Banro Corp. fka BAA

[Chelski]

Banro Raises Almost $100M - Does This Mean The Company Is Now Out Of The Woods?
Jan. 5, 2016 12:04 PM ET
Summary

Banro was running on fumes and needed a fresh cash injection - which it has now found.

75% of the refinancing consists of equity and equity-related investments, as Banro's ability to add more debt to the balance sheet was limited.

I consider a term loan with an interest rate of 8.5% for a DRC project pretty decent.

Additionally, based on the current gold price and expected production rate at Twangiza, the payback period on the streaming deal will be quite long.

Taking everything into consideration, I don't think Banro could have negotiated a better deal than what's currently on the table.

Introduction

Back in 2015 I have written three articles wherein I kept an eye on the developments of Banro (NYSEMKT:BAA) as the company's operations looked pretty interesting (and even intriguing) but the balance sheet could use a decent clean-up. Even though Banro is a small company, these articles immediately drew almost 40 companies and I promised my dear readers to keep them posted on my expectations and views on the company.


Banro has recently released an invasive financing package that provides a total cash injection of almost $100M to reduce the working capital issues and to provide some additional liquidity to the company.

Breaking the financing deal down in parts

It sure looks like Banro needed several months to complete the negotiations which will basically provide a cash injection of almost $99M. The majority of the cash will be injected through a debt and equity issue, but there also is a streaming component. I'll break the financing deal down in parts.

A) The debt

Banro has entered into an agreement with RFW and with funds managed by Gramercy whereby Banro will borrow an initial $22.5M as part of a term loan at an interest rate of 8.5% in the first two years of the issue, followed by 3M LIBOR + 8% after the second anniversary of the term loan. What's interesting is that this is initially a short-term loan (repayable on November 30th of this year), but the maturity date of this term loan can be extended by up to three years if Banro continues to meet certain financial standards. This basically means the term loan will be a current liability throughout the entire term and will always have an impact on Banro's working capital position.



Source: company presentation

Additionally, RFW and Gramercy have entered into agreements with existing debtholders of Banro, and have acquired $40M of senior (secured) bonds and $20M of preferred shares that were issued in 2012 and 2014 respectively. This basically means RFW will be on the hook for approximately $82.5M in debt (and preferred securities) of Banro, and that's a pretty big commitment if you'd ask me!

B) The equity issue

Of course, in any debt situation, the upside potential for the debt investor remains limited and the best case scenario consists of receiving all interest payments as well as the principal amount of the loans. That's why it isn't surprising to see RFW also asking to be allowed to purchase shares. As part of the agreement, Banro will issue 50 million new shares to raise $8.75M, and a basic calculation learns us this equates to $0.175 per new Banro share. This might sound cheap, but it actually was the market price right before the deal was announced, so it doesn't look like RFW got a real bargain.

C) The streaming deal

The streaming deal probably is the most important part of Banro's recapitalization program. As its ability to add even more debt to its balance sheet was limited, Banro had to raise the cash as part of some equity-related capital raise. Of course, as a 20% dilution raises less than $9M, Banro had to be creative in finding more cash.



Source: company presentation

A streaming deal really was the only option left. The buyer of the stream has wired $67.5M as a prepayment for the current and future gold production. As long as the gold price remains lower than $1150/oz, Banro will have to deliver 12.5% of its total gold production for an ongoing payment of $150/oz. The percentages will be slashed by 50% after the Twangiza mine has produced 1.14 million ounces (which should happen by 2024 based on the current production rate). Banro has the right to repurchase the gold stream after the third anniversary by making a cash payment resulting in an internal rate of return of 17.5% for the buyer of the stream.

So what does this mean for Banro shareholders?

Banro knew the majority of the fresh cash would have to be found as part of some 'equity' solution as its net debt position (short term + long term debt - cash ) was $180M (excluding the preferred shares), which already is quite high.



Source: company presentation

First of all, the term loan has pretty good terms as an interest rate of 8.5% for a DRC-based gold mine in the current gold climate is actually pretty good (considering Banro isn't exactly a debt-free company either). The interest expenses will increase by less than $2M per year, and that's a small price to pay!

The equity infusion will have a bigger impact as the future profits and cash flows will have to be shared over 302M shares instead of 252M shares. That's a 20% dilution, but again, Banro didn't really have another option…



Source: company presentation

The streaming deal actually also looks pretty decently structured considering the geopolitical risks of operating a gold mine in the DRC which isn't exactly a first tier mining country (and yes, that's an understatement). Based on an undiscounted and pre-tax calculation, the buyer of the stream would need approximately 4.3 years using an annual production rate of 140,000 ounces per year (a pretty aggressive assumption, considering the production rate will be lower as you can see on the previous image) and a gold price of $1050/oz

If you'd apply an 8% discount rate (which I'd think is even quite low considering the location of the mine), the payback period would be approximately 5 years.

The inflowing $99M in cash will definitely help to boost the cash position from the silly $4M Banro had left as of at the end of September of this year. The working capital position should increase from a negative -$58M to a positive $18M (a pro forma calculation based on the financial situation at the end of the previous quarter).

Investment thesis

I don't think this financing deal will be a complete surprise for the majority of Banro's shareholders, as everybody agreed that 'something' would have to be done to give the company more room to breathe. After now having analyzed the terms of the recent financing pretty carefully, I think Banro got a pretty sweet deal, considering the circumstances. An 8.5% interest rate on a loan is pretty good for ANY DRC project, and a payback period of 5 years on the gold stream agreement is also pretty good for Banro, considering I used extremely conservative inputs.

I used a gold production rate of 140,000 ounces at Twangiza whilst the average production rate will very likely be just 100,000-125,000 ounces per year in the next few years, so the real payback period (using an 8% discount rate for the streaming company) will very likely be in excess of 6 years. So, yes, this is a good deal for Banro.

It looks like the investors in the stream (with a Chinese fund as main participant!) are betting on an increase in the gold price in order to generate a meaningful return on their investment. After having combed through all of the details of this deal, I think I can say this is a good deal for Banro, and it's actually a better one than what I would have expected! Now Banro has plenty of cash to ramp up the production rate at the Namoya mine, which holds the key to a successful future for Banro.

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http://seekingalpha.com/article/3790956-banro-raises-almost-100m-does-this-mean-the-company-is-now-out-of-the-woods