Debt troubles start to pile up for miners

Vancouver – For a growing number of mining companies unable to make payments on significant debts, the prospects for a happy new year are growing dim.

During the last days of 2008 and the first of 2009 at least four companies that are developing or running mines admitted to serious debt payment problems. And those four stories could be just the tip of the debt-default iceberg.

On the last day of December Minera Andes (MAI-T) confessed its inability to respond to a US$11.3-million cash call from its subsidiary, Minera Santa Cruz (MSC), which owns the San Jose gold project in Argentina. The project is a joint venture: Hochschild Mining owns 51% of MSC and operates San Jose, while Minera Andes owns the other 49%.

The cash call went out to finance further expansion and development at the gold project, which commenced production in late 2007 and had its first three months of positive earnings from gold and silver sales in the second quarter of 2008. But the partners have ambitious plans for the project.

Within its first 15 months of operation the joint-venture partners have already expanded the San Jose operation, boosting mining and processing capacity to 1,500 tonnes per day from just 750 tonnes. The second phase of expansion involves connecting to the regional electrical grid, a task planned for early 2009; in the third phase further expansion of the refining circuit will enable the operation to convert all concentrate to dore.

Despite the magnitude of plans at San Jose, Minera Andes did not expect to face a cash call from MSC because the company expected to finance phase 2 and 3 expansion costs from cash flow. Indeed, Hochschild had previously assured Minera Andes that cash calls would not be necessary. It is unclear exactly what forced the situation to change, other than the general global economic downturn, but now Minera Andes is in a tight spot.

Under the terms of its credit agreement with Macquarie Bank, Minera Andes is required to hold cash and cash equivalents at least equal to the sum of all MSC’s outstanding cash calls, plus certain other amounts. Minera Andes currently has US$3.3 million on hand, which means it is not in compliance with the terms of the credit agreement. In addition, the company is required to maintain its shareholding in MSC at 49%. If Minera Andes does not finance its portion of the cash call its shareholding in MSC could be diluted, which would also not comply with the credit agreement.

Finally, Minera Andes has to repay a portion – US$7.5 million – of the principal amount outstanding under the credit agreement in March, and then pay the remaining US$10 million in September. Its obligations to Macquarie are secured by the company’s assets.

Minera Andes and Macquarie are discussing the possibility of refinancing the credit agreement or rescheduling the amounts due. Minera Andes is also looking at other financing options. On news of the cash call and credit troubles the company’s share price lost another penny to close at 42¢, near its 52-week low of 39¢ and distant from its February high of $1.92. Minera Andes has 190 million shares outstanding, 223 million fully diluted.

Unstable ground from an over-active irrigation system has given Gold Hawk Resources (CGK-V) no end of trouble. The company started production at its Coricancha gold-silver-lead-zinc mine, which sits 90 km east of Lima, Peru, in October 2007. In early May, after just seven months of production, a regular inspection detected ground movement uphill and near the tailings handing area and processing plant. Gold Hawk immediately suspended plant operations and tailings placement.

Geotechnical consultants determined the ground movement was due to excessive irrigation of the hillside above the tailings and processing plant by third parties. The Peruvian government ordered the third parties to terminate irrigation and Gold Hawk installed ground movement detectors and dewatered affected areas. By the end of July the ground movement had ceased.

Nevertheless, as a result the company has to move its entire operation – meaning the processing plant and the tailings facility – to a new area some 30 km away. Gold Hawk has submitted an environmental impact assessment for the new facility; if the EIA is approved and Gold Hawk can raise the needed capital, the company says it can restart production at Coricancha by the middle of the year.

Gold Hawk will receive US$14.5 million in insurance monies and has already received a US$2-million advance. However, the lack of cash flow combined with the costs associated with moving the entire operation mean the company is unable to repay its principal debt, which sits at US$9.7 million. The debt was due for repayment on December 31, following a three-month extension. The company and its primary lenders are in discussion to extend the repayment date but were unable to come to an agreement by the end of the year.

