Structured Product for mining projects

1. The Retaining Wall
A structured product for
mineral wealth generation in
Guyana.
Brian McGann
11 July 2012
Università della Svizzera Italiana

2. Agenda:
Introduction.
Why Guyana?
Why the Product?
Structural Benefits, Risks and Returns.
Conclusions.

3. Intro: Motivation
•
•
We will address a common problem to a specific industry in a specific country.
We talk about the mine financial industry, its problems, and propose a solution.
What are we solving today…and How?
•
•
•
•
•
Finding companies money through a convertible bond –
Guaranteed by MIGA
Enabling us to Attract Investors
Reducing volatility of the asset class.
Eliminating cost pressure by World Class Management.
Company
Guyana Goldfields (1775 oz)
Sandspring Resources (1,373 oz)
First Bauxite
Company
Guyana Goldfields (1775 oz)
Sandspring Resources (1,373 oz)
First Bauxite
Absolute
CAD Market Cap.
$
229
$
64
$
22
$
315
NPV % increase over Market caps.
• Pie in the sky or gold in the ground?
Intro
Why Guyana
Why Product?
Structural Benefits,
R/R.
Conclusion
$
$
$
$
Pre-tax NPV
1,683
1,259
157
3,099
884%

4. Intro: Motivation
• What kind of
companies are these?
Project Name
Company
Aurora Gold Project
Toroparu Gold/Copper Project
Bonasika Bauxite Project
Total
Feasibility capital cost
Guyana Goldfields
Inc. (Operator)
Sandspring
Resources Ltd.
(Operator)
First Bauxite
Corporation
(Operator)
Total
$
Amt Raised
1,291,000,000 $
$
86,426,000
482,000,000
$
$
$
92,554,000
160,800,000 $
1,933,800,000 $
Equity Capital Raised as % of Feas. Costs
178,980,000
9.26%
Market Cap as % of Feas. Costs
16.29%
Project Name
Company
Aurora Gold Project
Toroparu Gold/Copper
Project
Bonasika Bauxite
Project
Total
Guyana Goldfields Inc. (Operator)
$
First Bauxite Corporation (Operator)
$
$
• Toroparu: 6 million
ounces of contained
material.
• Bonasika: 13 m
tonnes.
Feasibility Capital Amt Raised (5
Cost
years)
$
1,291,000,000 $ 86,426,000
Sandspring Resources Ltd. (Operator)
• Aurora: 10 million
ounces of contained
material.
482,000,000
$
• Tarakuli Bauxite 62 m
tonnes.
92,554,000
160,800,000 $ 99,028,000
1,933,800,000 $ 278,008,000
• Can they get it?
…not likely
Intro
Why Guyana
Why Product?
Structural Benefits,
R/R.
Conclusion

5. Intro: Concerns – Do you own the company directly?
•
•
Gold stands at $1568/oz below
its 2011 high of $1,900.
•
Zugzwang – In chess is a term
which describes a situation
where the player cannot skip a
turn but any move he makes
will put him in a worse
situation…..
•
250
All companies are nonproducers and cycles are
exacerbated-high volatility.
•
Guyana 14 Stock Universe - priceweighted average
Commodities are cyclical.
Demonstrates one asset
exploration companies.
200
150
100
50
Apr-12
Dec-11
Aug-11
Apr-11
Dec-10
Aug-10
Apr-10
Dec-09
Aug-09
Apr-09
Dec-08
Aug-08
Apr-08
Dec-07
Aug-07
Apr-07
Dec-06
0
www.finance.yahoo.
com
Intro
Why Guyana
Why Product?
Structural Benefits,
R/R.
Conclusion
Limitations

6. Intro: Gold Demand
• In 2011, Central Bank gold
demand reached I&D demand..500
tonnes.
• USD 22.8 billion was the
identifiable gold demand in the
technology sector
• Demand for Jewelry and
Investment dominate.
• Gold demonstrates excellent
biocompatibility within the human
body
• The most reliable of conductive
metals.
Intro
Why Guyana
Why Product?
Structural
Benefits, R/R.
Conclusion

