Transcript Mine Africa - Surviving the Global Financial Crisis in the

Surviving the Global Financial Crisis in the Mining Sector:
Strategies for Junior and Mid-Market Companies
Daryl J. Hodges
Senior Managing Director
Investment Banking
13 January 2009
This presentation is for discussion purposes only and is incomplete without reference to, and should be viewed solely in conjunction with, the
oral briefing provided by Jennings Capital. Neither this presentation nor part of its contents may be disclosed or used by any other purpose
without the prior written consent of Jennings Capital.
The information in this presentation is based upon any management forecasts supplied to us and reflects prevailing conditions and our views
on this date, all of which are accordingly subject to change. Jennings Capital’s opinions and estimates constitute Jennings Capital’s
judgment and should be regarded as indicative, preliminary and for illustrative purposes only. In preparing this presentation, we have relied
upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or
which was provided to us by or on behalf of the Company or which was otherwise reviewed by us. In addition, our analyses are not and do
not purport to be appraisals of the asset, stock, or business of the Company or any other entity. Jennings Capital makes no representations
as to the actual value which may be received in connection with neither a transaction nor the legal, tax or accounting effects of
consummating a transaction. Unless expressly contemplated hereby, the information in this presentation does not take into account the
effects of a possible transaction or transactions involving an actual or potential change of control, which may have significant valuation and
other effects.
Jennings Capital’s policies prohibit employees from offering, directly or indirectly, a favorable research rating or specific price target, or
offering to change a rating or price target, to a subject company as consideration or inducement for the receipt of business or compensation.
Jennings Capital also prohibits its research analysts from being compensated for involvement in investment banking transactions except to
the extent that such participation is intended to benefit investors.
Jennings Capital Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of tax matters included herein (including any
attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by
anyone not affiliated with Jennings Capital of any of the matters addressed herein or for the purpose of avoiding tax related penalties.
This presentation does not constitute a commitment by Jennings Capital to underwrite, subscribe for or place any securities or to extend,
arrange or provide any other services.
2
Monday: September 29th, 2008…
3
… and More Recent Headlines (Jan 2009)
4
Credit Freeze & Financial Crisis – Markets’ Reaction
Apr-July 2008 – Certain
Markets and Commodities
Make New Highs; Small Caps
Left out of the Rally
Jan 2008 – The First Major
Sell-Off in the Eq. Markets –
Fed Slashes Rates in
Emergency Meeting
120.0
Sept – Oct 2008:
Lehman Fails, AIG
Bailed Out/ TARP
Passes After First
Being Rejected, Panic
Takes Over
110.0
Relative Performance (%)
100.0
90.0
80.0
70.0
Aug 2007 –
Credit Crunch
News Hits the
Eq. Markets
Mar 2008 – Bear
Stearns Fed
Brokered Deal
60.0
50.0
Aug 2008 – A slew
of Negative News
Hits the Markets –
Freddie & Fannie
40.0
30.0
Jul-07
Sep-07
Nov-07
Mar-08
May-08
Jul-08
Sep-08
Nov-08
S&P SmallCap 600 Sector Indices – Materials Sector Index - Index Level
S&P 500 Sector Indices - Materials Sector Index - Index Level
S&P Midcap 400 Sector Indices - Materials Sector Index - Index Level
S&P 500 Index (^SPX) - Index Level
Source: Bloomberg Financial Markets
5
Jan-08
Jan-09
Liquidity Crisis – Different Toll on Different Metals
6
Source: Metalprices.com
Light Crude Oil (CL, NYMEX)

After an all-time high of US$ 147.27 in July 2008, oil has fallen under US$ 40.00 by January 2009; prolonged recession
expectations coupled with US$ appreciation fuelled the dramatic fall in crude prices
Source: NYMEX
7
Equity Capital Markets: 3 Year Review

Over the last 3 years, Global, Mining and Canadian Equity Issuance – very strong; exception: 2008

While the overall global equity sales dropped significantly in 2008, it seems Mining issues, while lower, held better than
the overall markets