Prior to the operations halt, the facility at Coricancha was milling 410 tonnes per day at an average grade of 3.06 grams gold per tonne and 91 grams silver per tonne. The property hosts 651,200 measured and indicated tonnes grading 6.5 grams gold, 200.4 grams silver, 3.17% lead, 3.84% zinc, and 0.44% copper, plus 3.9 million inferred tonnes averaging 6.5 grams gold, 261 grams silver, 2.56% lead, 3.12% zinc, and 0.35% copper.

Gold Hawk, which has a 52-week trading range of 52¢ to 1¢, is trading at 1.5¢. The company has 226 million shares outstanding.

The third troubled story to ring in the new year is that of Belvedere Resources (BEL-V). In mid-December Belvedere suspended operations at its Hitura and Sarkiemi nickel mines, which are both in Finland. As a result, Belvedere’s wholly-owned subsidiary Finn Nickel will now be unable to fulfill its production and delivery obligations under the terms of its off-take agreement with Jinchuan Group. Finn has, therefore, declared a force majeure, which excuses the company from its obligations for a period.

Finn has advised Jinchuan Group that, if a depressed nickel price forces a prolonged suspension of its operations, non-delivery will turn into a default under the prepayment agreement. If Finn defaults, Jinchuan can demand full repayment of a US$7.5-million prepayment that Finn accepted from Jinchuan in August. The two companies are in discussions.

Belverdere is working towards developing two production centres in Finland, meaning two processing facilities that will be fed by several surrounding deposits. The company achieved production at its Hitura region in mid-2007, where the Hitura and Sarkiniemi mines together produce some 2,500 tonnes of nickel annually in concentrate.

In October Belvedere was granted an environmental permit for its Luikonlahti mill. The company purchased the mill in October 2007; it will form the nucleus of the Kotalahti production centre in central Finland. The first mine planned for production at Kotalahti is Hautalampi, where in November Belverdere boosted resources by 30%. Measured and indicated resources now stand at 1.71 million tonnes grading 0.46% nickel, 0.4% copper, and 0.11% cobalt; inferred resources add 55,843 tonnes grading 0.44% nickel, 0.19% copper, and 0.07% cobalt.

There are roughly 2 km of underground workings already in place at Hautalampi, left behind by a previous operator, that mean Belvedere can initiate production at the site within six months of a production decision. Ore from the site will be trucked 40 km to Luikonlahti, at a rate of 250,000 tonnes annually. Until recently the company maintained it would start production in the second half of 2009.

Belvedere shares are now trading at 18¢. The company has a 52-week trading range of 4¢ to $1.75 and has 79 million shares issued.

And finally, Zaruma Resources (ZMR-T) has also admitted an inability to make debt payments. Zaruma’s wholly-owned subsidiary, Minerales Libertad (ML), borrowed US$23.5 million from Empresa Minerales Los Quenuales (EMLQ), a member of the Glencore International AG group of companies. ML used the money to fund development of Luz del Cobre, a copper project in Sonora, Mexico.

When the money ran out in October, ML advised EMLQ that it was no longer able to pay its debts generally, as they came due. Within weeks ML halted development work at Luz del Cobre, even though the project was just four months away from the commencement of production. Luz del Cobre is expected to be able to produce copper at roughly US$1.15 per lb. but the project needs another US$15 million to reach production.

Now, with several months having passed with no payments, ML has received notice from EMLQ that it is in default, which means that the entire loan is payable immediately. EMLQ holds the shares of ML as security for the loan; one effect of the default notice is that Zaruma has lost its voting rights in directing ML’s movements. Since the shares of ML are worth far more than the outstanding debt, Zaruma says it will take all necessary action to protect shareholders’ interests.

One option that the parties are investigating is to use the existing milling equipment at Luz del Cobre to crush ore from the San Antonia gold resource nearby and pile it onto heap leach pads. An internal scoping study indicates that a gold heap leach operation could get into production in five months for minimal capital costs. At a gold price of US$800 per oz., the operation is expected to yield US$450,000 per month in net cash flow.

Zaruma shares, which traded between 3¢ and 45¢ over the last 52 weeks, are currently sitting at 5¢. The company has 118 million share outstanding.