7. Intro: Bauxite Demand
• Only two countries Produce
Refractory Bauxite for export, China
and Guyana.
• 75% if bauxite production is
consumed by the Steel industry.
• China has emerged as the dominant
producer with 44% of global steel
production in 2010 up from 31% in
2005 producing 3.3 times more steel
than the rest of advanced AsiaPacific.
• Wait, what is bauxite? It is classified
by its application.
Intro
Why Guyana
Why Product?
Structural
Benefits, R/R.
Conclusion

8. Intro: The Mining Business.
•
•
Scoping study:
Prefeasibility study:
 What should it be?
 What will it be?
 Does it make sense to
 Have I analyzed enough
Investors and
management need to
understand the economic
potential of a mining
project even at the early
stages when the majority
of the company’s
resources may be
inferred.
Feasibility study:
 What could it be?
The NI 43-101 regulatory
requirements is the gate
keeper deciding what
may be revealed to the
public and what should
be excluded.
 What risks will this project
pursue this opportunity?
alternatives?
 Have I identified the
optimum project
configuration?
involve?
 What rewards will this
project provide?
 Have I presented an
investment case that is
unlikely to vary
significantly?
Intro
Why Guyana
Why Product?
Structural
Benefits, R/R.
Conclusion

9. Why Guyana?
Government
Governance
Mineral Rich
Intro
Why Guyana
Why Product?
Structural
Benefits, R/R.
Conclusion

10. Why Guyana?
Politicial Potential Index
Country
PPI Ranking
Top Ranked:
University of New
Brunswick head of
Chemical
Engineering
(Alcan now Rio
Tinto Alcan)
Latin American Peer Group.
New Brunswick
Finland
Sweden
President:
Donald Ramotar
Chile
Mexico
Guyana
Peru
Brazil
Colombia
Argentina
Surinam
Equador
Venezuela
Bolivia
Guatamala
Honduras
Reference rankings:
South Africa
Russia
DRC Congo
www.fraserinstitute.org
No news is good news…
Intro
Why Guyana
Why Product?
Structural
Benefits, R/R.
Conclusion
1
2
7
18
32
53
56
57
64
66
72
86
90
91
92
93
54
71
76

11. Guyana’s Dependency on Gold.
• Here we demonstrate
the correlation and
the importance of gold
production to Guyana’s
GDP.
• Guyana’s GDP has
increased from its
1981 level of $570 to
$2,259 in 2010, 296%
increase.
• From it’s 1991 bottom
of $337, the increase
in GDP was 570%
• GDP/GOLD Correlation
of 86.88%.
Intro
Why Guyana
Why Product?
Structural
Benefits, R/R.
Conclusion

12. Why the Product?
The Mining Exploration Model
The Current state of Financial Markets
Proposition: Retaining Wall
Intro
Why Guyana
Why Product?
Structural
Benefits, R/R.
Conclusion

