadn't been forced into hedging by the banks," Mr Wendt said.
Another growing source of investment is from prospective end users looking to secure future production.
US commodity trading giant Sempra Metals & Concentrates has further entrenched itself with emerging local producers.
The company has invested $1.2 million in Marengo Mining in return for priority in buying output from that company's proposed copper-molybdenum mine in Papua New Guinea.
Sempra is already financing development of Terramin Australia's Anga zinc project and Hillgrove Resources' Kanmantoo copper mine, both in South Australia.
It has done other financing deals with producers Tectonic Resources and Tritton Resources.
