Baja slides another 21% as it looks for funds

The clock is ticking for Baja Mining (BAJ-T) as it approaches its August deadline to raise additional funds for the Boleo copper-cobalt-zinc project in Mexico to cover the project’s cost overruns so it continue accessing its loans.

On July 13, Baja, which retained BMO Capital Markets in May to help it explore financing options, said it has yet to receive any funding proposals, adding it only has enough cash to maintain the project’s construction efforts until August 1^st. Investors reacted to the news by pushing the company’s stock down 15% to close at 14¢.

However, the junior pointed out several parties that have signed non-disclosure agreements are still reviewing the company’s data and an independent engineering report prepared by SRK. The report will be made public once its NI 43-101 compliant.  

“They are down to the wire for sure,” comments Haywood Securities’ analyst Stefan Ioannou in a brief interview.

Three things could happen now, he says, explaining at best the company could find a potential project partner to help fill the funding gap. The second possibility is Baja gets bought out completely by an existing miner with a strong balance sheet, and lastly, the worst-case scenario is Baja can’t raise the funds and the project is put on care and maintenance before falling into the hands of the lenders.

Mackie Research analyst Matt O’Keefe, who has put Baja under review on June 22^nd given the amount of uncertainties, says in an email that it is unlikely Baja will raise the funds by the August deadline, but at best may sign a memorandum of understanding.

“At worst,” he writes, agreeing with Ioannou, “maybe the funds run out, the project gets shut down, Baja equity goes to zero and the project gets auctioned off by the lenders at a later date.”

But before that happens, Ioannou reckons the lenders could extend the standstill 45-day agreement they signed in June to buy Baja more time. But, if the standstill is not extended, Baja will default on its loans and lose ownership of Boleo.

In April, Baja said building its 70%-owned project would cost about US$246 million more than the US$1.14 billion estimated in 2010 because of scope and design changes and higher costs for steel and fuel. The rest of the project is owned by a Korean consortium.  

In mid-June, the company announced a new cost overrun estimate of US$400 million for Boleo, which includes the US$246 million in extra costs, a US$100-million cost-overrun facility and US$54 million in additional contingencies.

However, it cautioned that the US$400-million figure excluded delay costs, additional working capital and financing costs which are projected to add another US$50 million to US$150 million to the project’s price tag, bringing the total capital cost up to US$1.72 billion.

More recently on July 13 the junior reported that higher costs for mining, sulphur, diesel and labour also drove up Boleo’s estimated operating costs to US$50 to US$60 per tonne, almost double the 2010 estimate of US$35 per tonne.

Ioannou says one of the reasons a potential partner or buyer hasn’t emerged yet is because the suitor may be waiting until the company’s cash position weakens before making a bid.  

“The project is technically robust, but if you are a buyer you’ll wait until the price is cheap.”

On July 16, Baja shares slid another 21% to close at 11¢, after losing 15% on July 13. The company shed roughly 88% of its market value since announcing the initial US$246-million cost overrun in April.