Anvil gets big financing from Trafigura

It remains busy days in the Democratic Republic of the Congo’s (DRC) mining sector.

Shortly after the government announced that it had wrapped up its mining contract review for all but one project – the massive Tenke Fungurume copper project — Anvil Mining (AVM-T, AVM-A) announced a deal with metals trader Trafigura Beheer that will allow it to push through construction on the second phase of its Kinsevere project in the Katanga province.

The deal will see Anvil get US$200 million, enough to finish the project by late next year, and will see Trafigura take a strategic stake in the company.

“There’s the expectation that in the fullness of time Trafigura will get to a 36% position in Anvil and a desire to see Anvil go on to become what it can become in the Congo,” Anvil’s president and chief executive Bill Turner said on conference call.

While Turner admitted that the deal is a complex one in that it involves debt, equity and off-take agreements, he said it was by far the best offer on the table.

It remains to be seen if Anvil shareholders feel the same way.

While the first tranche of equity is being issued to Trafigura without shareholder approval, they do get to vote on the other aspects of the deal at a shareholders meeting in October.

And while raising US$200 million for a project in a notoriously difficult country to operate in may seem like a no-brainer to some, investors might have pause over the amount of control being handed over to Trafigura.

As would be expected in a deal with a metal trader, the deal comes with an offtake agreement with Trafigura. The trader managed to secure a life-of-mine offtake agreement for the sale of all products from the Kinsevere mine.

And Trafigura also gets to nominate three of the seven members of the Anvil Board.

If shareholders decide to surrender that much control, they can partake in a deal that will give the company US$100 million equity financing and US$100 million in debt.

The equity portion is being raised through a private placement that will see units issued at $2.20 per unit, and consist of one common share of Anvil and 0.232 of a warrant – a whole warrant gives the Trafigura the option to pay $2.75 per share for thirty months.

The $2.20 per unit represents a 16% premium to the 30-day volume weighted average share price of Anvil’s stock.

The first tranche – that will proceed without shareholder approval — will see 15.6 million units issued, and give Trafigura a 19.9% stake in the company by the August 21.

At the current U.S., Canadian exchange rate, the second tranche would see 33.6 million units issued.

Trafigura can increase its 36% stake in the company to 39% with the exercise of warrants issued with the deal. Such a scenario would net Anvil an additional $31 million.

The US$100 million in debt financing being provided by Trafigura can only be tapped into once cash from the equity financing is used up.

The debt bears interest of LIBOR plus 4%, plus the cost of political risk insurance.

As with most debt financing done in these times, this one comes with a hedge book. Anvil says it will hedge the portion of production from Kinsevere Stage II that would cover at least principal and interest repayments and operating costs. Details of the hedge book, however, haven’t been finalized.

Stage two of Kinsevere’s development is slated to produce 60,000 tonnes of copper per year from a Solvent Extraction – Electrowinning (SX-EW) facility at an estimated cash cost of 89¢ per lb of copper.

Anvil expects to begin commissioning the mine in late 2010 with commercial production coming in 2011.

The company has already spent roughly $195 million on the second phase.

Trafigura is the second largest independent trader in the non-ferrous market, with annual turnover in excess of US$70 billion.

The company says it will also be providing technical support for the construction of the Kinsevere

“Anvil has an attractive strategic position in the Congo and our support will significantly enhance its capability to deliver on our combined, future growth objectives,” Jeremy Weir, Executive Director of Trafigura said in a statement.

In Toronto on Aug. 10 Anvil’s shares were up 16% or 39¢ to $2.77 on 7.9 million shares traded.