Baja secures US$90M financing, hit with $260M lawsuit

VANCOUVER — Baja Mining (BAJ-T) just can’t catch a break these days.

The company, mired in debt and escalating costs at its under-construction Boleo coppper-cobalt-zinc mine, announced on July 26 that it had secured US$90 million in interim financing that could keep Baja’s project, and Baja itself, alive.

But any relief was short-lived, as the next day the company was hit with more bad news in the form of a class-action lawsuit. The lawsuit, against the company and certain present and former directors and employees, alleges the defendants made misrepresentations contrary to the Ontario Securities Act between November 1, 2010 and April 23, 2012.

Joseph Sue-Tang started the class-action suit and is seeking general and special damages of $250 million, punitive damages of $10 million, interest and costs. Baja had little to say on the lawsuit other than it will defend itself against the allegations.

The news sent the company’s stock price down 2.5¢ or 31% to an all-time low of 5.5¢ with 5 million shares traded, having already fallen from around a dollar in April when news of the major cost overruns broke.

As to the US$90 million, it’s being provided by the Korean consortium that controls 30% of Baja subsidiary Minera y Metalurgica del Boleo (MMB), which controls the Boleo project. The consortium includes Korea Resources, LS-Nikko Copper, Hyundai Hysco, SK Networks, and Ilgin Materials. The US$90 million is dependent on Baja securing an extension of the existing standstill agreement on other outstanding loans, currently due to expire August 1, until September 30.

The consortium plans to contribute the US$90 million at the end of August and may choose to contribute enough to complete the Boleo project, but has not actually committed to future funding and could even stop short of the US$90 million.

The terms of the interim funding state that an initial US$45 million contribution will immediately reduce Baja’s share of MMB from 70% to 49% and give the consortium control of MMB. The switch on control will also mean changes to the shareholders agreement, which will give more power to the consortium to manage MMB and limit Baja’s rights. However if the entire US$90 million is not funded at the end of August the consortium’s interest will revert to 30%, as will any board and management changes.

For stage two, Baja would be able to contribute to the funding for a minimum of US$10 million and for a maximum of 40% control of MMB. Baja would only be able to raise money through a non-backstopped rights offering to Baja shareholders, which it will have 60 days to do after SRK Consulting files an updated technical report in September. Mount Kellett, a major investor in Baja that took control of the company’s board in May, has told Baja it will not be participating in any such rights offering.

If Baja makes no contribution, its share of MMB would be reduced to 10% and if the total equity cost rises above US$443.4 million and further equity is needed, Baja would have to participate on a pro-rata basis or its remaining 10% interest in MMB would be diluted at an accelerated rate.

The company had contracted BMO Capital Markets to find a solution to its funding woes but the bank was unsuccessful. Baja therefore stated that the consortium’s proposal is the only option available.

A 2010 feasibility study update pegged Boleo’s total estimated capital costs at $889.5 million, but capital costs could now run as high as US$1.72 billion. Operating cost estimates have also gone up to between US$50 and US$60 per tonne, from roughly US$33 to US$44 per tonne in the 2010 study.