1st half of 2008 saw decent volumes on Iron Ore, Potash and Coal financings

2nd Half of 2008 – NO IPO’s on the TSX
Global Equity Markets
Equity Markets - Mining
$750.0
$622.8B raised
3,283 Issues
$240.0
$556.6B raised
3,095 Issues
$209.7B raised
365 Issues
$194.9B raised
232 Issues
$180.0
$377.9B raised
1,325 Issues
$250.0
Amount (US$ B)
Amount (US$ B)
$500.0
$118.4B raised
312 Issues
$120.0
$60.0
$0.0
$0.0
2006
2007
Source: Bloomberg Financial Markets
8
$21.5B raised
$19.3B raised
44 Issues
184 Issues $14.7B raised
74 Issues
2008
Global Mining
2006
Canadian Mining
2007
2008
High-Yield Debt Markets: 3 Year Review

High-Yield Global Debt Markets saw a sharp drop in 2008 from 2006, 2007 levels

Canadian and Mining specific deal were somewhat more resistant to the downturn
High-Yield Global Debt Markets
High-Yield Debt Markets - Mining
$250.0
$199.5B raised
535 Issues
$200.0
$195.7B raised
502 Issues
$250.0
$200.0
$150.0
$100.0
$72.4B raised
162 Issues
$50.0
Amount (US$ B)
Amount (US$ B)
$199.7B raised
2888 Issues
$153.4B raised
189 Issues
$150.0
$112.7B raised
249 Issues
$100.0
$50.0
$18.7B raised
73 Issues $14.2B raised
68 Issues
$0.0
$0.0
2006
2007
2008
Global Mining
2006
Source: Bloomberg Financial Markets
9
Canadian Mining
2007
2008
$20.7B raised
39 Issues
Liquidity Crisis – Different Toll on Different Securities
Mercator Minerals Ltd. - Share Price Performance
(12 Sep 2008 - 9 Jan 2009)
$7.20
3,000,000
9,000,000
$6.00
7,500,000
Recently Announced Very Dilutive
Equity Financing
2,400,000
Recently Filed for Bankruptcy
$0.20
1,200,000
$0.10
Volume
1,800,000
Price (C$)
Price (C$)
$4.80
$0.30
600,000
$0.00
0
15-Sep
30-Sep
16-Oct
31-Oct
17-Nov
Volume
4-Dec
22-Dec
$3.60
4,500,000
$2.40
3,000,000
$1.20
1,500,000
$0.00
9-Jan
0
15-Sep
Price (C$)
30,000,000
$1.50
24,000,000
$1.20
Volume
10
Source: Bloomberg Financial Markets
25-Nov
9-Dec
Price
23-Dec
9-Jan
Price
7,500,000
Performed Rather Well, Recently
Announced Equity Financing
6,000,000
6,000,000
$0.30
1,500,000
0
$0.00
$8.00
11-Nov
23-Dec
3,000,000
12,000,000
$0.00
9-Dec
$0.60
$16.00
28-Oct
25-Nov
4,500,000
18,000,000
14-Oct
11-Nov
$0.90
$24.00
29-Sep
28-Oct
Semafo Inc. - Share Price Performance
(12 Sep 2008 - 9 Jan 2009)
Volume
Price (C$)
Ongoing Sale of Noncore Assets,
Re-negotiating Debt Covenants,
Layoffs
15-Sep
14-Oct
Volume
Teck Cominco Ltd (Cl. B). - Share Price Performance
(12 Sep 2008 - 9 Jan 2009)
$32.00
29-Sep
Price
$40.00
6,000,000
9-Jan
0
15-Sep
29-Sep
14-Oct
28-Oct
11-Nov
Volume
25-Nov
Price
9-Dec
23-Dec
9-Jan
Volume
$0.40
Volume
First Metals Inc. - Share Price Performance
(12 Sep 2008 - 9 Jan 2009)
$0.50
Junior Natural Resources: The 2008 Meltdown



11
First half of 2008: tough credit, softening commodities

Volatility and liquidity: trading volumes declining and share prices falling

Deal flow showed a sharp decline, transactions were closing under issue price
Second half of 2008: financial collapse, plunging oil and copper

Trading volumes dried up, sellers wanted out - immediately

Selling down on positive news as increased volumes provided a liquidity window

Traditional investors, retail and institutional, fled the market… to cash

Resource equity financings become nearly impossible

Debt market activity shrinks to lowest level in over a decade
Result: share price collapse, severe treasury drain on junior companies
Where Are We Now?

