Bad Commercial Paper Delays Norsemont Payment

The frozen asset-backed commercial paper market continues to affect miners, with Norsemont Mining (NOM-T, NOMFF-o) announcing that it will have to delay a payment attached to its 100% acquisition of its flagship Constancia polymetallic project in Peru.

Norsemont made a deal with Mitsui Mining & Smelting in November last year that saw Mitsui transfer its 30% interest in the project for US$9.8 million. The amount was to be paid in five instalments over 12 months.

But with roughly $7 million of its funds tied up in commercial paper notes bought from Canaccord Capital (CCI-t), Norsemont was left with only $2 million in cash on hand — not enough to meet the US$3- million payment due on Dec. 31.

Mitsui has agreed to defer the payment to March 31 on the condition that Norsemont pays interest on the amount at a rate of LIBOR plus 3%.

Patrick Evans, Norsemont’s chief executive, says the company will make the payment at the later date.

“We expect to be able trade out of the (commercial paper) investment by March,” Evans says. “We have every intent of meeting the payment.”

The market for asset-backed commercial paper (ABCP) froze in August 2007 on fears of a connection to the U. S. subprime mortgage mess. Since then, a group led by Toronto lawyer Purdy Crawford has been trying to devise a plan that would convert the debt into longer-term notes that would mature in roughly eight years.

That plan, however, is now said to be in jeopardy thanks to the credit default swaps that serve as assets for some of the ABCPs. Those swaps may soon face margin calls that holders will be unable to make, leaving Purdy and his group nowhere else to turn but the federal government for a bailout.

As for Canaccord’s position in the mess, the Vancouver-based company has said it will guarantee the repayment of funds to individual investors but has not made any such promise to companies.

For his part, Evans says Norsemont expects to recover at least 90% of its initial investment. As insurance, Canaccord has offered the company a line of credit — secured against the notes — of up to 90% of value of the investment.

And while the lending rate has not been determined — Evans says it will be lower than prime — it would allow Norsemont to honour its payment to Mitsui.

Even with its inability to meet the initial deadline, Evans says Norsemont is not in any jeopardy of losing its interest in the project as Mitsui has already transferred the 30% stake to Norsemont.

The last of the five payments in connection with the deal is for US$4 million and is set to be paid on June 30, 2009.

Constancia sits 600 km southeast of Lima within the Yauri-Andahuaylas metallogenic belt. The area is known for hosting copper-gold- molybdenum porphyry deposits like Xstrata’s (XSRAF-O, XTA-l) Antapaccay and Grupo Mexico’s (GMBXF-O, GMEXICOB-m) Los Chancas projects.

A polymetallic deposit containing copper, molybdenum, silver and gold, Constancia hosts indicated resources of 256.3 million tonnes grading 0.5% copper for a total of 2.85 billion lbs., plus 156.5 million inferred tonnes of 0.33% copper for 1.1 billion lbs.

A scoping study completed by Norsemont estimates the project will produce more than 90,000 tonnes of copper annually and has a net present value of $530 million using an 8% discount rate.

Evans says the company will complete a feasibility study by the end of April and continue with its drill program on targets lying outside of the main orebody at Constancia.

It will cost roughly $6 million to finish the feasibility and Evans says the company is looking at doing an equity financing soon to raise the funds.