13. Project Cycle: Investment
s)
• Below we see the tradition investment patters at different stages of the
lifecycle of a mining company.
• Should the engineering firms announce a positive BFS, more investors
purchase the shares of the company as loans are secured.
• Problem…who is lending?
0
4
8
year 1
Don't Rush in Hundreds of
companies to
choose from.
Intro
12
16
BUY
20
24
year 2
SELL
28
32
year 3
36
40
44
year 4
48
52
56
year 5
60
64
68
year 6
Stay out or short during feasibility studies and environmental permit approvals. This is a long and tedious
After one or several
process. The project requires environmental base line studies and various permits for mine and mill
drill holes
After a visit to the project and
construction, waste rock disposal, tailings disposal, discharge of chemicals, road construction permits,
discoveries, a 5
confirmation of the discovery, buy and explosive storage, waste management, prevention of acid generation, water quality, forest and fisheries,
million market
hold the shares until final phase of
protection of animal domains, bird sanctuaries and many other minor permits. Engineers study the
capitalization is
drilling.
deposit in detail for suitable mining methods and extraction of metals. Even though the fundamentals of
acceptable.
the ore deposit and value remain the same, the share price may weaken and 50% - 60%. At the
completion of these studies, share prices offer the most attractive investments with almost no risk.
Why Guyana
Why Product?
Structural
Benefits, R/R.
72
76
BUY
80
84
year 7
Pr
od
uc
t io
n
fo
r
f ir
st
8
m
on
th
s
e
co Pro
n s du
t r ct
uc io
t io n :
n M
( 1 in
2- e
18 an
m dM
on i
t h ll
s)
Pr
D
Fe
is
as
co
ib
ve
il i
ry
ty
an
s
ot
Ro
ss
ra
G
Months
Years
St
d
ag
e
D
ev
(1
el
8-
op
36
m
m
en
t
on
th
(1
s)
0-
18
m
on
th
When to Buy and When to Sell: Junior Mining Companies.
Sell
88
92
year 8
96
Wait: Buy or Sell
100
year 9
Almost every operation will
experience start up problems.
Several factors could affect
the profitability of the
project. Inadequate removal
As the mine and mill construction progresses, the share prices of waste rock can limit the
will continue to climb until the production date. Optimistic
production of ore: More
forecasts and earnings projections will take the share prices to dilution than allowed for, ore
new heights.
grades are lower than
expected, or poor metal
recoveries. These problems
will cause the share price to
slide. At the bottom, they
offer an excellent
opportunity for reinvesting.
Conclusion
Injection of new
capital and new
energies of technical
people will turn the
project around to
new strong share
prices of qualified
good projects.
Otherwise, they
melt to zero.

14. Current State of Financial Markets- Mining.
“We are at the initial stages of a war for capital” says Paul Donovan, senior Global Economist at UBS. “There is
a fight for a slice for the global capital pie and project finance could be one of the losers.”
“There was an incredibly acute funding squeeze for single-project miners or mines in the late
development and early production phase as banks were simply refusing to lend. We are going to give
them that capital, we are going to help these companies to grow, but we are going to charge a lot
more for that capital, simply because that capital is much more valuable right now”
Evy Hambros, manager of a natural resource fund for Black Rock
“HSBC’s head of global banking in Australia, Chris Russell, said as the world entered a period of tighter
liquidity and scarcer capital flows, his bank was in an unparalleled position to tap into the global and Asian
investor bases. In effect, HSBC is going where other Asian-focused banks should follow in 2012, moving to
plug the gaps left by the European exit. Their entry cannot come soon enough, especially for the smaller
companies which have lost both banking and retail investor support.”
Intro
Why Guyana
Why Product?
Structural
Benefits, R/R.
Conclusion

15. Financial Markets – A Mining Example.
•
•
The Goldex mine attributed to
19% of the company’s cashflow
while the market reaction
brought the value of the
company to a May 2012 low of
$33.97.
•
Agnico-Eagle Mines Ltd. May 25, 2007 - 2012
A 52% decline??
$260 million (or approximately
$170 million after tax), or $1.00
per share of the Goldex
investment was written off.
USD 90
USD 80
USD 70
USD 60
USD 50
USD 40
USD 30
USD 20
USD 10
Feb-12
Nov-11
Aug-11
May-11
Feb-11
Nov-10
Aug-10
May-10
Feb-10
Nov-09
Aug-09
May-09
Feb-09
Nov-08
Aug-08
May-08
Feb-08
Nov-07
Aug-07
May-07
USD 0
www.finance.yahoo.com NYSE adjusted
share price
Intro
Why Guyana
Why Product?
Structural
Benefits, R/R.
Conclusion