Don’t get a false sense of security from the recent uptick - the panic may be over (Recall ’98-’03)

Treasuries are drained, money is scarce

Shares trading at rock bottom prices, they have rebounded slightly

Industrial commodities – at low prices again

Precious metals weak, but gold is starting to look attractive as the US dollar caps

Producers balance sheets – under increasing strain; start-ups struggling

Risk re-pricing: analysts and investors – re-rating companies; target prices dropping

Bankruptcy protection for some, extreme dilution for others

Risk re-rating: caused perceived risk to move “up market”

12

Bank stocks are considered risky

Juniors resource developers are excluded from many portfolios
RESULT: The cost of equity capital is the highest we have seen it
And the Casualties are Starting to Pile Up…
13

First Metals Inc. “Files Notice of Intention to Make a Proposal Under the Bankruptcy and Insolvency
Act” (January 2009)

Adanac Molybdenum Corporation to “Evaluate Strategic Alternatives Under CCAA Protection”
(December 2008)

Giant metals miner Teck Cominco cuts 1,400 jobs …“A big concern surrounding Teck is its ability to
pay off nearly $10 billion in debt it incurred with the purchase of Fording last fall. This includes a $4billion term loan and a $5.8-billion bridge loan.” (Globe and Mail, January 9, 2009)

Rio Tinto commits to reduce net debt by $10 billion in 2009 …Reduces workforce by 14,000 –
(company press release, December 10, 2008)
The “New” Cost of Capital: Yield and Dilution

Recent High Yield Debt Issues:

Petaquilla Minerals: USD $60 million (October 3, 2008)
(initial YTM, not including the warrant sweeter – 17.8%)(1)

Northern Star Mining Corp: USD$42 million (September 11, 2008)
(initial YTM, not including the warrant sweeter – 22.4%)(2)

Farallon Resources Ltd: $25 million (September 3, 2008)
(initial YTM, not including the common shares attached – 15.0%)(3)

Recent Equity Financings:

Yamana Gold Inc: $100 million @ $6.00/ sh. (3.00% dilution)
(52-week range: $4.29 to $19.79)

Semafo Inc.: $23 million @ $1.20/ sh. (10.00% dilution)
(52-week range: $0.75 to $1.72)

Mercator Minerals Ltd.: $23 million @ $0.70/ sh. (56.00% dilution)
(52-week range: $0.29 to $12.94)

Redback Mining Inc.: $60 million @ $3.50/ sh. (10.00% dilution)
(52-week range: $3.28 to $$9.25)
1) Petaquilla Unit financing: each Units consisted of $1,000 principal amount, 5 Yr 15% Coupon, and 382 common shares warrants, with the Notes to be redeemed
at maturity or change of control at 120%, Warrants’ initial exercise price – C$2.30 for 5 yrs, with an anti-dilution price protection floor at C$2.15
2) Northern Star Unit financing: Each Unit consists of a transferable 14% Coupon Senior Secured Note US$1,000 maturing in two (2) years, redeemable at 125%
and 750 transferable share purchase warrants, exercise price of C$1.20 per share for a period of five years from the date of issuance. The purchasers of Units also
received a due diligence fee in an amount equal to 5% of their total subscription amount.
3) Farallon Unit financing: each Unit consisted of a $100,000 promissory note, 15% Coupon, plus 8,000 Farallon common shares
14
Surviving the Downturn

Two choices:

Hunker down: slash spending, husband cash, and weather the storm

Seek creative, or non-traditional, financing strategies in the secondary market to continue
advancing the company, and prepare for the next upturn

15
Actually, there is only one choice… do both!



High Yield Debt Financing
Convertible Debentures
Flow-through Shares




Off-take Agreements, Strategic Investors
Royalty Agreements
Forward Sales
M&A




Where to Seek the Funds (Who is Providing Funds)
Requirements
Deal Structures
Recent Examples

Consider which of these could suit your Company, and get advice
Alternative Sources: High Yield Debt
16

Most commonly issued for project financing, situations in which banks – not willing to lend, or
conditions too onerous and time is of essence

Broad distribution – multiple buyers/ lenders, can be issued as a private placement or more broadly
under a prospectus:

Market to a wide cross section of equity, debt, and high yield portfolios

Retail demand – strong

Domestic and international exposure

Customize to the majority of lenders, no single party drives the process

Debt instrument is secured (commonly) or unsecured (rarely), provides a high priced coupon, offered
at a discount, and often accompanied by an equity “kicker”

Typically less onerous covenants compared to a classic project financing or bank debt:

