Augusta’s financing plan fails to impress

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Investors have greeted Augusta Resource Corporation’s announcement last week it has reached a preliminary financing agreement with a consortium of international lenders to provide capital to build its Rosemont copper project with a big yawn.

Augusta’s sagging stock continues to languish around $2 a share following Augusta’s Aug. 9 announcement that it has signed a “Mandate Letter” with 12 international financing institutions.

One likely reason for the underwhelming market reception to Augusta’s announcement is because no definitive financing agreement has been reached. Instead, Augusta’s latest agreement lays out a series of actions that still must be completed before final lending commitments are in place.

“The Mandate Letter sets forth the required steps, (emphasis added) including agreement on final terms and conditions and requisite documentation for the loan, completion of due diligence, and procurement of credit approvals, as well as time frames for completing these steps,” Augusta states.

In other words, there are many crucial steps remaining before definitive financing is in place.

Augusta’s latest financing plan is similar to other agreements the Vancouver, B.C.-based speculative mining company has executed where funding is contingent on the company obtaining the necessary regulatory permits to construct an open-pit copper mine in the Santa Rita Mountains on the Coronado National Forest southeast of Tucson.

Augusta has agreed to sell all its silver and gold production from the Rosemont project to Silver Wheaton for no more than $3.90 ounce for silver and $450 an ounce for gold in exchange for $230 million to fund mine construction. Augusta, however, cannot access Silver Wheaton’s funds until after all major permits have been received and project financing is in place.

Augusta also has an agreement with its Korean-based joint venture partner, United Copper & Moly, for UCM to invest $106 million to fund mine construction. The UCM investment is also contingent on Augusta receiving all major permits for the mine.

The company states that the preliminary agreement outlined in the mandate letter will provide sufficient funds to construct the $1.2 billion mine and support facilities expected to process 75,000 tons of copper ore per day.

“The proposed senior secured loan is expected to provide all of the debt required for Rosemont, including a cost overrun component,” Augusta stated in its release.

The mandate letter, however, does not disclose the amount of financing Augusta is seeking from the 12 international lenders, nor does it disclose the financing cost, including fees to lenders and legal expenses.

Junior copper mining companies like Augusta have had difficulty obtaining financing as copper prices have fallen in the wake of declining demand and increased production that is forecast to produce copper surpluses the next few years.

The tight lending environment for junior minors is likely to be reflected in high financing costs if, and when, Augusta executes a final financing agreement.

In the near term, Augusta continues to face an eroding cash position and an uncertain regulatory outlook. Augusta reported $19 million in working capital at the end of the 1st Quarter. The company is expected to release its 2nd Quarter results later this week.

Augusta has been relying on $83 million in loans from Red Kite, a London-based metals hedge fund, for working capital. The Red Kite loan is due in July 2014.

As its cash position erodes, Augusta is pressing the U.S. Forest Service to issue a Final Environmental Impact Statement and a Record of Decision on the Rosemont mine by the end of September.

The Forest Service released a draft of its Final EIS in July and county, state and federal agencies are required to file comments by Aug. 15. If the Forest Service does not issue a Final EIS by Sept. 27, new regulations will take effect that will delay final publication of the EIS by at least 90 days.

Any delay in issuing the FEIS past the end of the 3rd Quarter will likely force Augusta to obtain additional near term financing, the company has stated in regulatory filings.

“If funding cannot be obtained, this would indicate an existence of a material uncertainty that raises substantial doubt about the Company’s ability to continue as a going concern,” Augusta stated in its 1st Quarter Management Discussion & Analysis report filed with Canadian securities regulators.

“The Company’s ability to continue as a going concern is dependent on the Company raising additional debt or equity financing to support ongoing operating and corporate administrative activities.”

Augusta still needs to obtain a crucial Section 404 Clean Water Act permit from the U.S. Army Corps of Engineers. Augusta needs the permit because the proposed mine will dump waste rock and mine tailings on more than 3,000 acres of the Coronado National Forest, destroying streams, springs, seeps and washes that drain into a federally-protected aquifer at the Las Cienegas National Conservation Area.

