Since opening its data room and inviting term sheets and proposals from lenders in April, Roxgold (TSXV: ROG; US-OTC: ROGFF) has nailed down a US$75-million senior project debt facility from Société Générale and Credit Suisse, which should finance its Yaramoko gold project in Burkina Faso into production.
“The response to our debt-selection process was strong, and we had a large number of participants,” John Dorward, Roxgold’s president and CEO, said in a telephone interview. “We ran a competitive process and looked at different term sheets from alternative financings available, including streams and royalties, and felt the most competitive way was with the commercial banks.”
Although the final terms of the financing package have yet to be ironed out, Dorward said he expects it will be just under 5% including Libor per annum, and the debt package will likely encompass a hedging component of 8.5% of Yaramoko’s current reserves. The price at which the gold will be hedged still needs to be determined and will be based on the gold price on the date that the hedge is put in place.
While many in the industry frown on hedging, Dorward said the practice is often needed for debt packages of this kind. “Generally the commercial bank project financing does require you to take out some hedging as price protection during the course of the loan life,” he explains. “It’s a relatively low level of hedging compared to other projects I’ve seen, which reflects our low operating costs. You would generally see hedging a higher proportion of gold.”
Dorward also said that management has tried to strike a balance between excessive leverage and the risk associated with that, and too much dilution. “It’s an issue we’ve wrestled with many times before,” he continued. “We try to strike an acceptable balance.”
He adds that “there is a place for a sensible debt component,” and that “if we were looking at equity financing the full amount, we would be looking at significant dilution.”
Dorward says the debt package reflects a better tone to the market and to the lenders’ confidence in Yaramoko. “I think there is appetite by debt providers to put capital to work in quality projects, and so while I think there is a better tone to the market as a whole, it’s still selective in the types of projects it wants to support.”
David Sadowski, an analyst at Raymond James, notes that that total amount of the debt package exceeds his previous expectation of US$60 million by 25%, which he says “demonstrates a strong appetite for high-quality projects in the current environment.”
On the permitting front, Dor-ward says the project is progress-ing well. The environmental and social-impact assessment has
been lodged, and the company has wrapped up its public consultations. “We think that the financing and permitting will coalesce and allow us to make a production decision by the end of the third quarter,” he says.
In a note commenting on the news, Tara Hassan of Haywood Securities said that the two mandated banks are “well known and active lenders in the mining space, and have already advanced the initial portions of due diligence, lowering the risk related to this part of the approval process.” She also said the 8.5% hedge of reserves “is expected to be spread over the initial years to maintain upside exposure,” and doesn’t expect it will “overly punish” the economics.
Hassan says Yaramoko is high grade as well as “relatively continuous, with limited variability and good predictability.”
She writes that “these grades drive an attractive cash-cost profile that will see Yaramoko’s costs fall among the lower end of development and production peers . . . the grade and geometry of Yaramoko allow for Roxgold to bump up against the desired threshold of 100,000 oz. per year, while developing a small-scale operation.” The operation would average 750 tonnes per day, compared with average throughput for the region of nearly 6,000 tonnes per day.
Hasan says the result is limited pre-production capital requirements, which “enables a shorter development timeline, and lowers execution risk.”
At press time Roxgold traded at 80¢ per share within a 52-week range of 36¢ to 84¢.
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