Retaining Wall: A Structured Product for Mineral Wealth Generation in Guyana.

The Retaining Wall

Brian McGann

11 July 2012 Università della Svizzera Italiana

A structured product for mineral wealth generation in Guyana.

Introduction.

Why Guyana?

Why the Product?

Structural Benefits, Risks and Returns.

Conclusions.

Agenda:

Why Guyana

Intro Why Product? Structural Benefits, R/R.

Conclusion

Intro: Motivation

Company CAD Market Cap.Guyana Goldfields (1775 oz) 229$ Sandspring Resources (1,373 oz) 64$ First Bauxite 22$

315$

Company Pre-tax NPVGuyana Goldfields (1775 oz) 1,683$ Sandspring Resources (1,373 oz) 1,259$ First Bauxite 157$ Absolute 3,099$

NPV % increase over Market caps. 884%

• We will address a common problem to a specific industry in a specific country.• We talk about the mine financial industry, its problems, and propose a solution.

What are we solving today…and How?• Finding companies money through a convertible bond – • Guaranteed by MIGA • Enabling us to Attract Investors • Reducing volatility of the asset class.• Eliminating cost pressure by World Class Management.

• Pie in the sky or gold in the ground?

Why Guyana


Conclusion

Intro: Motivation

1,291,000,000$ 86,426,000$

160,800,000$ -$

9.26%

16.29%

Equity Capital Raised as % of Feas. Costs

Market Cap as % of Feas. Costs

• What kind of companies are these?

• Aurora: 10 million ounces of contained material.

• Toroparu: 6 million ounces of contained material.

• Bonasika: 13 m tonnes.

• Tarakuli Bauxite 62 m tonnes.

• Can they get it?

…not likely

Project Name CompanyFeasibility Capital

CostAmt Raised (5

years)

Aurora Gold Project Guyana Goldfields Inc. (Operator) 1,291,000,000$ 86,426,000$ Toroparu Gold/Copper

Project Sandspring Resources Ltd. (Operator) $ 482,000,000 92,554,000$ Bonasika Bauxite

Project First Bauxite Corporation (Operator) 160,800,000$ 99,028,000$

Total 1,933,800,000$ 278,008,000$

Why Guyana


LimitationsConclusion

Intro: Concerns – Do you own the company directly?

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Guyana 14 Stock Universe - price-weighted average

www.finance.ya-hoo.com

• Commodities are cyclical.

• All companies are non-producers and cycles are exacerbated-high volatility.

• Gold stands at $1568/oz below its 2011 high of $1,900.

• Zugzwang – In chess is a term which describes a situation where the player cannot skip a turn but any move he makes will put him in a worse situation…..

• Demonstrates one asset exploration companies.

Why Guyana


Conclusion

Intro: Gold Demand

• In 2011, Central Bank gold demand reached I&D demand..500 tonnes.

• USD 22.8 billion was the identifiable gold demand in the technology sector

• Demand for Jewelry and Investment dominate.

• Gold demonstrates excellent biocompatibility within the human body

• The most reliable of conductive metals.

Why Guyana


Conclusion

Intro: Bauxite Demand

• Only two countries Produce Refractory Bauxite for export, China and Guyana.

• 75% if bauxite production is consumed by the Steel industry.

• China has emerged as the dominant producer with 44% of global steel production in 2010 up from 31% in 2005 producing 3.3 times more steel than the rest of advanced Asia-Pacific.

• Wait, what is bauxite? It is classified by its application.

Why Guyana


Conclusion

Intro: The Mining Business.

• The NI 43-101 regulatory requirements is the gate keeper deciding what may be revealed to the public and what should be excluded.

• Investors and management need to understand the economic potential of a mining project even at the early stages when the majority of the company’s resources may be inferred.

Scoping study:

Prefeasibility study:

Feasibility study:

What could it be?

Does it make sense to

pursue this opportunity?

What should it be?

Have I analyzed enough

alternatives?

Have I identified the

optimum project

configuration?

What will it be?

What risks will this project

involve?

What rewards will this

project provide?

Have I presented an

investment case that is

unlikely to vary

significantly?

Why Guyana


Conclusion

Why Guyana?

Government

Governance

Mineral Rich

Why Guyana


Conclusion

Why Guyana?

