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FINANCING FROM THE PERSPECTIVE OF MINING COMPANIES
By
Eric Low
A thesis submitted to the Department of Mining Engineering

in conformity with the requirements for the
degree of Bachelor of Science
Queen's University
Kingston, Ontario, Canada
February, 2011
Copyright © Eric Low, 2011

ABSTRACT
Raising capital by issuing debt or equity is necessary in almost every corporation. In the field of
corporate finance, the raising of capital is a heavily-studied topic. However, some of what is studied on
this topic in corporate finance is not applicable in the mining industry. There are also many financing
options that were created for the mining industry such as flow-through shares, prepaid forwards, and
royalty sales.
The cyclical nature of the industry makes the risk-return profile of financings more difficult to estimate
than in other industries. Additionally, the methods used to assess firm value are different than other
industries, as the values of orebodies are not included on balance sheets. For precious metals
companies, which are a hedge against most other securities, there are additional complications with
determining investor expectations and cost of equity.
This thesis puts forth a decision-making framework to explain mine financing choices from the
perspective of mining companies. The approach is threefold. First, all of the major equity and debt
financing instruments available to mining companies are presented and analyzed. Each financing
method is assessed on a wide range of criteria. Next, these concepts are applied in case studies of four
companies: BHP Billiton, Barrick Gold, Teck Resources, and Noront Resources. For each company, the
overall choice of financing methods is shown and analyzed. The effect of financing choices on the
weighted average cost of capital (WACC) is calculated. The final section deals with case studies of
individual mine finance decisions during the past two years.
ACKNOWLEDGEMENTS
Thanks to the following people, without whom this thesis would not have happened:
Jim Martin, who provided continuous input, guidance, resources, and showed a strong interest in
helping me learn.
My father, John Low, who has always encouraged my interest in mining and finance.
TABLE OF CONTENTS
1. INTRODUCTION ..................................................................................................................................... 1
2. FINANCING OPTIONS ............................................................................................................................ 2
2.1 Introduction .................................................................................................................................. 2
2.2 Equity ............................................................................................................................................ 2
2.3 Debt and Quasi-Debt .................................................................................................................... 9
2.4 Other Financing Types ................................................................................................................ 15
2.5 Comparison of Major Financing Types........................................................................................ 16
3. COMPARISON OF CAPITAL STRUCTURES ............................................................................................ 19
3.1 Introduction ................................................................................................................................ 19
3.2 Methodology............................................................................................................................... 19
3.2 BHP Billiton.................................................................................................................................. 23
3.3 Barrick Gold................................................................................................................................. 24
3.4 Teck Resources............................................................................................................................ 26
3.5 Noront Resources ....................................................................................................................... 27
4. CASE STUDIES OF FINANCING DECISIONS ........................................................................................... 28
4.1 Introduction ................................................................................................................................ 28
4.2 Teck Resources’ Recovery ........................................................................................................... 28
4.3 Barrick’s Equity Financing in 2009 .............................................................................................. 32
4.4 Copper Mountain Mining’s Joint Venture with Mitsubishi......................................................... 34
4.5 Xstrata’s $5.9 Billion Rights Offering and Coal Acquisition......................................................... 36
5. CONCLUSIONS AND RECOMMENDATIONS ......................................................................................... 38
5.1 Conclusions ................................................................................................................................. 38
5.2 Recommendations ...................................................................................................................... 38
6. REFERENCES ........................................................................................................................................ 39
7. APPENDIX A ......................................................................................................................................... 42
LIST OF TABLES
Table 1: Considerations for equity and quasi-equity financing options ..................................................... 16

Table 2: Considerations for debt and quasi-debt financing options.......................................................... 17
Table 3: Considerations for debt and quasi-debt financing options (continued) ...................................... 18
Table 4: Comparison of cost of debt ........................................................................................................... 19
Table 5: Beta values and correlation coefficients ....................................................................................... 20
Table 6: Cost of equity results .................................................................................................................... 21
Table 7: Weighted average cost of capital results ..................................................................................... 22
Table 8: BHP debt securities as of June 1/ 2010 [BHP 20-F form, 2010] .................................................... 23
Table 9: Barrick Gold debt instruments [Barrick, 2011] ............................................................................. 24
Table 10: Debt Instruments at Teck Resources [Teck, 2011] ...................................................................... 26
Table 11: Equity Instruments at Teck Resources [Teck, 2011] ................................................................... 26
Table 12: Noront Resources capital structure [Noront, 2010] ................................................................... 27
Table 13: Details of Teck’s 2009 private placement of bonds .................................................................... 29
LIST OF FIGURES
Figure 1: Distribution of mining equity financings by exchange .................................................................. 3

Figure 2: Conditions for mining company listings on the TSX and TSXV....................................................... 5
Figure 3: TSX flow-through financings .......................................................................................................... 6
Figure 4: Major debt financings among Canadian miners in 2009 ............................................................. 10
Figure 5: Selected earn-in contracts from 2010 ......................................................................................... 12
Figure 6: Teck’s total debt and debt ratios ................................................................................................. 30
Figure 7: Copper prices from Dec 2008 to Dec 2010 .................................................................................. 31
Figure 8: TSX mine financings in 2009 ....................................................................................................... 33
Figure 9: Joint venture financing plan after agreement between Copper Mountain and Mitsubishi........ 35
1. INTRODUCTION
Raising capital by issuing debt or equity is necessary in almost every corporation. In the field of
corporate finance, the raising of capital is a heavily-studied topic. However, much of what is taught on
this topic in corporate finance is not applicable in the mining industry.
There are many financing options that do not exist outside the mining industry such as flow-through
shares, prepaid forwards, and royalty sales. The cyclical nature of the industry makes risk far more
difficult to estimate than in other industries. It also makes investment-grade credit ratings and
affordable debt financing difficult to obtain for all but the largest and most financially secure companies.
For exploration companies with no income and no assets, the risk-reward profile is very different than
any other industry. Additionally, the methods used to assess firm value are completely different than
other industries, as the value of orebodies are not included on balance sheets. For gold companies,
which are a hedge against most other securities, there are additional complications with determining
investor expectations and cost of equity. For these reasons, the mining industry presents a unique set of
challenges for the study of corporate finance.
This thesis is an attempt to explain financing from the perspective of mining companies. The approach
is threefold. First, the methods of mine financing are explained and their advantages and disadvantages
are considered. Next, capital structures of a range of different companies are analyzed. Finally, case
studies of individual mine financing decisions are analyzed and criticised. This approach is a therefore a
study of mine financing both in theory and in practice.
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2. FINANCING OPTIONS
2.1 Introduction
This section outlines the range of financing options available to mining and exploration companies. Each
section explains the overall importance of the financing type, and the most important factors that
mining companies must analyze when considering that type of financing. Financing types are broadly
categorized into equity, debt and quasi-debt.
A summary table of the key considerations for each of the financing methods is shown in section 2.5.
2.2 Equity
Equity financing is the issuing of ownership in a company to investors in exchange for cash. There are
several variations on how equity financing can be used by mining companies.
Public equity
Public equity financing is the issuance of common or preferred shares on a stock exchange. For both
large and small mining companies, the equity markets are by far the largest source of capital. In 2009,
public equity financings in the Canadian mining industry amounted to $90 billion, or 90% of all funds
raised. [Bogden, 2010] This is because the equity markets offer the largest pool of capital for mining
companies to tap.
Equity financing is also generally the fastest mine financing option. For companies that continually
disclose information, equity financing can be arranged in just 3-8 weeks using a short-form prospectus
(NI 44-101).
However, when a company first begins listing on an exchange, it should allow 3-6 months for completion
of the required documents: long form prospectus (NI 41-101), audited financial statements, and any
necessary technical reports. Development of a prospectus for an equity issuance usually costs between
$150 000 and $250 000. [SME Handbook]
For companies that choose to finance with public equity, several additional factors must be considered.
Location and Regulatory Environment
The most significant exchanges for mining financings are the TMX Group (Toronto), LSE (London), ASX
(Sydney), NYSE (New York), and JSE (Johannesburg).
Listing in the United States allows easy access to the largest pool of capital. However, the cost of
regulatory compliance is typically much higher in the United States.
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Listing with the TSX is becoming increasingly popular for mining companies. There are currently 351
mining issuers on the TSX and 1071 on the TSX Venture Exchange. [Mining Association of Canada, 2010]
As shown in figure 1, the TSX group has accounted for 82% of mining financings from 2005-2009 and
accounted for 32% of the total capital raised.
Figure 1: Distribution of mining equity financings
TMX = dark blue. LSE-AIM = light blue. ASX = forest green. NYSE = olive green. [Gamah International,
2010]
Advantages of listing in Canada include the fact that Canadian corporate laws do not require listed
companies to be incorporated in Canada and do not require corporate directors to be residents of
Canada. [TMX Group] As well, some companies can still have access to the US market using the multi-
jurisdictional disclosure service. [Duncan, 2010]
A disadvantage of listing in Canada is that securities laws are different in each province, though they are
increasingly being harmonized through the use of national instruments.
Analyst Coverage
Analyst coverage helps bring companies to the attention of investors and increases the chance of
institutional investors (mutual funds, pension funds, etc.) buying their stock. The amount of analyst
coverage offered varies based on company size and which exchange the company is listed on. With the
TSX, companies receive an analyst coverage guarantee, though this is not the case for the TSXV.
[Duncan]
Timing of Financing
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Investors’ appetite for stocks in the commodity markets is highly volatile. The success of an equity
financing (both in terms of issue price and number of shares purchased by invstors) depends greatly on
the timing in the commodity price cycle. For example, 2009 saw 66% of Canadian mining exploration
financings go to gold companies. Ideally, it is best to issue shares when the stock price is overvalued. In
practice, this is not always possible since funds are often required in difficult times when stock prices are
depressed.
Bought Deals
If investor appetite is high, mining companies may have the option of pursuing “bought deal financings”.
In these arrangements, the underwriter(s) purchase all of the shares issued by the mining company in
the confidence that shareholders will want them. Bought deal financings provide extra predictability to
the mining company in equity financings. For example, the uranium company Denison Mines performed
a bought deal financing just days after the March 2011 Japanese Tsunami that caused significant unrest
in the nuclear industry. Because of the bought deal status, the underwriters were forced to buy the
shares from Denison at a significant premium to the newly-reduced share price.
Admission Criteria
Meeting an exchange’s admission requirements is a necessary prerequisite for equity financing.

