The Retaining Wall
A structured product for
mineral wealth generation in
Guyana.
Brian McGann

11 July 2012
Università del...
Agenda:
Introduction.
Why Guyana?
Why the Product?
Structural Benefits, Risks and Returns.
Conclusions.
Intro: Motivation
•
•

We will address a common problem to a specific industry in a specific country.
We talk about the mi...
Intro: Motivation
• What kind of
companies are these?
Project Name

Company

Aurora Gold Project
Toroparu Gold/Copper Proj...
Intro: Concerns – Do you own the company directly?
•
•

Gold stands at $1568/oz below
its 2011 high of $1,900.

•

Zugzwan...
Intro: Gold Demand
• In 2011, Central Bank gold
demand reached I&D demand..500
tonnes.
• USD 22.8 billion was the
identifi...
Intro: Bauxite Demand
• Only two countries Produce
Refractory Bauxite for export, China
and Guyana.
• 75% if bauxite produ...
Intro: The Mining Business.

•

•

Scoping study:

Prefeasibility study:

 What should it be?

 What will it be?

 Does...
Why Guyana?
Government
Governance

Mineral Rich

Intro

Why Guyana

Why Product?

Structural
Benefits, R/R.

Conclusion
Why Guyana?
Politicial Potential Index
Country

PPI Ranking

Top Ranked:

University of New
Brunswick head of
Chemical
Eng...
Guyana’s Dependency on Gold.
• Here we demonstrate
the correlation and
the importance of gold
production to Guyana’s
GDP.
...
Why the Product?

The Mining Exploration Model
The Current state of Financial Markets
Proposition: Retaining Wall

Intro

...
Project Cycle: Investment

s)

• Below we see the tradition investment patters at different stages of the
lifecycle of a m...
Current State of Financial Markets- Mining.

“We are at the initial stages of a war for capital” says Paul Donovan, senior...
Financial Markets – A Mining Example.

•
•

The Goldex mine attributed to
19% of the company’s cashflow
while the market r...
Cost Pressure Risks

Company

Start-up

Project

1 PRU

2012 1Q
2012 1Q
2012 3Q

4 ELD

2012 3Q
2012 4Q

Pueblo Viejo

6 D...
Why the Product? It’s Profitable.
Company
Guyana Goldfields (1775 oz)
Company
Sandspring Resources

Company
First Bauxite
...
Why the Product?

…because they can’t do it
alone.

Intro

Why Guyana

Why Product?

Structural
Benefits, R/R.

Conclusion
Why the Product?
Because we are Reducing Risk through:
 A convertible structure…
 Insured and Guarantee by MIGA
With:
 ...
Retaining Wall: Terms and Conditions

Convertible Debt Issue: Terms and Conditions
Issuer
Guarantor
Amount senior
Amount s...
Retaining Wall: Convertible Bond
All Projects are in Guyana
Investors:







Guyanese Citizens




Banks: Standard...
Investment

Intro

Why Guyana

Why Product?

Structural
Benefits, R/R.

Conclusion
Investment: Sector Price/NPV Multiples.

Intro

Why Guyana

Why Product?

Structural Benefits,
R/R.

Conclusion
Investment: Implementation.

Intro

Cost: 1.9 billion
Assumption - the load
can be had.

•

$ 26,106,300.00
873,893,700.00...
Conclusion
Total Market Cap
CAD m
Multiple Price/NPV…
$

315

Pre-tax NPV (millions)

$

3,049

$

2,958

1.66

1.237

0.9...
Final Note: Investments awry.

• $6.2 billion writedown Internet-advertising company
AQuantive Inc.,
• BHP Billiton swoops...
Q&A

Thank You
Retaining Wall: A Structured Product for Mineral Wealth Generation in Guyana.
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Retaining Wall: A Structured Product for Mineral Wealth Generation in Guyana.

  1. 1. The Retaining Wall A structured product for mineral wealth generation in Guyana. Brian McGann 11 July 2012 Università della Svizzera Italiana
  2. 2. Agenda: Introduction. Why Guyana? Why the Product? Structural Benefits, Risks and Returns. Conclusions.
  3. 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. 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. 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. 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. 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. 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. 9. Why Guyana? Government Governance Mineral Rich Intro Why Guyana Why Product? Structural Benefits, R/R. Conclusion
  10. 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. 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. 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. 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. 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. 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
  16. 16. 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%
  17. 17. 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
  18. 18. Why the Product? …because they can’t do it alone. Intro Why Guyana Why Product? Structural Benefits, R/R. Conclusion
  19. 19. 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
  20. 20. 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
  21. 21. 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
  22. 22. Investment Intro Why Guyana Why Product? Structural Benefits, R/R. Conclusion
  23. 23. Investment: Sector Price/NPV Multiples. Intro Why Guyana Why Product? Structural Benefits, R/R. Conclusion
  24. 24. 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
  25. 25. 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
  26. 26. 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
  27. 27. Q&A Thank You

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