project funding - hedging?

Thought it worth re-posting this under a new subject heading which is more to the point to entice more discussion.

Also GZ with respect to possible hedging associated with project funding. I also know very little of the complexities. However, it seems to be an essential part of financial risk management both on the lenders and the mining company. With commodity prices and currency exchange rates open to fairly significant swings, forward commodity price contratcts and forward exchange contracts are insurance against possible falls in commodity prices and foreign exchange losses (as most contracts written in US$).

As a lender to a mining company that has no capital reserves or substantial liquid assets, it would seem prudent for them to require the borrower to take our some insurance against any reduced capacity to pay back the loan. As you point out GZ there are risks. Of course the biggest risk to mining companies is a fall in commodity prices to a stage where the costs of getting the ore out of the ground and processed is uneconomic. So it obviously becomes un-deliverable and effectively the company will have to buy the gold "on market" and deliver it that way at an obvious loss. If they can't do this it is "goodnight" and we have seen many examples of this. Also delivery to the forward sales contracts can be affected by other factors unrelated to the commodity price/cost issue. All sorts of unexpected events such as accidents, plant closures/breakdowns, political turmoil (fortunately not in Australia I hope), shonky resource/reserves/mining planning, loss of key personnel etc etc can effect delivery......I guess these are the ones you would be worried about GZ.

The mining company can also insure against problems in supplying by having put in place forward options contracts to buy gold at a certain price. Clearly this is best done when there has been or is a dip in the commodity price.

In recent times when there is great confidence of higher commodity prices most cashed up producing miners have been buying out or delivering early to their hedging contracts so they can expose future production to the higher prices.

Now getting back to Tectonic's position. It is possible (by my rough unexpert calculations) that they could secure the majority of initial capital debt funding of $70m (total capital funding for the entire project life = $125m) on the back of "flat forward hedging" for delivery of possibly half the gold produced over the first 3 years of production. The rest of production could be exposed to market prices to benefit from any potential increase.

So what are the risks to TTR being able to meet that hedging commitment. The Phillips River resource which is to be mined in the early years at Kundip and Trilogy are shallow and metallurgically not complex. Also, how reliable will the JORC reserve estimates, mining plans be? The extra drilling over tha last four years since the original DFS has enhanced statistical confidence to the robust levels that "money lenders" will require.

Can the Tectonic team get this project up and running on time......... ???? I have no doubts on this. Even though Burnakura was a failure in the end the logistical exercise in getting it up and running in such a remote area proves a great deal to me. Lack of funds to boost production at the time forced Tectonic to sell it off to someone who possibly could. Steve and co very successfully managed RAV8 and he was also invloved with the Mt Dimer Gold Project. All the current Board and key staff have great experience in the industry well before coming to Tectonic.

The main purpose of this post is to created further interesting discussion / debate on the Phillips River Project and its viability as it enters such a pivotal time........it will help GZ pass the time waiting (lol).