Exchange groups often have multiple listing categories, each with their own criteria for admission.
London has the LSE for larger companies and the AIM index for smaller ventures. New York has the
NYSE and Nasdaq. The TMX group has the TSX and TSX venture exchange (TSXV).
Navigating an exchange’s requirements for admission is a complex process. For example, the TSX and
TSXV have multiple levels of admission criteria for mining companies that include: property
requirements, reserves and resources, net working capital, assets, management, and distribution of
shares. Details are shown in figure 2.
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Figure 2: Conditions for mining company listings on the TSX and TSXV [Duncan, 2010]
Flow-Through Shares
A variation on public equity is the concept of flow-through shares. Flow through shares are a unique
Canadian financing option that allows mining and exploration companies to pass on tax benefits to
shareholders. When investors purchase flow-through shares, the funds are deducted from their
personal taxable income and added to the corporate taxable income of the exploration company. Flow-
through shares are the most popular form of financing for exploration companies with Canadian
properties. [Globe and Mail, 2009]
The most important restriction on the use of flow-through shares is that the proceeds must be used to
fund exploration in Canada. Specifically, funds must be used for “expenses incurred to determine the
existence, location, quality, or extent of a mineral resource or an accumulation of petroleum or natural
gas in Canada.” *Canada Revenue Agency, 2011+ These expenses cannot include overhead expenses
such as administration and management.
Flow-through shares are possible for exploration companies that are limited partnerships as well as
corporations. Typically, companies will aim to get their flow-through shares listed in major flow-through
funds from firms such as Front Street Capital and Middlefield Resource Funds. Since mining companies
that use flow-through shares forfeit tax-deductible cash flows, they are most logical for non-producing
exploration companies who are not paying corporate tax.
For mining companies, the main advantage of using flow-through shares is that they can be issued at a
premium to the market price of regular common shares (often up to 25%). [Cornell, 2006]
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Investors’ appetite for flow-through shares tends to fluctuate with more volatility than regular public
equity. Therefore, companies must give special attention to the timing of flow-through financings.
Investors are often eager to reduce their taxable income using flow-through shares at the end of
profitable years in the equity markets, as shown in figure 3.
Figure 3: TSX flow-through financings. [Bogden, 2010]
Note the greater number of financings in the final quarter of 2009, which was a good year for Canadian
equity markets.
Warrants
A stock warrant is a right to buy common stock at a given exercise price (strike price) until a given time
in the future. Generally, the strike price is created to be lower than the current market price. Warrants
are thus similar to call options except that the shares are issued by the company rather than by third
parties in the open market. Warrants are traded on stock exchanges, in a similar manner to stock
options.
Warrants offer the advantage of offering two cash flows for the mining company. This first is an
immediate cash influx that occurs with the sale of the warrants themselves. A second cash flow occurs if
and when the warrants are exercised.
The main disadvantage of warrants is that they dilute the company’s equity. If overused, this technique
can lead to decreased shareholder confidence. It is also possible that a warrant issue could raise less
money than an equity financing if warrants are exercised at a significant discount to the market price.
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However, if the share price falls below the exercise price, equity is not diluted and the company earns
free financing from the warrant sale without equity dilution. For this reason, mining companies
experience less risk with warrants than with regular public equity.
This risk-reducing feature makes warrants a valuable and heavily-used tool for royalty sales companies
such as Silver Wheaton and Franco Nevada, which experience high risks related to changes in
commodity prices.
Warrants can also be used as part of a shareholder rights plan (poison pill) against hostile takeover bids.
To accomplish this, warrants are issued to dilute the hostile party’s shares, thus increasing the cost of
the takeover bid.
Rights Issues (Rights Offerings)
Rights issues are an equity instrument that gives the holder the right (but not the obligation) to
purchase shares of a company’s equity at a predetermined price at a specific date in the future. Rights
issues are given to existing shareholders, who have the option to exercise them or sell them on the open
market. Rights issues take roughly 10 weeks to arrange. They are generally used for large-scale
financings by companies in poor financial condition, or for growth and acquisitions.
Unlike regular equity financings and warrants, rights issues give existing shareholders the option to
maintain their stake in the company without equity dilution.
Rights issues are more common in the UK, Europe, and Australia. Among North American mining
companies, they are often considered to be a last resort for financing.
Recent examples of rights issues include $5.9 billion for Xstrata in March 2009, $1.0 billion for Ivanhoe in
October 2010, $250 million for Katanga Mining in July 2009, and $95 million for Semirara Mining in June
2010.
Private Equity
Private equity financing refers to investments by individuals or institutions in non-listed companies or

