Cash Call Emergency Threatens Minera Andes’ Survival

VANCOUVER — A few months ago, it seemed like Minera Andes (MAI-T, MNEAF-O) had it all: a 49% stake in a producing gold-silver mine, a massive copper deposit nearing development stage, and a pipeline of promising exploration properties.

It’s amazing how quickly things can change. Now the company’s ability to survive beyond the end of February is in the hands of the Toronto Stock Exchange, which has to decide if the company can, without shareholder approval, issue 40 million shares and bring a major shareholder’s ownership to 37.4% in order to raise the funds it needs to meet pressing obligations.

That shareholder is none other than Robert McEwen, founder and former CEO of Goldcorp (G-T, GG-N). The highly successful McEwen, who is currently the president and CEO of US Gold (UXG-T, UXG-X), already owns 24% of Minera and sits on the board as a director. And at a time when money is hard to come by through the usual routes, a private investment of $40 million appears to be the white knight Minera desperately needs.

“We’re sitting there, basically travelling at about 100 miles an hour about to slam into a wall,” McEwen says, describing the events leading up to his offer. “This is Thursday and we need the money by yesterday. And because we’ve exhausted our routes the dealer comes in and says: ‘Here are some terms we should think about offering (to a third party). . . but it’ll have to be at a discount.’ And I’m going, ‘Now wait a minute.'”

McEwen believes in Minera; he says its share price is far too low considering its producing mine, its massive Los Azules copper deposit, and its pipeline of exploration possibilities. And he says he wasn’t about to give the company away to a non-shareholder at a bottomed-out price.

So on Feb. 9, McEwen offered to buy 121.2 million shares at 33¢ apiece, for total proceeds to the company of $40 million. The price was set as Minera’s closing price on Feb. 4, and since Minera has 190 million shares outstanding, the issuance would dilute Minera shares by 65%.

Then on Feb. 17, McEwen sweetened the deal, announcing amended terms to the financing. Instead of 121 million shares at 33¢, McEwen would buy up to 40 million shares at $1 each in a two-part private placement that would only give him 37.4% of Minera. The first part would see Minera issue 18.3 million shares at $1 while the second part would have McEwen take over US$17.5 million in Minera debt (convertible into shares at $1).

The dilemma now, however, is that the transaction under either set of terms triggers the need for shareholder approval, according to TSX regulations. But Minera doesn’t have time for that. To understand why, one needs to go back to the beginning.

The company’s current financial predicament stems entirely from its producing mine. Minera owns 49% of the San Jose gold-silver mine in Santa Cruz province, Argentina. Hochschild Mining (HCHDF-O, HOC-L) owns the other 51% and operates the mine, which began production in mid-2007.

As part of its efforts to finance development at San Jose, Minera borrowed US$17.5 million from Macquarie Bank in 2007. The debt facility was predicated on the expectation that San Jose would achieve positive cash flow in 2008, allowing Minera to repay the debt. Minera used its assets to secure the loan; the agreement stipulated that the company could not dilute its interest in San Jose without defaulting.

Hochschild brought San Jose online in August 2007 and even before the high-grade, underground mine reached full commercial production, the major decided to expand the operation. Initially, the mine was built to process 265,000 tonnes of ore each year; Hochschild embarked on an expansion to bring annual capacity to 530,000 tonnes.

Minera has essentially no control over decisions at San Jose. The company that owns San Jose is 51%- owned by Hochschild and 49%-held by Minera, and is controlled by a five-member board of directors. Three of those members are from Hochschild; the other two are from Minera.

Both partners expected to fund the expansion using cash flow. Unfortunately, development work cost more than expected and in December, Hochschild told Minera it needed cash. Specifically, Hochschild said the partners needed to provide US$23 million to fund the expansion, which meant Minera Andes needed to hand over US$11.3 million within 60 days.

That’s when things got interesting. The company had $2.5 million in the bank — not nearly enough to fund the cash call — and because San Jose was not producing positive cash flow, Minera was already in breach of one of the covenants on its Macquarie loan.

In short, the company needed US$28.8 million almost immediately and rather unexpectedly.

“We asked in the summer if there would be any cash calls in the fall and Hochschild said no,” McEwen says. “Then in December, all of a sudden, oops there’s a cash call and it’s due in sixty days.”

Minera evaluated its options. McEwen says the board tried to raise interest in an equity financing but, not surprisingly, found the markets unresponsive. One institution offered to try a best-efforts financing, provided McEwen participated, but best-efforts financings in the current market offer no certainty. Minera also tried to renegotiate its loan but instead of finding willingness to extend or increase the amount, the bank said it wanted to accelerate the repayment schedule.