Country PPI Ranking

New Brunswick 1Finland 2Sweden 7

Chile 18Mexico 32Guyana 53Peru 56Brazil 57Colombia 64Argentina 66Surinam 72Equador 86Venezuela 90Bolivia 91Guatamala 92Honduras 93

South Africa 54Russia 71DRC Congo 76

www.fraserinstitute.org

Politicial Potential Index

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Top Ranked:

Reference rankings:

University of New Brunswick head of Chemical Engineering (Alcan now Rio Tinto Alcan)

President: Donald Ramotar

No news is good news…

Why Guyana


Conclusion

Guyana’s Dependency on Gold.

• Here we demonstrate the correlation and the importance of gold production to Guyana’s GDP.

• Guyana’s GDP has increased from its 1981 level of $570 to $2,259 in 2010, 296% increase.

• From it’s 1991 bottom of $337, the increase in GDP was 570%

• GDP/GOLD Correlation of 86.88%.

The Mining Exploration Model

The Current state of Financial Markets

Proposition: Retaining Wall

Why Guyana


Conclusion

Why the Product?

Why Guyana


Conclusion

Project Cycle: Investment

When to Buy and When to Sell: Junior Mining Companies.

BUY SELL BUY Sell Wait: Buy or SellMonths 0 4 8 12 16 20 24 28 32 36 40 44 48 52 56 60 64 68 72 76 80 84 88 92 96 100Years year 1 year 2 year 3 year 4 year 5 year 6 year 7 year 8 year 9

Injection of new capital and new

energies of technical people will turn the project around to new strong share prices of qualified good projects. Otherwise, they

melt to zero.

Don't Rush in - Hundreds of companies to choose from.

After one or several drill holes

discoveries, a 5 million market capitalization is

acceptable.

After a visit to the project and confirmation of the discovery, buy and

hold the shares until final phase of drilling.

Stay out or short during feasibility studies and environmental permit approvals. This is a long and tedious process. The project requires environmental base line studies and various permits for mine and mill

construction, waste rock disposal, tailings disposal, discharge of chemicals, road construction permits, explosive storage, waste management, prevention of acid generation, water quality, forest and fisheries,

protection of animal domains, bird sanctuaries and many other minor permits. Engineers study the deposit in detail for suitable mining methods and extraction of metals. Even though the fundamentals of

the ore deposit and value remain the same, the share price may weaken and 50% - 60%. At the completion of these studies, share prices offer the most attractive investments with almost no risk.

As the mine and mill construction progresses, the share prices will continue to climb until the production date. Optimistic

forecasts and earnings projections will take the share prices to new heights.

Almost every operation will experience start up problems. Several factors could affect

the profitability of the project. Inadequate removal of waste rock can limit the production of ore: More

dilution than allowed for, ore grades are lower than

expected, or poor metal recoveries. These problems will cause the share price to slide. At the bottom, they

offer an excellent opportunity for reinvesting.

• Below we see the tradition investment patters at different stages of the lifecycle of a mining company.

• Should the engineering firms announce a positive BFS, more investors purchase the shares of the company as loans are secured.

• Problem…who is lending?

Why Guyana


Conclusion

Current State of Financial Markets- Mining.

“We are at the initial stages of a war for capital” says Paul Donovan, senior Global Economist at UBS. “There is a fight for a slice for the global capital pie and project finance could be one of the losers.”

“There was an incredibly acute funding squeeze for single-project miners or mines in the late development and early production phase as banks were simply refusing to lend. We are going to give them that capital, we are going to help these companies to grow, but we are going to charge a lot more for that capital, simply because that capital is much more valuable right now”

Evy Hambros, manager of a natural resource fund for Black Rock

“HSBC’s head of global banking in Australia, Chris Russell, said as the world entered a period of tighter liquidity and scarcer capital flows, his bank was in an unparalleled position to tap into the global and Asian investor bases. In effect, HSBC is going where other Asian-focused banks should follow in 2012, moving to plug the gaps left by the European exit. Their entry cannot come soon enough, especially for the smaller companies which have lost both banking and retail investor support.”

Why Guyana


Conclusion

Financial Markets – A Mining Example. M

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www.finance.yahoo.com NYSE ad-justed share price

Agnico-Eagle Mines Ltd. May 25, 2007 - 2012

• A 52% decline??

• The Goldex mine attributed to 19% of the company’s cashflow while the market reaction brought the value of the company to a May 2012 low of $33.97.

