Red Eagle Mining (RD.V) has secured $65M in financing from Orion Mine Finance which will be used to start the construction of the San Ramon mine, a part of Red Eagle’s Santa Rosa project.
The terms look quite favorable as the $60M debt component with a 5 year term has a 18 month grace period whereby Red Eagle doesn’t have to make repayments, and the interest rate of LIBOR + 7.5% is acceptable for a new mine in Colombia. However, Orion does get a nice kicker of $30 per produced ounce on the first 405,000 ounces the project produces which will result in an additional $12M cash payment to Orion. This might sound expensive but it remains acceptable as 1) Orion participate in equity financings at a premium to the market price, 2) there doesn’t seem to be an arrangement fee, and 3) the debt component is extremely high for a South American project. So whilst it might sound expensive, it’s in fact very reasonable, especially if you realize we expect the operating cost per produced ounce to drop by at least $75/oz by applying the current USD/COP exchange rate. We would however urge Red Eagle to hedge a part of its currency risk as soon as the entire financing deal has been completed.
The debt financing is contingent on Red Eagle raising an additional $15M in equity and this shouldn’t be a problem at all now the majority of the financing has already been arranged. We visited the Santa Rosa project last week and will release a site visit report shortly. We also had a short chat with Ian Slater, CEO of Red Eagle to get some more details on this financing deal. You can find our questions and his answers herebelow.
– The $30/oz payment is quite unusual. Could you elaborate on this?
No matter who we borrowed the $60M from, there was some catch, whether it was off-take, hedging, royalty etc. And $60M debt out of a $74M capex is 80% leverage which was difficult to obtain.
– Will an 18 month repayment holiday might be sufficient considering your construction period will be 14 months and you will need several months to ramp up the production rate to generate positive cash flow? Is it the plan to start drawing down on the debt facility once you have spent a considerable amount of equity-based cash on the project?
I don’t think the 18 month holiday is tight. It was the longest holiday on offer and one of the principal reasons we went this route. As you say, the 18 month holiday doesn’t start until first draw and we have to spend $15M from equity on development first. As construction costs are similiar to a bell curve, we anticipate first draw with about 9 months left of construction. So we should have the remaining 9 months to ensure ramp up.
– Regarding the $30/oz on the first 405,000 ounces, will those ounces have to be produced at the San Ramon mine or would this apply to the entire Santa Rosa project?
Those 405,000 can come from anywhere on the entire Santa Rosa Project.
– Is there a penalty for early repayment of the debt facility?
There’s a 1% penalty on early repayment. However, I don’t think it will get to that as there is a 50% cash sweep. So we have the best of both worlds; a 5 year term if things aren’t going perfectly, and a very quick pay back without penalty if things go according to plan. You need to remember there is approx. $55M in free cash flow in each of the first two years.
Disclosure: The author holds a long position in Red Eagle Mining. Red Eagle is a sponsor of the website. Please see our disclaimer for current positions.