17. Cost Pressure Risks
Company
Start-up
Project
1 PRU
2012 1Q
2012 1Q
2012 3Q
4 ELD
2012 3Q
2012 4Q
Pueblo Viejo
6 DGC
2013 1Q
2018 4Q
Cerro Casale
8 ABX/NG
2019 2Q
9 ABX
2013 3Q
Pascua
2016 3Q
Conga
2011
175
148
160
175
46%
152
Donlin
2010
152
194
28%
152
152
152
46%
Detour Lake
7 ABX/KGC
2009
Olympias
5 ABX/GG
2008
120
Efemcukuru
2007
Mercedes
3 ELD
2006
Edikan
2 AUY
2005
10 NEM/BVN
104
142
2012 % Cost Increase
165
1,350
2,700
2,700
3,000
3,400
3,700
174%
1,085
1,450
1,450
72%
1,960
1,960
2,300
3,650
4,200
4,200
6,000
264%
2,130
2,130
3,382
4,481
4,481
4,481
6,678
214%
1,200
1,200
2,350
2,700
2,900
2,900
3,450
4,850
304%
1,100
1,100
1,100
1,100
2,950
2,950
3,505
4,090
272%
Avg increase
Intro
Why Guyana
155%
844
1,650
2,200
420
Why Product?
Structural
Benefits, R/R.
Conclusion
157%

18. Why the Product? It’s Profitable.
Company
Guyana Goldfields (1775 oz)
Company
Sandspring Resources
Company
First Bauxite
* amounts are calculated as pre-tax.
Project
Aurora
After-tax IRR
33%
After-tax NPV (m)
$
1,164
Payback period
4.3
Project
Toroparu
Pre-tax IRR
30%
Pre-tax NPV (m)
$
1,259
Payback period
2.8
Project
After-tax IRR
Pre-tax NPV (m)
Payback period
Bonasika
18%
$
157
5
• Above are the project economics we will consider in our
investment through the Retaining Wall.
• High IRR and low payback period make these investment
attractive.
• Can they realize these returns independently?
Intro
Why Guyana
Why Product?
Structural
Benefits, R/R.
Conclusion

19. Why the Product?
…because they can’t do it
alone.
Intro
Why Guyana
Why Product?
Structural
Benefits, R/R.
Conclusion

20. Why the Product?
Because we are Reducing Risk through:
 A convertible structure…
 Insured and Guarantee by MIGA
With:
 Allocation of risk through Senior and Subordinated tranches.
 Generating increase wealth through Size premium with Scale
economies.
 Global Management Expertise.
 Dormant NPV Can Be Realized.
And Because…. It’s acceptable to management while providing all
parties with attractive risk return proposition.
…. Financial engineering making it possible
Intro
Why Guyana
Why Product?
Structural
Benefits, R/R.
Conclusion

21. Retaining Wall: Terms and Conditions
Convertible Debt Issue: Terms and Conditions
Issuer
Guarantor
Amount senior
Amount subordinated
Maturity*
Coupon
Issue price
Redemption price
Conversion Senior
The Retaining Wall
MIGA
US$ 300 million convertible bonds
US$ 700 million convertible bonds
5 years ( due on 11 July 2017)
0.00% pa annually
100%
100% (for senior debt holders)
Each US$10,000 bond is fully converted during the
conversion period by a vote held conditional that the
majority decides in favor of the conversion.
Conversion Subordinated
Each US$10,000 bond is fully converted during the
conversion period by the same vote is conditional on a
majority decision in favor of the conversion.
> 3 years
US$10,000
No callable features.
11 July 2012
Conversion period
Denominations
Call Options
Payment
Redemption provisions
MIGA- > 5 years :)
Non tradable
Intro
Why Guyana
Why Product?
Structural
Benefits, R/R.
Conclusion

