Augusta Rejigs Debt, Advances Rosement

Augusta Resource (AZC-T) is restructuring US$40 million in debt to ease the pressure to secure financing for its massive Rosemont copper project in Arizona before it matures this June.

Augusta and Red Kite Explorer Fund have signed a credit-approved term sheet relating to a US$40-million senior secured loan and copper concentrate offtake agreement.

The loan will be used for the redemption of Augusta’s existing US$40 million short-term debt. Interest will be payable at the London interbank offered rate plus 4.5%. Red Kite will also receive 1.67 million warrants, which can be exercised into shares at $3.90 apiece over three years.

The original short-term loan through Sumitomo Corp. of America matures in June 2010 and came with an interest rate of LIBOR plus 1.5%.

“(The new agreement) allows us to continue to complete the project financing transaction without having the concern that we have a looming maturing of a $40 million dollar debt,” said Augusta president and CEO Gil Clausen in an interview.

The Red Kite deal is expected to close in February and will mature once Augusta has either secured financing to complete the Rosemont project or in two years time, whichever is earlier.

Project costs were last estimated at US$900 million, and Augusta says it’s raising the money from multiple sources, including equipment-related financing, concentrate off-take financing and senior project debt.

Clausen says the company will know the final development costs and announce the lead bank for the debt financing in the first quarter of this year. He expects to announce the entire consortium of project lenders in the second quarter and complete the deal in the summer.

“We’ve been advancing our project along the path and on the project development schedule that we put together three years ago and we haven’t deviated from that path,” Clausen said.

Under the deal, Red Kite will buy up to 15% of Rosemont’s copper concentrate up to a maximum of 45,000 dry tonnes per year over 10 years.

Commercial production at the open pit project is expected to start in 2012. Augusta’s January 2009 feasibility study estimated that the deposit could produce 221 million lbs. copper per year, plus silver and molybdenum.

Clausen says the company also plans to have a precious metals streaming deal worked out this quarter as an equity component of the financing.

In 2008 Augusta signed a letter of intent with Silver Wheaton (SLW-T, SLW-N) for its silver production but that deal was canceled. Clausen says the structure would have been unique: usually Silver Wheaton pays a lump sum up front and then pays by the ounce as the metal is produced, but under the original deal Augusta would have gotten all the cash up front.

“We had to look at it from the legal and accounting side and we couldn’t get comfort that it would be a deal that would work for both parties,” Clausen said.

Augusta is talking with Silver Wheaton right now, as well as a few other counter parties to hammer out a standard silver streaming transaction.

Once developed, the Rosemont project will be the third largest copper mine in the United States.

“This is a very big year for Augusta,” Clausen said. “The project is going full-tilt.”

Final permits should be in by the fourth quarter of 2010 and construction will start soon after.

Current proven and probable reserves are 546 million tons grading 0.45% copper, 0.015% moly and 0.12 oz. silver per ton in sulphide ore.

There is another 70 million tons grading 0.17% copper in oxide ore.