Full bankable feasibility study not necessary, but assurances of success need demonstration

Metal hedging can take place at a future date, at the Company’s discretion

Less onerous reporting requirements – reasonable financial stress tests

The high coupon and wide distribution can make the situation stressful, if deadlines are difficult to meet
or the issuer needs to negotiate changes to the original deal

Current conditions – leading to extremely costly financings; difficulty in meeting debt obligations:

ALL lenders have become extremely nervous

Use as a bridge loan until other forms of financing are available
Alternative Sources: Convertible Debentures

Similar application as High Yield Debt, Convertible Debentures: a hybrid debt – equity instrument
 Debenture: secured and pays a coupon over its term
 Conversion feature: can convert into shares of the company at a future date, usually at a higher price

Distribution: investors view convertible debentures as a trade off between perpetual, low-cost capital
(equity) and time-limited, costly (high yield) form of capital

In the current market it reflects both yield and dilution components of financing and can reduce both
slightly

Terms of coupon and conversion: trade–off between expected equity return, liquidity of underlying
shares, stability of cash flow (if any), and security of underlying assets

In many deals, the short-sellers/ arbs gets involved:
 Sell short the underlying shares and buy/ go long on the convertible security (if the stock rises, they convert the
bond to cover the short. If not, they continue to earn % coupon rate)

17
As with debt the current market conditions are making these products very expensive for issuers and
the providers are very nervous
Alternative Sources: Flow-Through Shares

Canadian exploration and certain development projects: can be funded by FT shares that “flow” the
exploration tax deductions, normally claimed by corporations, “through” to investors

Funds must be spent on specific allowable tasks (drilling, surveying, etc) and are thus restricted

Flow through funds, and retail investors: main purchasers

Issuer must be a Canadian company, and

Projects must be in Canada

Additional provincial tax credits can be available

Not really a new alternative, since these have been available off and on for twenty years, but
traditionally confined to exploration Co’s and strictly to the ones having Canadian properties/ assets

More mid–cap companies may need to explore this avenue for exploration financing

Deals typically done around year-end but also whenever a fund raises capital (which is becoming more
difficult)

Pricing is market dependant; many companies expect premiums, given the tax advantage inherent

For exploration companies this is often the only method of financing

Many investors buy flow through for the tax advantage with no concern for the underlying issuer or its
project

18
The shares often re-enter the market as soon as the investor can sell
Alternative Sources: Off-Take / Strategic Investors
19

Mostly done by European, Asian smelter companies/ or metal trading houses

The company must have a mining project with measurable production expected

Usually companies get an up-front cash payment, plus fixed price on the metals/minerals

Overseas strong financial partner providing both equity/ debt financing, combined with an off-take
contract, represents pure relationship business (essentially important in bear markets):

Mitsubishi Materials Corp. purchased 25% equity interest in Copper Mountain Project (CUM: TSX) for
$28.75m, arranged a $250m project loan, and contract to purchase all the copper con from the mine for 10 yrs

Korea Resource Corp (KORES) 30% acq. of Baja Mining Corp. (BAJ: TSX) for US$435m of project funding
and 30% Off-Take Rights on Commercial Terms & 30% Completion Guarantee on Project Debt

Tata Steel Global Minerals purchased 19.9% of New Millennium Capital Corp. for $23.5 million and an option
to acquire 80% equity interest in the DSO project, by paying 80% of cost, investing a further $300 million in
exchange for 100% off take

Trafigura Beheer BV Amsterdam, off-take agreement with Farallon Resources Ltd. (FAN: TSX)

Chinalco, Jinchuan and Glencore AG are cashed up and currently making strategic investments in base
metals producers
Alternative Sources: Royalty Sales

Company gives up a portion of future income or revenue stream – exchange for current financing

Usually completed just in front of production, but are not unusual on exploration projects

20
Often used in early “prospector” transactions, so very important to search for lingering or multiple royalties on
title, since a royalty is most commonly recorded as a lien against a property

Typical royalty: Net Smelter Royalty (“NSR”) of 2% of the proceeds net of smelting and refining
charges

Net Profits Interest (“NPI”) of 10% to 15% is paid after all expenses from operations are deducted

Generally royalties are considered non-dilutive, but equity investors are not keen on them, and often
they do not raise that much money relative to the payout stream