investments to buyout listed companies as a means to make them private. In many cases, mining
companies are taken over by private equity firms without management’s consent. Private equity firms
can partner together or use leveraged buyouts to launch hostile takeover bids.
Recent examples of private equity transactions in mining include Nunavut Iron Ore Acquisition Inc’s joint
takeover of Baffinland Iron Mines with ArcelorMittal, Pala’s takeover of Gemcom Software
International, and Resource Capital’s takeover of Molycorp (which was purchased for $110 million and
now has an estimated value of $1.5 billion after 2 years of ownership by Resource Capital).
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Overall, private equity is not as common in mining as it is in other industries. Private equity firms tend
to prefer firms in which they can drastically improve a company’s performance through influence on
management. In the mining industry, influence on management will have little effect if commodity
prices are not favourable. Also, private equity firms tend to avoid industries that require a high degree
of specialised knowledge.
When used in mining, private equity is a popular option for juniors at the feasibility or development
stage of a project. It is also used for bridge financing or acquisition financing. Mining companies are
also more likely to be targeted for private equity buyouts if they have high cash flow to debt ratios. This
is because private equity firms tend to operate at high leverage ratios and need strong positive cash
flows to protect their investment.
In the mining industry, private equity financing is mainly performed by firms that specialise in the
industry, such as Resource Capital (Denver/Perth), Pala Investments (Zurich), Pacific Road Capital
(Sydney), and RNB Resources (Denver/London/Sydney).
A disadvantage of private equity is that companies often must negotiate more stringent terms with the
financier than they would with most other financing options. However, an advantage of this negotiation
process is that it can be conducted in private with a small number of buyers (often just one).
Joint Venture (Strategic Alliance)
Joint ventures are an arrangement between two or more companies to share interest in a property.
Joint ventures are more than just a financial arrangement. They are used to combine both capital and
expertise. Joint ventures are most attractive when each company possesses an important asset or
realm of expertise necessary to make a project successful. For example, a junior partner may contribute
mineral rights and local expertise of a property while the partnering company may contribute more
capital and experience in operating mines.
Examples of joint ventures in mining include Antamina (BHP, Xstrata, Teck, and Mitsubishi), the BHP-Rio
Tinto alliance in Western Australia, and the BC Mining Joint Venture (Fluor and AMEC).
Joint ventures often result from good long-term cooperation between management teams over a
sustained period of time (sometimes as little as 3 months, but often several years). As a result, they are
rare as a short-term financing option, but offer many advantages over the long-term.
For a junior partner with a single deposit, joint ventures offer the opportunity to retain control of a
company, as opposed to the main alternative: being acquired. The reputation of the larger partner can
also help secure financing from lenders that would never consider lending to the junior company alone.
For the partner with more capital resources, joint ventures offer the opportunity to profit from a
property without having to acquire the company that originally owns it. During times of limited capital
availability, this is a useful advantage.
8
The main disadvantage of joint ventures is that they rely on good relations between the partners. A
breakdown of this relationship is damaging to both companies.
For partnering companies that have chosen to enter a joint venture, an additional choice must be made
between an equity (incorporated) joint venture or a contractual (unincorporated) joint venture. A
contractual joint venture involves each company agreeing to provide certain costs for a project in
exchange for a percentage of the revenues. An equity joint venture involves the creation of a new legal
enterprise in which both companies have an equity stake. The consequences of this choice have
implications for tax, management structure, liability, and government regulations.
2.3 Debt and Quasi-Debt
Debt financing is the acceptance of cash from investors in exchange for the promise of future repayment
with interest. There are many variations on this concept. Several forms of financing have features of
both debt and equity and are referred to as “quasi-debt”. These include preferred shares, convertible
bonds, and mezzanine debt.
Preferred Shares
Preferred shares are a hybrid security that combines attributes of both debt and equity. Preferred
shares can be perpetual or be converted into common shares after a fixed term, generally 5 years or
more. Preferred shares are non-voting, have higher dividends, and typically have lower volatility than
common shares.
From a company’s perspective, preferred shares are typically preferable to bank debt because payments
are not forced. Mining companies can choose to reduce or eliminate dividends with little or no effect on
their credit rating. In addition, preferred shares can be used as part of a shareholders’ rights plan
(poison pill) if they contain a condition that they must be redeemed at a high price in the case of a
change in control of the company.
Despite these advantages, preferred shares are not commonly used by mining companies. The reason
investors typically turn to preferred shares is because they have lower volatility and higher dividends
than common shares. In the heavily cyclical mining industry, future cash flows are unpredictable and
therefore low volatility and predictable dividends are difficult conditions to meet. The ability to attract
investors to preferred shares is therefore limited to the largest, most-diversified producers.
9
Bonds (Notes)
Bonds are debt instruments issued to investors which require repayment of the principal at a fixed date
as well as coupon payments (typically paid semi-annually). Bonds are by far the most popular form of
debt financing for mining companies. Mining companies can issue bonds through public placement, or,
if rapid financing is required, a private placement to accredited investors. As shown in figure 4, bonds
accounted for almost all of the major Canadian debt financings in the mining industry in 2009.
Bonds typically carry many terms and conditions. A bond’s seniority refers to its priority on the capital
structure in the event of default (senior debt has priority over subordinated debt). A ‘secured’ status
means that the bond is backed by assets as collateral in the event of default. Unsecured bonds are
typically only used by companies with excellent credit ratings (A or above).
Figure 4: Major debt financings among Canadian miners in 2009 [Bogden, 2010]
The feasibility of financing by bonds is determined largely by companies’ bond ratings. Corporate bonds
are rated by four major agencies: Standard and Poor’s (S&P), Moody’s, Fitch, and Dominion Bonds
Rating Service (DBRS).
In the mining industry, bonds are used almost exclusively by major producers. Junior companies carry
too much credit risk to effectively raise capital in the bond markets. Due to the uncertainty of future
cash flows in small mining companies, any bonds that they would issue would be low-grade “junk”
bonds, which would require high coupon rates. Even major producers often struggle to obtain high
bond ratings (and resultantly low coupon rates). In 2009, Teck Resources bonds were downgraded to
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junk status, while the most profitable mining company in the world (BHP Billiton) is rated two levels
below the highest standard (Moody’s AAA rating).
For the few mining companies that can obtain good bond ratings, the bond markets are an effective
source of financing.
Convertible Bonds (i.e. Convertible Notes, Convertible Debt, CV’s)
Convertible bonds are a hybrid security that begins as debt and is converted into shares of the issuing
company after a fixed term.
From a mining company’s perspective, they offer the advantage of lower coupon rates compared to
regular bonds. The disadvantage is that they dilute shareholders’ equity.
Mezzanine Debt
Mezzanine debt is a type of hybrid security that begins as debt and is automatically converted into
equity if the debt holder is unable to repay the loan in full or on time. Mezzanine debt is typically very
subordinated (usually only senior to common shares). This makes it a very high-cost choice for mining
companies, with interest rates often ranging from 20-30%.
Mezzanine debt is generally not an option for juniors and explorers due to their inherently high risk. If a
junior is unable to repay a loan, there is a good chance that its equity would also be worthless to the
lender by this point. Mezzanine debt is therefore mostly used by large mining companies whose equity
will still have value in the event of a subordinated debt default.
Equipment Leasing
Equipment leasing is provided by most mining equipment manufacturer such as Caterpillar, Komatsu,
and P&H. Mining companies can choose between operating leases (shorter-term, cancellable, includes
maintenance) and financial leases (longer-term, non-cancellable, non-maintenance).
Good reasons for mining companies to lease include tax benefits and increased operating flexibility. It
has also been argued that operating leases benefit companies by making their balance sheets and debt
ratios appear stronger. [Ross, 642] While it is true that lease payments are not treated as a liability on
balance sheets, competent lenders and credit rating agencies will still notice this off-book liability and