• $260 million (or approximately $170 million after tax), or $1.00 per share of the Goldex investment was written off.

Cost Pressure Risks

Why Guyana


Conclusion

2005 2006 2007 2008 2009 2010 2011 2012$0

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Edikan Mercedes Efemcukuru Pueblo Viejo Detour Lake Cerro Casale Donlin Pascua

Conga

Source: BMO Capital Markets

Capital Expenditure Pressure New Mine Capital Expenditure Guidance History ($million)

Cost Pressure Risks

Why Guyana


Conclusion

Company Start-up Project 2005 2006 2007 2008 2009 2010 2011 2012 % Cost Increase

1 PRU 2012 1Q Edikan 120 175 148 160 175 46%

2 AUY 2012 1Q Mercedes 152 152 194 28%

3 ELD 2012 3Q Efemcukuru 104 142 152 152 152 46%

4 ELD 2012 3Q Olympias 165 420 155%

5 ABX/GG 2012 4Q Pueblo Viejo 1,350 2,200 2,700 2,700 3,000 3,400 3,700 174%

6 DGC 2013 1Q Detour Lake 844 1,085 1,450 1,450 72%

7 ABX/KGC 2018 4Q Cerro Casale 1,650 1,960 1,960 2,300 3,650 4,200 4,200 6,000 264%

8 ABX/NG 2019 2Q Donlin 2,130 2,130 3,382 4,481 4,481 4,481 6,678 214%

9 ABX 2013 3Q Pascua 1,200 1,200 2,350 2,700 2,900 2,900 3,450 4,850 304%

10 NEM/BVN 2016 3Q Conga 1,100 1,100 1,100 1,100 2,950 2,950 3,505 4,090 272%

Avg increase 157%

Why Guyana


Conclusion

Why the Product? It’s Profitable.

Company Project After-tax IRR After-tax NPV (m) Payback periodGuyana Goldfields (1775 oz) Aurora 33% 1,164$ 4.3

Company Project Pre-tax IRR Pre-tax NPV (m) Payback periodSandspring Resources Toroparu 30% 1,259$ 2.8

Company Project After-tax IRR Pre-tax NPV (m) Payback period

First Bauxite Bonasika 18% 157$ 5* amounts are calculated as pre-tax.

• Above are the project economics we will consider in our investment through the Retaining Wall.

• High IRR and low payback period make these investment attractive.

• Can they realize these returns independently?

Why the Product?

Why Guyana


Conclusion

…because they can’t do it alone.

Why the Product?

Why Guyana


Conclusion

Because we are Reducing Risk through:

A convertible structure… Insured and Guarantee by MIGA

With:

Allocation of risk through Senior and Subordinated tranches. Generating increase wealth through Size premium with Scale

economies. Global Management Expertise. Dormant NPV Can Be Realized.

And Because…. It’s acceptable to management while providing all parties with attractive risk return proposition.

…. Financial engineering making it possible

Retaining Wall: Terms and Conditions

Why Guyana


Conclusion

Issuer The Retaining WallGuarantor MIGAAmount senior US$ 300 million convertible bonds Amount subordinated US$ 700 million convertible bonds Maturity* 5 years ( due on 11 July 2017)Coupon 0.00% pa annuallyIssue price 100%Redemption price 100% (for senior debt holders)Conversion Senior Each US$10,000 bond is fully converted during the

conversion period by a vote held conditional that the majority decides in favor of the conversion.

Conversion Subordinated Each US$10,000 bond is fully converted during the conversion period by the same vote is conditional on a majority decision in favor of the conversion.

Conversion period > 3 yearsDenominations US$10,000Call Options No callable features.Payment 11 July 2012

Redemption provisionsMIGA- > 5 years :)Non tradable

Convertible Debt Issue: Terms and Conditions

MIGA(Multilateral Investment

Guarantee Agency)

Guyanese Citizens

Investors:

Banks: Standard Charter, West LB.

Multilateral Development Banks: IFC, CDB.

Top 20 producing mining companies

Guyana Government Resource PE firms Management Other private & institutional

investors.

