GORO - Isn't Hochschild Mining the Company that really tried to stick it to Minera Andes (MAI.TO) recently? They basically forced Minera to either sell the company to them (at a premium to shareholders, but nowhere worth value in ground), or to heavily dilute. Maybe no big deal, but Hochschild does seem a bit ruthless...
This from the Northern Miner on 2/11 regarding Minera's problem and their work-over by Hochschild:
The company's current financial predicament stems entirely from its producing mine. Minera owns 49% of the San Jose gold-silver mine in Santa Cruz province, Argentina. Hochschild Mining (HOC-L) owns the other 51% and operates the mine, which achieved production in mid-2007.
As part of its efforts to finance development at San Jose, Minera borrowed US$17.5 million from Macquarie Bank in 2007. The debt facility was predicated on the expectation that San Jose would achieve positive cash flow in 2008, allowing Minera to repay the debt. Minera used its assets to secure the loan;
the agreement stipulated that the company could not dilute its interest in San Jose without defaulting. Hochschild brought San Jose online in August 2007 and even before the high grade, underground gold-silver mine reached full commercial production the major decided to expand the operation. Initially the mine was built to process 265,000 tonnes of ore each year; Hochschild embarked on an expansion to bring annual capacity to 530,000 tonnes.
Minera has essentially no control over decisions at San Jose. The company that owns San Jose, of which Hochschild owns 51% and Minera 49%, is controlled by a five-member board of directors. Three of those members are from Hochschild; the other two are from Minera. Both partners expected to fund the expansion using cash flow. Unfortunately development work cost more than expected and in December Hochschild told Minera it needed cash. Specifically, Hochschild said the partners needed to provide US$23 million to fund the expansion, which meant Minera Andes needed to hand over US$11.3 million within 60 days. That's when things got interesting. The company had some $2.5 million in the bank - not nearly enough to fund the cash call - and because San Jose was not producing positive cash flow, Minera was already in breach of one of the covenants on its Macquarie loan. In short, the company needed US$28.8 million almost immediately and rather unexpectedly.
"We asked in the summer if there would be any cash calls in the fall and Hochschild said no," says McEwen. "Then in December, all of a sudden, ops there's a cash call and it's due in 60 days.
Minera evaluated its options. McEwen says the board tried to raise interest in an equity financing but, not surprisingly, found the equity markets unresponsive. One institution offered to try a best-efforts financing, provided McEwen participated, but best-efforts financings in the current market offer no
certainty. Minera also tried to re-negotiate its loan but instead of finding willingness to extend or increase the amount the bank said it wanted to accelerate the repayment schedule.
"So we're not getting much luck on the equity front, we're not getting much luck on debt refinancing, and so we're looking at a situation where, if we don't make this cash call, our interest in San Jose goes from 49% to 38%," says MwEwen.
And there's the rub. The other major covenant controlling the Macquarie loan is that a dilution in Minera's stake in San Jose defaults the loan, allowing the bank to demand full repayment in seven days. When Minera failed to repay the US$17.5 million, the bank could step in and seize the company's assets.
That's when McEwen made his $40-million offer and left the directors' meeting. The tricky part is that convening a shareholder meeting to approve the significant, insider share issuance would take months but Minera only has until Mar. 3rd to pay the cash call or essentially it's all over. So the company applied to the TSX for exemption from the requirement for shareholder approval according to Section 604(e), the financial hardship exemption.
The next day, Hochschild made two offers to Minera. The major first made a bid for the entire company, offering 0.22 Hochschild share for each Minera share. The takeover bid valued Minera at 62¢, a 100% premium to the company's closing price on Feb. 5th. Alternately, Hochschild offered to buy Minera's 49% interest in San Jose US$70 million in cash.
At the same time Hochschild also appealed to the TSX to "re-examine and reconsider" the availability of the hardship exemption.
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