treat the company accordingly. Trying to conceal off-balance sheet liabilities could erode trust between
the company and investors.
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By definition, equipment leasing can only be used for a limited range of projects. As well, the interest
rates charged by lessors are often less competitive than those offered by other lenders in the form of
debt.
Earn-ins (Property Options)
Earn-ins are an arrangement used by juniors to fund exploration on lower-priority properties. The junior
company making the earn-in available (earn-in party) accepts cash or shares from the optioner in
exchange for giving up the future earnings from one of its properties for a specified term (often 3-5
years).
This method is most useful for junior mining and exploration companies that do not have the capital to
explore on all of their properties. Earn-ins are often most practical between 2 junior companies (one
with capital, and the other with attractive properties)
Typical examples of earn-in contracts are shown in figure 5.
Figure 5: Selected earn-in contracts from 2010 [Bogden, 2010]
Prepaid Forwards (Off-Take Financing)
Prepaid forwards are based on the concept of a “gold loan” (a bank loan with gold as collateral). In a
prepaid forward arrangement, the lender provides cash in exchange for a percentage of the production
(typically 10 or 15%) from a property for a set tenure (1-5 years). For accounting purposes, they are
treated as deferred revenue.
Examples of prepaid forward agreements include Deutsche Bank’s contracts with Petaquilla Minerals’
Molejon Gold Project and Century Mining’s Lemaque Mine.
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For mining companies, prepaid forwards have the advantage of tying repayment to revenues from
production. This has a securing effect. If production is delayed, payments to the lender are delayed. If
commodity prices drop, payments to the lender drop accordingly.
However, the mining company loses significant upside potential if revenues are higher than expected,
Prepaid by-product Calls
A variation on the prepaid forward is the prepaid by-product call. The lender provides cash to the
mining company in exchange for a call option on future commodity production.
For a mining company, this provides immediate cash but puts a cap on the price of commodity sales.
This is a wise strategy if the company wants to secure against lower commodity prices in the future.
Royalty Sales (Commodity Streaming)
Royalty sales operate on a similar principle to prepaid forwards. They are an agreement between a
mining company (operator) and a bank or royalty company (royalty holder). In these agreements, the
royalty holder pays the operator in cash to provide financing for a project to come on-stream. In return,
the operator agrees to provide the royalty holder with a predetermined percentage of the project’s
future production of a certain commodity at a predetermined price. These agreements typically last for
the length of a project’s life, though some have fixed terms (often 25 years or more). The royalty is tied
to the property and not to the operating company. Therefore, it applies even if a property is sold from
one company to another. Royalty sales are often negotiated to give the royalty holder cash flow from
by-products in polymetallic orebodies.
Examples of contracts include Gold Wheaton for FNX in McCreedy West and Podolsky (Sudbury), Franco
Nevada for St Andrews Goldfields in Holloway, Franco Nevada for Taseko in Posperity, Silver Wheaton
for Goldcorp in Penasquito, and Silver Wheaton for Barrick in Pascua-Lama. Both small and large
companies make use of royalty financings.
The phenomenon of royalty-based financing has emerged to prominence in the last 10 years. It is
currently performed by companies such as Franco Nevada (IPO in 2007), Royal Gold, Gold Wheaton
(currently being acquired by Franco Nevada), Silver Wheaton (spun-off from Goldcorp in 2004),
Sandstorm Resources (gold), and Altius (multiple commodities).
As with prepaid forwards, mining companies that sell royalties benefit from the fact that repayment is
tied to future production. If production is delayed or cancelled, there is no obligation to pay the royalty
holder. Another advantage is that mining companies can enter royalty sales agreements without
violating any negative pledge constraints on existing senior debt.
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One disadvantage of this method is that some royalty holders may impose conditions on mining
companies that may conflict with their desired plans for operations. Another disadvantage is that
royalty sales agreements take a long time to arrange (often over 6 months) because of the large amount
of due diligence that royalty holders undertake before agreeing to a contract.
Commodity Exchangeable Bond
A commodity exchangeable bond is a bond that can be converted into a predetermined quantity of a
commodity by the holder. It is thus similar to a convertible bond except that it is convertible into a
commodity rather than into equity.
There are many advantages to commodity exchangeable bonds. Like regular convertible bonds, the
convertibility feature allows mining companies to offer investors a lower coupon rate. As well,
commodity exchangeable bonds do not lead to equity dilution or changes in the value, volatility, and
voting rights of equity. [Deutsche Bank]
The main disadvantage of commodity exchangeable bonds is that the loss of potential upside if
commodity prices rise.
Commercial Bank Loans (ie. Syndicated Bank Facilities, Structured Commodity Trade Finance Loans)
Commercial bank loans can be performed by individual banks or by consortiums of banks (called
syndicates). Commercial bank loans usually have the highest seniority. Loans are for a predetermined
term at a predetermined interest rate.
These loans allow mining companies access to the large capital pools offered by major banks. As well,
these loans tend to be liquid and relatively cheap and simple to arrange.
Due to their high leverage ratios and resultantly lower risk tolerance, commercial banks will often
require stringent terms to protect their investment. For example, Deutsche Bank (a major financier to
the mining industry) requires at least 2 years of production and cash flow history. (Deutsche Bank, 2010)
Commercial banks often require that their debt is secured with collateral. These types of conditions
generally make commercial bank loans impractical for juniors, but often attractive for major producers.
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2.4 Other Financing Types
Project Financing
Project financing is financing used for a single project, rather than for a whole company. Project finance
can be in the form of debt, equity, or both. It is primarily issued by banks, and ranges in size from a few
million dollars to hundreds of millions of dollars. Project financing is used by major companies and
juniors alike.
In project debt financing, a project’s assets are used as collateral for the loan. The project’s finances are
kept at arm’s length from the rest of the company. This means that in the event of a default, a financier
has no claim on a company’s assets other than those used for the project. This can be a major
advantage to the mining company.
One potential problem is that intercreditor issues, such as violations of negative pledge constraints, can
arise with the holders of senior debt.
International Financial Corporation (IFC)
For mining companies operating in developing countries, the International Financial Corporation (IFC)
offers alternative means of financing. As a member of the World Bank Group, the goal of the IFC is to
promote development and reduce poverty in developing nations.
IFC financing is only available for long tenures (typically 7 years for equity and 10-12 years for debt).
80% of IFC financings are private equity. The remaining 20% is primarily senior debt, subordinated debt,
acquisition financing, and mezzanine finance. [Bulmer, 2010] These investment vehicles are not unique
to the IFC. What makes IFC financing different is its focus social and environmental goals.
For mining companies with projects in developing countries that meet the IFC’s social and
environmental criteria, the IFC may be the only financing option. In other cases, it may offer more
attractive terms than regular lenders that are concerned about political risk. Another advantage of the
IFC is its package of advisory services on topics such as risk management, corporate governance, energy
efficiency, community development, and local supplier development. The main disadvantage to using
IFC financing is the increased level of bureaucracy that must be dealt with in comparison to the private
sector. IFC financing typically takes far longer to arrange than other forms of financing (usually around 2
years).
Export Credit Agency (ECA) Financing
Export Credit Agencies are private or government-owned financiers that take on risk and uncertainty of
payments to exporters. In Canada, EDC (Export Development Canada) is the major lender. It provides
15
financing to Canadian companies with international activities. It mostly focuses on small companies, but
has financed companies as large as Agnico-Eagle and Lundin. [EDC, 2011]
Mergers and Acquisitions
Strictly speaking, mergers and acquisitions are not a type of financing. Nonetheless, they are a method
of bringing projects into production that should be considered as an alternative to the aforementioned
methods.
For juniors, being acquired is often the most attractive method of brining a project into production.
Mergers between juniors are an option that allows the companies to maintain ownership of their
property and attract increased interest from investors.
2.5 Comparison of Major Financing Types
A summary of the major financing types was compiled and is displayed in tables 1, 2, and 3.
Table 1: Considerations for equity and quasi-equity financing options
Equity and Quasi-Equity

