Hochschild sues Minera Andes over $65-million loan

Vancouver – The conflict-ridden relationship between the joint-venture owners of the San Jose gold-silver mine in Argentina just got worse: 51% owner and operator Hochschild Mining (HOC-L) is suing 49% owner Minera Andes (MAI-t) over unsigned documents formalizing a three-year-old loan agreement.

Hochschild filed suit in the New York Supreme Court asking that Minera Andes be required to execute formal loan agreement documents for the $65-million loan Hochschild advanced to its partner to finance construction of San Jose. Hochschild says Minera Andes has “refused to execute” the documents for three years and the refusal has delayed loan repayment.

Hochschild says it “has made repeated attempts” to finalize the documents but alleges in the suit that Minera Andes has obstructed progress by making “demands never contemplated by the original letter agreements.”

In remedy, Hochschild wants the New York Court to issue a decree requiring Minera Andes to execute formal documents consistent with previous loan agreements. The London-listed major also wants Minera Andes blocked from any further interference in repayment of the loan, wants the court to order its partner to pay Hochschild an amount consistent with the “benefits derived by Minera Andes” as a result of the loan, and wants the court to declare other shareholder loans as subordinate to the project finance loan.

For its part, Minera Andes says it welcomes the lawsuit from Hochschild. The company says it “has [been] and continues to be willing to execute definitive loan documentation with Hochschild” and says it has always wanted the formal documents to reflect the original agreement from October 2006.

“Regrettably, despite significant effort on the part of Minera Andes, it appears that the courts of the state of New York may provide our shareholders with the best venue for ensuring fair treatment by our joint-venture partner so that both parties can begin receiving the profits generated by the San Jose mine,” said the company’s president and CEO, Robert McEwen, in a statement.

Neither party can receive any funds from the San Jose mine until the documents in question are signed because the original loan agreement stipulated that Minera Andes’ portion of the mine’s cash flow would go towards loan repayment. As such it would seem to be in both parties’ best interests to sign the deal.

More generally, Minera Andes said it is reviewing Hochschild’s suit in detail and will respond accordingly but the company “believes the details of the case will speak for itself.”

The original agreement, from late 2006, provided for a loan of $61 million to Minera Andes from Hochschild to cover Minera Andes’ remaining contribution towards the construction of San Jose. The announcement of the deal was quite positive, listing the benefits of a loan from Hochschild rather than a loan from a bank such as cash flow repayment and no hedging requirements.

By the middle of 2007 the loan had grown slightly, to $65 million. A few months later Hochschild, as operator, decided to embark on a major expansion at San Jose, doubling the daily throughput to 1,500 tonnes from 750 tonnes. Since the expansion was to be funded using mine cash flow, Hochschild extended the payback period for the loan until after the expansion was complete.

The expansion strained the partners’ relationship significantly. In late 2008 Minera Andes announced it had received an $11.3-million cash call from Hochschild to finance the expansion work, even though the major had previously assured Minera Andes that expansion costs would be covered by cash flow and cash calls would not be required. If Minera Andes could not respond to the cash call its interest in the mine would be diluted to 38% from 49%.

Not only did Minera Andes not have the funds to meet the cash call, the company also had a US$17.5-million credit agreement with Macquarie Bank that required the company to maintain sufficient cash to meet cash calls and to maintain its San Jose interest at 49%. As such the cash call put Minera Andes out of compliance with the terms of its credit agreement with Macquarie. In addition, Minera was already expected to repay US$7.5 million of the Macquarie loan in a few months and only had US$3.3 million in the bank.

The dire situation required a dramatic solution and Minera Andes found one in one of its board members, Rob McEwen. In February 2009 the company inked a preliminary deal for McEwen to invest $40 million in Minera Andes, sufficient to meet the cash call and repay the entire Macquarie loan with funds to spare. In order to execute the deal in time, Minera Andes applied to the TSX for a financial hardship exemption that would allow the company to close the deal without shareholder approval, since either waiting for approval or not achieving approval would have meant significant hardship for the company.

As Minera Andes worked out the details with McEwen, Hochschild was busy trying to take advantage of its partner’s weakened position to gain full ownership of San Jose. The major proposed either buying Minera Andes’ stake or buying the entire company. Hochschild also submitted to the TSX an argument against allowing Minera Andes the financial hardship exemption, knowing that if Minera Andes were required to hold a vote the company, left without enough time, would have not choice but to turn to Hochschild for help. Minera Andes reviewed the proposals and decided the McEwen deal was preferable, and the TSX allowed the hardship exemption.

Since then the partners’ relationship has remained very strained. McEwen, who was appointed president and CEO shortly after his major investment, has called Hochschild the “partner from hell” in interviews. And now the partners are clashing again. At least the lawsuit is not expected to impact operations at the San Jose mine. San Jose initiated operations in 2007. In 2009 the mine produced roughly 5 million oz. silver and 77,000 oz. gold.

Minera Andes share price slipped a penny on news of the lawsuit to close at $1. The company has a 52-week share price range of 57¢ to $1.05 and has 263 million shares outstanding.