The U.S. Environmental Protection Agency has stated that Augusta’s wholly-owned Rosemont Copper Company has failed to provide sufficient environmental mitigation for impacts on water resources from the proposed mile-wide, half-mile deep mine. EPA has the authority to veto Clean Water Act permits issued by the Corps.

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3 Responses to Augusta’s financing plan fails to impress

  1. ALAN JOHNSON says:

    ONCE AGAIN AUGUSTA HAS PORTRAYED ITSELF AS ” SPIN MASTERS ” . THE ” MANDATE LETTER ” LISTS 12 AGENCIES AS PARTICIPANTS TO PROVIDE APPROXIMATELY US$ 890 MILLION TO HELP COVER THE CAPEX OF US$1.2BILLION REQUIRED TO BRING THE ROSEMONT PROPERTY INTO PRODUCTION PROVIDED ALL PERMITTING IS FIRST COMPLETED SUCCESSFULLY . IT IS INTERESTING TO NOTE THAT EXPORT DEVELOPMENT CANADA IS LISTED AS ONE OF THE 12 PARTICIPANTS . THIS QUASI GOVERNMENT AGENCY IS MORE A FACILITATOR THAN A FINANCIAL LENDER . THE ” MANDATE LETTER ” DOES NOT LIST OR EVEN INDICATE THE AMOUNT OF FINANCIAL INPUT EACH OF THE 12 PARTICIPANTS WILL HAVE . THIS IS THE FIRST ATTEMPT THAT AUGUSTA HAS MADE TO ADDRESS PROJECT FINANCING BUT IT FALLS FAR SHORT OF WHAT IS REQUIRED IF ONE IS TO BELIEVE ANYTHING THAT AUGUSTA PUTS OUT IN A NEWS RELEASE . IT COMES AT THE 11TH HOUR . IT WILL TAKE CONSIDERABLE TIME AND EXPENSE FOR EACH OF THE 12 PARTICIPANTS TO CARRY OUT THEIR OWN DUE DILIGENCE ON THE ROSEMONT PROPERTY . UNTIL THIS IS DONE EVERYTHING REMAINS AS PURE SPECULATION . IF THE ” POWERS THAT BE ” DO APPROVE ALL PERMITTING , THIS WILL PROVIDE AUGUSTA WITH A BANKABLE DOCUMENT , THUS MAKING IT EASIER FOR THEM TO PURSUE FUNDING OPTIONS . HOPEFULLY , THIS WILL NOT BE THE CASE .

  2. Thomas Stewart says:

    Mr Alan Johnson Your Reply Appears To Be From The Liberal Spin Of Stall And Complain?? Sounds Like Section 404 Clean Water Act Permit From The US Army Corps Of Engineers Should Be A “Slam Dunk”!! Following The Rosemont Copper Company The Federal Govt EPA Has Made It Appear Some-One Does Not Want This Copper Mine, When You State The Reason As “Mine Tailings” Destroying Stream, Springs, Seeps And Washes!! Yikeess, Rosemont Copper Has Jumped Thru Every Environmental Mitigation To Comply With Existing Laws And Passed With Flying Colors. Maybe You Could Take A Tour Of The Local Mines?? Now Compare The Tour Of Rosemont Copper Co, Nothing Wasted, Blocked, Or Changed!!! Yours Truly Thomas Stewart Green Valley Az

  3. Fergus Graham says:

    This, or any loan proposal is open to question under present circumstances. Using figures previously published by Rosemont the total capital cost of the mine project would be $1,226 million. To date $113 million of this has been raised and spent leaving a balance of $1,113 million. Total equity committed from two sources, and available only after permits and other financings have been finalized, is $336 million, leaving a balance of $777 million to be financed by loans. This loan amount represents approximately 70% of the remaining, or 63% of the initial capital requirement.
    The question is whether any loan company or companies would be willing to lend to a project with such a high loan to equity ratio for what would be considered in the business as a high risk venture. Compounding the risk is the fact that after acquisition of necessary equipment, site clearing and road building, the next two years will be spent removing almost 100 million tons of overburden. Only in the following year will ore be reached, mined and processed, meaning that it will be the end of the third year of the whole operation or into the fourth before any revenue starts to come in; a long time to wait for loan repayment to start.