Public Flow- Rights Issues Warrants Private Joint Venture
Equity through Equity
shares
3-8 weeks 10 weeks 16 weeks or Months to years
Time to
(short- more
Arrange
form)
Size of Large Medium Large Large Small Large
Capital Pool
For all Only for For all For all For all Only when strong
companies companies companies companies companies partnership exists
with
Feasibility exploration
in Canada
Cost of Cost of Cost of Cost of Cost of N/A

equity equity and equity equity equity
increased
Rates
taxable
income
Position in Subordinat Subordinate Subordinate Subordinate Subordinate N/A

Capital ed d d d d
Structure
16
Increased Increased Increased Increased Varies Varies
Balance equity equity equity equity +
Sheet cash
Better or Better or no Better or no Better or no Varies Better
Credit Rating no change change change change
Effects
Yes Yes Yes, but Yes N/A Varies
shareholders
Shareholder are
Dilution compensate
d
By far the Attractive to Causes drop Commonly Often has Used when each
most investors in share used by stringent company brings
popular due to tax price. Not royalty sales terms resources/expertis
option benefits. common in companies e to a project that
Investor North the other does not
Comments
demand America have
fluctuates except in
strongly emergency
situations
Table 2: Considerations for debt and quasi-debt financing options
Debt and Quasi-Debt
Bonds/ Convertible Commodity- Preferred Mezzanine

Debentures Bonds exchangeable Shares Debt
Bonds
Time for 10 weeks 10 weeks

prospectus,
Time to
except with
Arrange
private
placement
Size of Capital Large Large Small Small Medium

Pool
Only for large Only for large Only for large Rare Not for
Feasibility
producers producers producers juniors
Typically 2 to Slightly As above 1 to 8% + non- 15 to 30%

12%, depends <above voting equity
Rates on interest rates
and credit
rating
Position in Senior, secured Senior, Senior, secured After bonds Subordinated

Capital or unsecured secured or
Structure unsecured
17
Balance Sheet Worse Worse Worse None Worse
Credit Rating Worse Worse Worse None Worse

Effects
Shareholder No Yes No Yes Sometimes

Dilution
Most popular More popular Rare, but Very Mainly used

type of debt for somewhat increasingly uncommon in for short-
financing smaller popular financial mining. term loans
producers, product Difficult
Comments
compared to without very
non- predictable
convertible cash flows
bonds
Table 3: Considerations for debt and quasi-debt financing options (continued)
Debt and Quasi-Debt

Equipment Prepaid Royalty Bank Loans Project
Leasing Forwards (Off Sales Financing
Take
Financing)
Time to 6-12
Arrange months
Size of Small Small Small Large Large
Capital Pool
Available to Available in Available Available to For all
all pre-production in pre- producers, companies
Feasibility companies after feasibility production generally with feasible
is proven large ones projects
Give up Give up % Typically

predetermined of future LIBOR +
quantity of production premium
Rates
commodity for project based on
life credit rating
Position in Secured Senior, N/A Most senior Subordinated

Capital secured
Structure
None Immediate Immediate Worse Varies
Balance cash increase cash
Sheet increase
Effects
Credit Worse Worse Worse Worse Worse
Rating
18
No No No None No
Shareholder
Dilution
Limited Mostly for Tied to Has the most Repayment

applicability. experienced property, stringent tied to single
Lease types producers, but not terms project
can be can be used for company. (negative
operating or a first project if Repayment pledge
Comments financial. very is constrains,
Some tax economically dependent interest
benefits. attractive on coverage
production constraints,
etc.)
3. COMPARISON OF CAPITAL STRUCTURES
3.1 Introduction
Part 1 analyzed all of the major financing methods available to mining companies. This section will apply
these concepts in case studies of four companies: BHP Billiton, Barrick Gold, Teck Resources, and Noront
Resources. For each company, the overall choice of financing methods will be shown and analyzed. The
effect of financing choices on the weighted average cost of capital (WACC) will be calculated. The
companies were chosen to represent a wide spectrum in size, ranging from the world’s largest (BHP) to
a non-producing junior (Noront). Barrick was included so that the unique financing considerations for
gold companies could be included.
3.2 Methodology
Cost of Debt
For each company, cost of debt was calculated using a weighted average of the interest rate on all of the
company’s long-term debt instruments. Interest rates for debt instruments were provided by all
companies in their regulatory filings. A summary of the cost of debt results is shown in table 4. Figures
were calculated using fair values of debt in accordance with IFRS as opposed to GAAP since GAAP are no
longer used in Canada.
Table 4: Comparison of cost of debt
19
Cost of Debt (%)
BHP 5.48%
Barrick 5.78%
Teck 8.54%
Noront no debt
Discussion of each company’s debt instruments is detailed in each company’s section.
Tax Rates
Tax rates were determined based on each company’s effective tax rate as of Dec 31, 2010 as declared in
their 2010 annual report.
Cost of Equity
Cost of equity is defined as the rate of return that an equity investor expects on his or her investment.
Unlike debt, equity investments do not have predictable future cash flows in the form of coupon
payments, royalty payments, or loan repayments. Therefore, cost of equity must be estimated using
financial models. It is generally accepted that equity investors’ expected return is related to risk. Two
methods of quantifying this relationship are the Capital Asset Pricing Model (CAPM) and the arbitrage
pricing theory (APT), both of which are discussed below.
Beta
Beta is a statistical measure of a stock price’s sensitivity to the return of the stock market. It is used for
the calculation of cost of equity in the CAPM and other models for cost of equity. For this thesis, the
S&P/TSX composite index was used as a proxy for the market portfolio. Beta values were calculated
using monthly returns for the period December 2005 to December 2010. This long time frame was
selected in order to utilise a large statistical sample (60 months) as well as minimize the impact of the
global financial crisis on the results. A summary of the beta values is shown in table 5. Full data and
calculations are shown in appendix A.
Table 5: Beta values and correlation coefficients
5-year beta Correlation Beta Beta

using monthly Coefficient (globe (msn
returns for Beta investor) money)
BHP 1.716 0.77 1.299 1.46
Barrick 0.48 0.211 0.339 0.43
Teck 3.298 0.786 3.616 3.53
Noront 3.384 0.244 1.527 3.02
Correlation coefficients indicate the level of certainty of the beta value, with a value of zero meaning no
correlation and a value of one indicating a perfect correlation. The low correlation coefficients for
20
Barrick and Noront indicate that the performance of the stock market has a very limited effect on their
share price while the share prices of BHP and Teck are heavily influenced by the market return.
To help ensure accuracy, the calculated beta results were compared to stated beta values from
investment analysis websites GlobeInvestor and MSN Money. The beta values from these websites
were not used for subsequent analysis because the methodologies used to calculate them were not
stated. All calculated beta values are close to these stated results.
Individual beta values will be discussed in detail in the sections for each company.
Capital Asset Pricing Model (CAPM)
The Capital Asset Pricing Model is the most widely-accepted method of determining cost of equity.
Developed by [Sharpe, 1964], it is based on the observation that equity returns are roughly correlated to
a stock’s sensitivity to market performance (beta). As a result, The CAPM assumes that expected
returns should be linearly correlated to beta. The equation representing the CAPM is as follows:
( )
Where:
Ke = Cost of Equity
Rf = Risk‐free Rate
Rm = Expected Market Return
β = Beta of the Company
Risk-free rate is defined as the rate at which investors can obtain a return with negligible risk. Bank of
Canada 1-year treasury bills (t-bills) are used as a proxy for the risk-free rate. As of December 2010, t-
bill rates were 1.38% (Bank of Canada, 2010).
Expected market return is based on an average annual compounded return of 8.09% in the US and
7.06% in Canada during the period 1921 to 1996, including dividend reinvestment (Jorion, 1999).
A summary of the CAPM-predicted cost of equity values is shown in table 6.
Table 6: Cost of equity results
5-year beta
Risk- using Market
Free monthly Premium Cost of Equity
Rate returns (Rm-Rf) (%)
BHP 1.38 1.716 6.71 12.89
Barrick 1.38 0.48 5.68 4.11
Teck 1.38 3.298 5.68 20.11
Noront 1.38 3.384 5.68 20.60
Alternative Models for Cost of Equity
21
CAPM was selected as the only means of determining the cost of equity. Use of the Gordon model was
considered, but ultimately not used due to its reliance on dividends and retained earnings in the cost of
equity calculation. In the mining industry, dividends are rare and retained earnings fluctuate greatly due
to the cyclical nature of the industry.
Multifactor models using Arbitrage Pricing Theory (APT) were also considered, but not used. The most
common APT models (such as the Fama-French 3-Factor model) rely on factors such as the return of
small companies compared to big companies and the book to market ratio. While these factors are
undoubtedly important in industrial companies, they are less valuable in the mining industry. Book to
market ratio is particularly irrelevant in a mining context because mining companies’ main assets (their
orebodies) are reported on their balance sheets at the cost of drilling rather than their market value.
The only way for APT to be relevant to mining companies would be to create a model that uses
commodity prices as factors. In other words, cost of equity would be based on a stock price’s
covariance to the prices of the commodities that it produces and the historical variance of those
commodity prices. However, the creation of such a model is beyond the intended scope of this thesis.
Weighted Average Cost of Capital (WACC)
Weighted average cost of capital is an estimate of the expected percentage cost of all sources of capital.
Companies strive for a lower WACC as it is an important figure for capital budgeting decisions.
Generally, new projects are accepted if they have an internal rate of return (IRR) greater than the WACC.
WACC is determined using the formula:
( ( ))
Where:
Wd = Proportion of Capital that is Debt