Retaining Wall: Convertible Bond

Bond Floor Guarantee 40%

10% Guarantor premium

Convertible Bond

Issuance

Cash Investm

ent

1

Project: Bonasika (First Bauxite)Feasibility Cap. Cost : $160.8m . Mineral: Refractory BauxiteArrangement: PSA* : 176.4m (a/t)Objective: Provide financing- initiate revenue.Time to Production: 1.5 yearsLOM: 42 years

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All Projects are in Guyana

Project: Tarakuli (First Bauxite)Feasibility Cap. Cost : est. $ 120 m. Mineral: Metallurgical Bauxite Arrangement: PSA* NPV: naObjective: Provide financing – initiate revenue.Time to Production: est. 2.5 yearsLOM: 60 years

Project: Aurora (Guyana Goldfields)Feasibility Cap. Cost: $1.291bnElement: Gold (6.87 m oz)Total gold production : 4.359 m. ozMinelife grade: 3.17 g/t AuStrip ratio : 9.1:1 (w/ pre-stripping): 1.164bn (a/t)LOM Production ≈ 198.2 k oz/yTime to Production: ≈ 3 yearsLOM: 22 years

Note: As projects mature and profits are generated, all debt is converted to equity shares at the same time so as to align incentives. The timing of the conversion is at the discretion of the bond holders and decided by a vote. Subordinated bond holders will have a higher conversion rate into shares of the Retaining Wall to compensate them lower guarantee and higher degree of risk.

Project: Toropar (Sandspring)PEA Cap. Cost : $ 482 m.Element: Copper/Gold (10 m oz): 1.190 bn (a/t Au $ 1,550)LOM grade: 0.78 g/t AuCut off: 0.28 g/t AuStrip ratio: 4.1:1LOM Production ≈ 255.3k oz/yTime to Production: <2.5 years.LOM: 14 years.

$$$

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Subordinated tranch 70%

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: Revenue stream to SPV from project investment

: Project Investment: combination of cash investment and debt financing in exchange for shares, warrants, options or PSA.

PSA* : Production Sharing Agreements

: SPV is established. Cash received from Investors in return for convertible bond issuance. 10% is paid to Guyana as the Guarantor. : Investor Payoff

Issuer: Retaining Wall Liquidity: ≈ 3.5 year lock up.NAV: USD est. 1 billion.Coupon pmt: 0%

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$: Social benefits: higher employment & lower taxes.

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Equity ownership 34%: World Gold Council 33% World Bank, 33% Plinian Capital.

Senior tranch: 30%

22

Investment

Why Guyana


Conclusion

Investment: Sector Price/NPV Multiples.

Why Guyana


Conclusion

Investment: Implementation.

Why Guyana


Conclusion

Amt. Invested % of TotalRetaining Wall* 873,893,700$ 45%Syndicate 1,060,106,300$ 55%

1,934,000,000$ 100%

Company ProjectRequired

InvestmentRetaining Wall Syndicate Loan to RW

First Bauxite Bonasika Bauxite 161$ 72.66$ 88.14$ Sandspring Toroparu 482$ 217.80$ 264.20$ Guyana Goldfields Aurora 1,291$ 583.35$ 707.65$ Total 1,934$ 873.80$ 1,060.00$

• Objective: Get 3 mines into production

• Cost: 1.9 billion

• Assumption - the load can be had.

• Companies will not sell their project for their market caps and will work exclusively with RW.

• The idea - Make a 40% deal.

Investors:Amt. Raised 1,000,000,000Guarantor Fee (10%) 100,000,000 MIGA Insurance (Civil disturbance, Expropriation, War)…135 bps (of tot. proj. 26,106,300.00$

873,893,700.00

Conclusion

Why Guyana


Conclusion

Total Market Cap CAD m

Pre-tax NPV (millions) Junior Intermediates Seniors

Multiple Price/NPV… ………………………………. 0.97 1.237 1.66315$ 3,049$ 2,958$ 3,772$ 5,062$

Retaining Wall retains 40% 2,025$

Senior Bond Holders return 300$ 337$

Senior 3 year Return 12%

Remaining after Senior

payout. 1,687$

Subordinated Investment 700$

Subordinated 3 year

Return 141%

Final Note: Investments awry.

Why Guyana


Conclusion

• $6.2 billion writedown Internet-advertising company AQuantive Inc.,

• BHP Billiton swoops on Petrohawk for $12.1 billion.

Q & A

Thank You

Retaining Wall: A Structured Product for Mineral Wealth Generation in Guyana.

Economy & Finance

Transcript of Retaining Wall: A Structured Product for Mineral Wealth Generation in Guyana.