Typical NSR deals would have been struck at anywhere between 1.25% to 2.00%, recent negotiations
have started @ 2.00%, with a sliding-scale NSR, that could reach as much as 3.25%-3.50%

Royalty Companies are not very fond on NPIs, even though mining companies were willing/ ready to
do deals in the range of 10%-15% NPI participation/ profit interest

Recent Transactions:

International Royalty Corp. (IRC: TSX) $2.85m acq. of additional gold royalties from Barrick/ Atna Resources

Franco-Nevada Corp. (TSX: FNV) $103.5 m acq. of 7.29% NSR on the Gold Quarry Royalty Property/ Nevada

International Royalty Corp. (IRC: TSX) $2.6m acq. of additional Skyline Coal Mine royalties located in Carbon
and Emery Counties, Utah
Alternative Sources: Forward Sales

Company sells forward portion of future revenue stream, usually by-product at a pre-determined
price, in exchange for current financing

An excellent way to monetize future minor revenue from a project

Can be made to downstream consumers (i.e. smelters), but more recently specific gold and silver
companies have been purchasers of metal from would–be or existing producers: Silver Wheaton, and
Gold Wheaton

Usually completed just in front of production, usually done on by product precious metals

Generally forward sales – considered non-dilutive; equity investors and analysts – satisfied with
them, provided negotiated metal prices – not too deeply discounted

Typical gold or silver deals would involve a substantial pre-payment in exchange for most of metal
revenue, with residual revenue stream

Recent examples include:
 Silver Wheaton purchase of Mercator Minerals’ silver stream at Mineral Park US$42m
 Gold Wheaton purchase of 50% of FNX’s gold, platinum and palladium: C$175m in cash, 350m Gold Wheaton
shares & C$50m in Gold Wheaton warrants
 Gold Wheaton purchase of 25% First Uranium’s 2.1m Ozs gold stream: C$125m in 2 tranches, C$75m due
Feb 27/ ‘09
 Silver Wheaton purchase of 75% of Farallon’s silver stream from Campo: C$80m in several tranches
21
Alternative Sources: Mergers and Acquisitions

Many companies – shrunk to puny market caps, well below many institutional investors’ thresholds

Risk re-rating has resulted in funds drying up and a reluctance to finance juniors

The current order of least to most likely to get financed is:

22

Early stage exploration – pre drilling: pass the hat!

Pre – resource drilling: difficult and only superb results attracting attention (area where good news has
caused sales on liquidity)

Resource drilling and pre – production: equity very difficult, pro-forma economics must be robust, must
be in “safe” jurisdiction, will be financed by existing investors or “value investors”, debt very difficult,
expensive and typical plant and equipment are being marked down extensively as collateral

Production: can get financed, especially to take advantage of “vulture opportunities”, but capital IS
expensive (excluding dealer commissions!)
This is the time for companies to look at preparing for next recovery and metal cycle:

Create critical mass that investors will want to own

Those with cash and healthy balance sheets to look for opportunities

Those with weakened balance sheets to face reality
Alternative Sources: Mergers and Acquisitions

What the market wants to see, and how to position for that:

Cash on balance sheet: find a partner with a healthy balance sheet, and be extremely stingy with that cash,

23
Explorers with good projects should seek those trading below cash value

Limited debt on balance sheet: beware of leverage, unless its manageable

Stable cash flow: find a partner with robust operations, and a track record

Reduce operating risk: make multiple, quality, producing assets a priority

CRITICAL MASS – annual production and market caps

100,000 + oz gold, 5 – 10 mm oz silver

50,000 tonnes copper, zinc, 10,000 tonnes nickel

$50 million market caps as a minimum

Growth opportunities: find assets that have upside, not retreads

Growth opportunities: find quality exploration properties

Strong management: find management teams with proven success

Strong board: find board members with depth and success

Sell your assets (projects, or future revenue/income)

Sell your company – give your investors flexibility
Conclusions:

Funds are scarce and expensive

Budget with care – watch every non-essential expenditure, and at a last resort, wind down or
temporarily close production/ operations

Consider the financing alternatives suggested, how does your Company’s profile fit?

Consider strategic partnerships – either with private pools of capital (NovaGold) or state backed
enterprises (Chinalco)

Merge with or acquire cashed up shells or other cash rich(er) companies

It may be necessary to sell assets, or all of the business

Even with all these different options, some of the current juniors will be extinct by the time the bottom
in equity and commodity markets is over
24
25