We = Proportion of Capital that is Equity
Kd = Cost of Debt
Ke = Cost of Equity
t = Effective Tax Rate (calculated from financial statements using Rate = total income tax / taxable
income)
A summary of the results is shown in table 7.
Table 7: Weighted average cost of capital results
Effective
Average Value of Value of
Market Cap Cost of Cost of Tax Rate Equity Debt WACC
(billions) Equity Debt (%) (millions) (millions) (%)
BHP 232 12.89 5.46 33.0% 49329 13571 10.90
Barrick 51.6 4.11 5.78 29.0% 20734 6692 4.11
Teck 31.2 20.11 8.54 28.6% 16176 4883 16.86
Noront 0.19 20.60 no debt N/A 96.9 0 20.60
22
A full discussion of the values is included in each company`s section.
3.2 BHP Billiton

BHP Billiton is the largest mining company in the world, with a market capitalization of $232 billion USD
(As of Dec 2010). It is also the largest company in terms of assets, revenues, and number of employees.
Capital Structure
BHP’s capital structure consists of $13.6 billion in debt and $49.3 billion in equity. The resulting debt to
equity ratio of 0.28 is low compared to most industrial companies but high compared to BHP’s peers in
the mining industry (except for other large diversified producers such as Rio Tinto, Vale, and Anglo-
American). BHP’s debt level is higher not because it is in poor financial condition, but because it is one
of the few mining companies with the high investment-grade credit ratings necessary to make debt
financing feasible.
Debt
A summary of BHP’s debt securities is shown in table 8.
Table 8: BHP debt securities as of June 1/ 2010 [BHP 20-F form, 2010]
2010 Fair Value

Type (Millions CAD)
Unsecured bank loans 361
Notes and debentures 12012
Secured bank loans 424
Redeemable preference shares 15
Financial leases 160
Unsecured other 250
Secured other 349
Total 13571
Cost of Debt* 5.46%
*Cost of debt based on the fair value the debt divided by BHP’s estimated future annual interest
payment ($741 million)
BHP’s heavy use of bonds and debentures is not surprising since these are the most popular form of
debt financing. It is interesting to note BHP’s use of unsecured bank loans. Banks typically only provide
unsecured loans to the most creditworthy mining clients.
Despite BHP’s relative stability (compared to other mining companies), it has made little use preferred
shares.
23
Equity
BHP had a beta of 1.716 with a correlation coefficient of 0.77. This is comparable to other large
producers: Rio Tinto (beta= 1.50), Anglo American (beta= 1.70), and Vale (beta= 1.60). [MSN Money]
BHP’s beta results are to be expected for a company that has products whose value fluctuates in tandem
with general economy. This leads to a cost of equity of 12.89%.
While equity makes up the large majority of BHP’s balance sheet, BHP has not recently issued any shares
to raise capital. Since 2004, it has been using its strong cash flows to repurchase shares. The number of
outstanding shares has been reduced from 6.2 billion to 5.6 billion in this time period.
BHP’s weighted average cost of capital is 10.9%. This is relatively low for a non-precious metals mining
company. BHP’s relatively low cost of capital likely allows for a wider variety of projects and acquisitions
to be economic.
3.3 Barrick Gold