“So we’re not getting much luck on the equity front, we’re not getting much luck on debt refinancing, and so we’re looking at a situation where, if we don’t make this cash call, our interest in San Jose goes from 49 per cent to 38 per cent,” McEwen says.

And there’s the rub. The other major covenant controlling the Macquarie loan is that a dilution in Minera’s stake in San Jose defaults the loan, allowing the bank to demand full repayment in seven days. When Minera failed to repay the US$17.5 million, the bank could step in and seize the company’s assets.

That’s when McEwen made his $40-million offer (which he subsequently amended) and left the directors’ meeting. The tricky part is that convening a shareholder meeting to approve the significant, insider share issuance would take months but Minera only has until March 3 to pay the cash call. So the company applied to the TSX for exemption from the requirement for shareholder approval according to Section 604(e), the financial hardship exemption.

On Feb. 10, Hochschild announced that it had made two offers to Minera on Feb. 6. The major first made a bid for the entire company, offering 0.22 of a Hochschild share for each Minera share. The bid valued Minera at 62¢, a 100% premium to the company’s closing price on Feb. 5. Alternately, Hochschild offered to buy Minera’s 49% interest in San Jose for US$70 million in cash. At the same time, Hochschild also appealed to the TSX to “re-examine and reconsider” the availability of the hardship exemption.

The TSX was to render its decision on Monday, Feb. 16, the closing date for McEwen’s first offer. But with amended terms, it may take the TSX a few more days to decide if Minera meets 604(e) status, leaving the second offer in limbo at presstime.

A question mark also hangs over McEwen’s debt shuffle, which requires the approval of both Macquarie and Hochschild. While Minera reports Macquarie is already onside, there is no word from Hochschild. But if Hochschild doesn’t go along, then McEwen has agreed to buy 21.7 million shares of Minera at $1 instead, proceeds of which could be used to pay back the loan.

As for the Hochschild offers, a special committee of independent Minera directors and financial advisers decided the McEwen offer was a better decision for the company.

“If the TSX doesn’t go along with this, the company is going to lose its interest in the property or be consumed,” McEwen says. “Hochschild’s strategy is to tie this all up and prevent it from closing on Monday (Feb. 16). Then no one else will be there to buy it and they’ll get i
t at the price they want.”

Progress at Los Azules

In other major Minera Andes news, a completed preliminary assessment has started the clock ticking on Xstrata’s (XSRAF-O, XTA-L) right to back in on Minera’s Los Azules copper project. And the first economic study of Los Azules has slapped the massive copper project with a US$2.7-billion price tag.

The preliminary assessment looked at an operation processing 36 million tonnes of ore annually to produce 170,000 tonnes of copper, 1.26 million oz. silver, and 38,000 oz. gold each year for 24 years. Over the life of mine, operating costs average out to US$7.59 per tonne of ore processed or US85¢ per lb. copper produced, net of gold and silver credits.

Minera based the open-pit study on an inferred resource of 843 million tonnes grading 0.51% copper. Preproduction stripping would remove 150 million tonnes of waste rock and once mining began, the waste-to-ore strip ratio would be 1.5:1.

With the price of copper set at US$1.90 per lb. and a discount rate of 8%, the project returned a net present value of US$496 million and an internal rate of return of 10.8%.

The biggest number in the study, though, is the estimate for initial capital costs. The study forecast development costs at US$2.7 billion. Capital payback is expected to take 6.4 years.

Los Azules is not easy to access. It sits at some 4,000 metres elevation in an isolated area of the Argentinean Andes, near the Chilean border. There is essentially no infrastructure onsite and there are no nearby towns or settlements. The road into Los Azules is closed roughly seven months of the year because of snow or running water.

A mine at Los Azules would require a road and Minera considered three possible routes. Studies have since shown that a route in from the north is the most economically viable. Camp facilities, power lines, and concentrate and fresh water pipelines would also have to be built.

Although Minera Andes has a 100% option on the property from Xstrata, the prefeasibility study satisfies a condition for Xstrata’s 51% back-in right. Xstrata has 90 days to make its decision now that a technical report shows that Los Azules can produce more than 100,000 tonnes of copper per year for at least 10 years. To claim its 51% interest, the major would have to pay Minera three times the amount it has spent at the site since late 2005, assume control of the project, and complete a feasibility study within five years.

There is also some confusion over another back-in right on the property. Xstrata originally optioned the property from Solitario Argentina, leaving Solitario a 25% back-in right on Xstrata’s interest, exercisable within 36 months of Xstrata’s decision to back in. Xstrata and Solitario are now disputing the validity of the 36-month deadline.