22. Retaining Wall: Convertible Bond
All Projects are in Guyana
Investors:





Guyanese Citizens


Banks: Standard Charter, West LB.
Multilateral Development Banks: IFC,
CDB.
Top 20 producing mining companies
Guyana Government
Resource PE firms
Management
Other private & institutional investors.
$
$
$
Convertible
Bond Issuance
10% Guarantor premium
MIGA
(Multilateral Investment
Guarantee Agency)
Issuer:
Liquidity:
NAV:
Coupon pmt:
Cash
Investmen
t
Retaining Wall
≈ 3.5 year lock up.
USD est. 1 billion.
0%
Senior tranch: 30%
Subordinated tranch 70%
Bond Floor Guarantee 40%
2
RM Management:
Plinian Capital and
Réjean Gourde.
$
1
3
Note: As projects mature and profits are
generated, all debt is converted to equity shares
at the same time so as to align incentives. The
timing of the conversion is at the discretion of
the bond holders and decided by a vote.
Subordinated bond holders will have a higher
conversion rate into shares of the Retaining
Wall to compensate them lower guarantee and
higher degree of risk.
PSA* :
Equity ownership 34%: World Gold Council
33% World Bank, 33% Plinian Capital.
Project: Tarakuli (First Bauxite)
Feasibility Cap. Cost : est. $ 120 m.
Mineral: Metallurgical Bauxite Arrangement:
PSA*
NPV: na
Objective: Provide financing – initiate
revenue.
Time to Production: est. 2.5 years
LOM: 60 years
4
Production Sharing Agreements
$
: Investor Payoff
: Social benefits: higher employment & lower taxes.
$
22

23. Investment
Intro
Why Guyana
Why Product?
Structural
Benefits, R/R.
Conclusion

24. Investment: Sector Price/NPV Multiples.
Intro
Why Guyana
Why Product?
Structural Benefits,
R/R.
Conclusion

25. Investment: Implementation.
Intro
Cost: 1.9 billion
Assumption - the load
can be had.
•
$ 26,106,300.00
873,893,700.00
% of Total
Companies will not sell
their project for their
market caps and will
work exclusively with
RW.
The idea - Make a 40%
deal.
45%
55%
100%
Project
Bonasika Bauxite
Toroparu
Aurora
Why Guyana
•
•
Company
Objective: Get 3 mines
into production
1,000,000,000
100,000,000
Amt. Invested
$
873,893,700
$
1,060,106,300
$
1,934,000,000
Retaining Wall*
Syndicate
First Bauxite
Sandspring
Guyana Goldfields
Total
•
•
Investors:
Amt. Raised
Guarantor Fee (10%)
MIGA Insurance (Civil disturbance,
Expropriation, War)…135 bps (of tot. proj.
$
$
$
$
Required
Investment
161
482
1,291
1,934
Why Product?
Retaining Wall
$
$
$
$
Structural
Benefits, R/R.
72.66
217.80
583.35
873.80
Syndicate Loan to RW
$
$
$
$
88.14
264.20
707.65
1,060.00
Conclusion

26. Conclusion
Total Market Cap
CAD m
Multiple Price/NPV…
$
315
Pre-tax NPV (millions)
$
3,049
$
2,958
1.66
1.237
0.97
……………………………….
Seniors
Intermediates
Junior
$
Retaining Wall retains 40%
3,772
$
5,062
$
Senior 3 year Return
$
300
2,025
337
$
Senior Bond Holders return
$
1,687
12%
Remaining after Senior
payout.
Subordinated Investment
$
700
Subordinated 3 year
Return
Intro
141%
Why Guyana
Why Product?
Structural
Benefits, R/R.
Conclusion

27. Final Note: Investments awry.
• $6.2 billion writedown Internet-advertising company
AQuantive Inc.,
• BHP Billiton swoops on Petrohawk for $12.1 billion.
Intro
Why Guyana
Why Product?
Structural
Benefits, R/R.
Conclusion

28. Q&A
Thank You