Barrick Gold is the largest gold company in the world, with a market capitalization of $52 billion CAD and
25 operating mines worldwide.
Its capital structure includes $6.7 billion CAD in debt and $20.7 billion CAD in equity. Like BHP, this is a
somewhat high proportion of debt compared to other miners, and attributable to Barrick’s stable A
grade credit rating.
Debt
A summary of Barrck’s debt instruments is shown in table 9.
Table 9: Barrick Gold debt instruments [Barrick, 2011]
Value (millions
Type Rate Maturity USD)
2039
2019
2019
Fixed rate notes
2014
2019
6.49% 2039 3217
Canadian notes 5.80% 2034 492
24
4.88% 2014 260
2036
US dollar notes
6.22% 2016 996
Convertible senior debentures 0.80% variable 0
Project financing** 3.65% 2025 754
Capital leases 4.30% N/A 72
Other debt 4.94% variable 901
Total 6692
Cost of Debt 5.78%
*Also has $625 million silver-streaming cash payment from Silver Wheaton for Pascua-Lama
**Project financing for the Pueblo Viejo project with Goldcorp. Financiers include international
financial institutions (including two export credit agencies), and a syndicate of commercial banks
Overall, these are low average rates for debt. For example, Barrick’s 4.95% 10-year notes have a yield
that is only 1.3% higher than comparable 10-year government bonds. The convertibility feature on
Barrick’s senior debentures allows it to charge the very low rate of 0.8%.
Barrick’s heavy use of bonds and debentures is not surprising. However, it is interesting to note that
Barrick used $625 million in royalty financing from Silver Wheaton for the silver by-product in their
massive Pascua-Lama project. Traditionally, mostly smaller companies have used Silver Wheaton for
financing. Given Barrick’s excellent financial position and low cost of capital, it did not need to use
royalty financing. Perhaps Barrick was bearish on silver prices, or it wanted to keep the company a pure
play on gold.
Equity
Barrick has a beta of 0.48 with a correlation coefficient of 0.211. This low beta is expected given that
gold is a hedge against most other securities. Other gold companies also have very low betas (ex. 0.55
for Goldcorp, 0.50 for IAMGOLD, 0.41 for Newmont, and 0.60 for Kinross). Barrick’s low beta leads to a
very low cost of equity of 4.1%.
The low cost of debt and very low cost of equity give Barrick an extremely low cost of capital of 4.11%.
This is likely lower than almost all other mining companies. Gold companies would enjoy a similarly low
cost of equity, but none are likely to also have the low cost of debt that Barrick enjoys due to its size,
diversified assets, and financial strength.
In theory, this low cost of capital means that Barrick can accept projects with a lower internal rate of
return (IRR) than other mining companies. In practice, though, Barrick has tended to be patient and
selective with regards to new projects. [Bouw, 2011]
25
3.4 Teck Resources
Teck’s capital structure consists of $8.9 billion in debt and $14.4 billion in equity. This is an exceptionally
high proportion of debt compared to most other mining companies. This is mainly due to the major
debt financing performed in 2009, discussed in more detail in the final section.
Debt
A summary of the Teck’s debt instruments is shown in table 10.
Table 100: Debt Instruments at Teck Resources [Teck, 2011]
Fair Value
Carrying Value (Millions
Type Rate Maturity (Millions CAD) CAD) Conditions
Variable Rate Term
Facility* 4.25% 2012 0 0 Paid in 2009
7.00% 2012 198 216 Callable at any time
9.75% 2014 494 657
10.25
Canadian Notes % 2016 608 813 Callable after 2013
10.75
% 2019 962 1,350
6.00% 2040 643 681
Revolving Credit** 2.75% x 55 55
4838
Cost of Debt 8.53%
*Interest rate is variable based on LIBOR (London Inter-Bank Oferred Rate) + a premium based on the
credit rating
**LIBOR + an unspecified margin (estimated @ 2.0%)
Overall, Teck’s list of debt instruments is far less attractive than the comparable charts for BHP and
Barrick. Most importantly, the interest rates are considerable higher, with an average cost of debt of
8.54%. The higher cost of debt is not surprising given Teck’s poor financial position in 2009, when the
majority of the debt was issued.
Equity
A summary of Teck’s equity instruments is shown in table 11.
Table 111: Equity Instruments at Teck Resources [Teck, 2011]
26
Class B
Class A Common Subordinate
Year Shares Voting Shares
2008 9353 477512
2009 9353 579779
2010 9353 581247
The class A shares are owned exclusively by the Keevil family (the founders of Teck). Class A shares are
entitled to 100 votes while class B shares are entitled to 1 vote. This share structure allows the Keevil
family to have a controlling interest in the company without majority ownership. This makes takeovers
of Teck impossible without consent from the Keevils. The class B subordinate voting shares are traded
on the NYSE and TSX.
Teck’s shares have a beta value of 3.3. This is exceptionally high compared to most companies and leads
to a cost of equity of 20.11%. It is expected that Teck’s beta should be higher than one. Prices of its
main products (metallurgical coal, copper, and zinc) are all correlated to economic growth and tend to
fluctuate with greater magnitude than other parts of the economy. Even so, the 3.3 figure seems rather
high. Perhaps it was distorted by Teck’s rapid collapse and recovery during the global financial crisis. In
this case, Teck’s stock price fell and recovered with far more magnitude than the market due to its poor
financial condition in the aftermath of a major acquisition and bridge loan. In the future, it is unlikely
that Teck will have such a high beta.
Teck’s weighted average cost of capital is 16.9%. This is high compared to BHP, and attributable to
Teck’s lower credit rating and higher beta value.
3.5 Noront Resources

Noront is an exploration company with two deposits in Northern Ontario’s “Ring of Fire” district, both of
which will likely be brought into production. As should be expected for a non-producing junior, Noront
uses equity financing exclusively, as shown in table 11. Using equity financing exclusively is standard
practice for most juniors (Stornoway Diamonds, St Elias Mines, Rainy River Resources, and Orko Silver,
to name just a few).
Noront’s lack of positive cash flow history makes it too risky for most bank loans. If Noront issued
bonds, they would have to be speculative “junk” bonds, which would need high coupon rates and be
difficult to sell to investors. Because Noront performs exploration within Canada, it is able to make use
of flow-through shares. All of Noront’s financings since its initial public offering have been performed
using flow-through. Until Noront generates taxable income, this is will continue to be a logical strategy.
Table 12: Noront Resources capital structure [Noront, 2010]
27
Value
Type (millions)
Capital stock* 119.4
Warrants 1.4
*Issued primarily with flow-through shares
Noront has a beta of 3.4 with a correlation coefficient of 0.244, meaning that its stock price rises greatly
when the market rises a little and falls greatly when the market falls a little. The low correlation
coefficient indicates that much of the variability in Noront’s price is not related to the market. This
makes sense for a non-producing junior, since its price would be significantly affected by exploration
results and other property-specific news items.
The resulting cost of equity is 20.11%. This is also the WACC since Noront has no debt. Given the high
risks associated with investing in juniors, this seems like a reasonable expectation for equity investors.
4. CASE STUDIES OF FINANCING DECISIONS
4.1 Introduction
This final section examines mine financing decisions on an individual basis. The pre-2008 boom in
commodity prices and subsequent crash during the global financial crisis have led to a number of
important financing events in recent years. Of the many interesting case studies, four were selected:
Teck’s Recovery, Barrick’s $4 billion equity financing, Xstrata’s $5.9 billion rights offering, and Copper
Mountain’s joint venture with Mitsubishi. These cases were chosen to represent a wide spectrum of
financing types.
Each section contains an analysis of the events leading to the financing decision(s), what decision was
made, the effect of the decision, and an analysis of whether the decision was correct and how it could
have been performed better.
4.2 Teck Resources’ Recovery

Background
Teck’s recovery from the brink of collapse in 2009 was one of the most important Canadian mining
stories in recent years. Teck is the 4th largest Canadian mining company with a market capitalization of
$37 billion. [TSX, 2010] It has significant holdings in metallurgical coal, copper, zinc, and oil sands.
The events that led to this near-collapse began with Teck’s acquisition of Fording Canadian Coal Trust in
July 2008. This purchase left Teck with a $6.0 billion bridge loan from a syndicate of 11 banks due in the
third quarter of 2009. At the time, many analysts believed that Fording Coal was a shrewd purchase,
and that Teck had acquired a bargain. [Canadian Business, 2010] However, after the severe drop in
commodity prices that occurred with the global financial crisis, Teck no longer had sufficient cash flows
28
to make its loan repayments. Among Teck’s major commodities, metallurgical coal prices dropped from
a high of $290 USD/t to $120 USD/t, copper prices dropped from $4.00 USD/ib to $1.25 USD/ib, and zinc
prices dropped from over $2.00 USD/ib to $0.60 USD/ib. [Kitco] With this development, Teck had to
either engage in significant financing activity or else face the risk of bankruptcy.
Decisions
Teck’s main refinancing actions were as follows.
1) Teck avoided financing in the equity markets until its price had recovered somewhat.
2) Teck eliminated their $486 million dividend. CEO Don Lindsay said that this was done “to send a
message to the bank CEO’s that we are serious about repaying their loan”. *Canadian Business+
3) Before issuing notes, Teck negotiated an extension on its bridge loan from October 2009 to October
2011. This was difficult because the loan was arranged by a syndicate of 11 banks.
4) Teck issued a private placement of $4.2 billion in senior, secured 5-10 year notes (analysts predicted
that only investors would only buy $1.0 billion). [Teck, 2010 ] This was the largest debt financing in
Canadian mining history. Details are shown in table 12.
Table 13: Details of Teck’s 2009 private placement of bonds
Value
(Billions
Term Rate Conditions CAD)
5-year 9.75% 1.315
7-year 10.25% 1.06
10-year 10.75% Callable 1.86
 All notes begin secured and become unsecured with improved credit rating.
5) In July 2009, Teck issued 101.3 million class B Subordinate voting shares to China Investment
Corporation (CIC) for $1.5 billion after price had recovered somewhat to $15. [Teck, 2010]
6) Teck sold $1.2 billion in gold properties, in Ontario, Mexico, and Chile. These include a 60% interest in
the Lobo-Marte project (sold to Kinross), a 50% interest in the Hemlo Mines (sold to Barrick) a 40%
interest in the Pogo mine (sold to Sumitomo), and a 78.8% interest in the Morelos project (sold to
Gleicen). [Teck, 2010]
Long-term Effects
29
The long-term effects of Teck’s financing decisions have been overwhelmingly positive. Teck is no
longer in danger of bankruptcy. Teck was successful in eliminating its bridge loan as well as reducing its
term loan. Its total debt and debt ratios have all declined significantly, as shown in figure 6.
Figure 6: Teck’s total debt and debt ratios [Teck, 2011]
As well, Teck’s credit rating has improved from speculative grade (Moody’s Ba3, Standard and Poors
BB+) to investment grade (Moody’s Ba1, Standard and Poors BB+). *Teck 2010, page 54+ Its share price
has recovered from a low of $3.85 to a current (as of Jan 2011) price of $63.11.
Analysis
Teck was correct in its decision to avoid financing in the equity markets when its stock was most
depressed (it waited until shares had recovered to $15 before issuing equity to (CIC). Teck’s stock price
dropped from $42.85 when Fording Coal was acquired to a minimum of $3.85. If Teck had financed at
these low prices, it would have caused unacceptable equity dilution and sent a sign of desperation to
shareholders and lenders. To illustrate this point, consider the following: eliminating the bridge loan
with a $6.0 billion equity financing at a share price of $5.00 would have required issuing 1.2 billion
common shares, resulting in a 204% increase in the number of shares outstanding.
Teck’s decision to eliminate its dividend seems like a logical way of allowing of reducing cash flows.
Given Teck’s financial position, it is unlikely that there would have been any increase in shareholder
confidence had the dividend been maintained.
Renegotiating the terms of the bridge loan before issuing bonds was crucial. If Teck had not done this, it
is unlikely that Teck would have been able to attract investors for its bond issuance.
The success of the bond issuance was probably the most important turning point in Teck’s recovery. The
use of a private placement for the bonds was also a good decision since it expedited the issuance.
30
Investors’ belief in the security of Teck’s bonds was a self-fulfilling prophecy. Once investors put forth
$4.2 billion, Teck became much more secure and the security of the bonds themselves increased
accordingly.
While the bond financing appears to have been an overwhelmingly wise decision, it may have been
better if all of the bonds had been callable, instead of just the 10-year notes. While this would have
required slightly higher coupon rates, it could have saved Teck hundreds of millions in interest
payments. The coupon rates on the bond placement were high for a company of Teck’s size (ranging
from 9.25% to 10.25%), and will continue to cost Teck for the next 8.5 years. Since Teck’s management
believed the company could escape the crisis, a call option on the bonds would have seemed more
valuable to Teck than to investors. Given that interest rates remain low and that the fair value of Teck’s
bonds now far exceeds their carrying value (Table 10 in section 3.4), Teck could now be benefiting from
calling the bonds and issuing cheaper debt if it had made the bonds callable.
Management’s decision to sell their gold assets after the bond issuance was also a good decision. It
allowed time to sell off assets slowly, rather than having a firesale which would have resulted in
discounted sale prices.
In spite of all of the smart decisions made by Teck’s management, luck also played a significant role in its
recovery.
Teck was helped by significant foreign exchange gains on sale of assets in 2009. [Teck, 2010] Teck was
also helped by a rise in the price of copper, a commodity which accounts for 30% of Teck’s revenues.
Just before the bond issuance, copper prices reached a low of $1.20 USD/ pound, as shown in figure 7.
The subsequent steady rise in copper prices rose allowed Teck to have an average realized price of $2.34
USD/pound in 2009. [Teck, 2010]
Figure 7: Copper prices from Dec 2008 to Dec 2010 [Kitco, 2010]
31
Without this unexpected development, Teck’s ability to pay for the interest on its massive debt load
would have been much more uncertain.
The effect of luck on the success of Teck’s financing decisions was neatly summarized by CEO Don
Lindsay: “We hoped and planned that the sun, moon and stars would line up…and they did”. *Canadian
Business, 2010]
Overall, Teck’s decision to acquire Fording Coal was the riskiest and arguably poorest decision made by
its management in the past 3 years. However, once the deal was complete and the subsequent crash
ensued, Teck’s subsequent major decisions were correct and necessary for escaping the crisis.
4.3 Barrick’s Equity Financing in 2009

Background
For decades, Barrick had significant positions in gold hedges (derivative instruments used to reduce the
risk of declining gold prices). In early 2009, Barrick had $3.0 billion in hedges on 9.5 million ounces at a
weighted average gold price of $930/ounce. As a result, each gold price increase of $100/ ounce caused
Barrick to lose $300 million on its derivative positions. [Regent, 2010] Based on its positive future
outlook for gold prices, Barrick’s management decided to eliminate these contracts.
As well, Barrick wanted to finance future project pipeline (Cortez Hills in 2010, Pueblo Viejo in 2011,
Pascua Lama in 2013) and acquire an additional 50% interest in Hemlo Mine. [Barrick, 2010]
Decisions
1) In September 2009, Barrick offered 109 million shares at $36.95/share for a total of $3.9 billion
in proceeds. This was the largest equity financing in the history of the Canadian mining industry.
The size of the financing as a proportion of all TSX mine financings is shown in figure 8.
32
Figure 8: TSX mine financings in 2009. Barrick is shown in light blue. [Bogden, 2010]
2) Barrick used the proceeds to eliminate their gold hedges and a portion of its floating contracts
(which are similar to gold hedges, but with a floating price)
3) Barrick also completed 2 debt financings in 2009: $750 million in senior unsecured 10-year notes
in March (6.95% coupon), and $1.25 billion worth of 10-year and 30-year notes in October (4.95%
and 5.95%, respectively).
Effects
The financing diluted shares by 12%. Barrick maintained an ‘A’ rated balance sheet, as Barrick’s avoid
major additions to its debt burden. [Munk, 2010] Barrick’s other major projects are currently
proceeding on schedule.
Analysis
The necessity of Barrick’s financing to eliminate gold hedges is highly questionable. It was based mainly
on a bullish long-term outlook for gold. Here are some of the justifications offered by CEO Aaron Regent
and Chairman Peter Munk:
a) Worldwide gold supply from mines peaked in 2001 and has been declining since (a trend which
will continue into the foreseeable future). [Regent, 2010]
b) The memory of the global financial crisis will scare people away paper assets and toward gold in
future years. [Munk, 2010]
c) Central banks became net purchasers of gold in 2009. [Regent, 2010]
d) A wave of new gold ETF’s has begun major purchases of physical gold. *Regent, 2010+
e) A falling US dollar.
33
Given that Barrick had maintained its hedges during gold’s long climb to $1200/ ounce, it is clear that
management’s ability to predict prices has been poor. As well, one would expect that all five
justifications would already be mostly reflected in the price of gold. The justifications are all
explanations for why gold prices had already gone up and seem to be reaction to past events rather
than a prediction of the future.
Another explanation for the decision was hinted at by Regent in his letter to shareholders: “Many of our
investors have told me they are disappointed with the performance of gold equities relative to the gold
price and we share their frustration.” *Regent, 2010+ However, if these investors were truly concerned
about the lack of performance compared to gold prices, there was nothing preventing them from
purchasing gold certificates or gold bullion exchange traded funds (ETF’s). Perhaps Regent and the rest
of Barrick’s management were concerned with following the trends of other investors and managers, at
the possible expense of Barrick’s long-term financial security.
In the short term, gold’s climb over $1400/ounce has validated Barrick’s analysis. However, Barrick’s
decision was clearly intended to be sustained for the long-term so it is perhaps too early to judge its full
effect.
Given that Barrick did decide to eliminate hedges, its decision to finance with equity instead of debt
appears to be a sound one. If Barrick had used debt financing, its total long-term debt load would have
increased from $5.06 billion USD to $8.96 billion USD, resulting in debt/equity ratio increase from 0.34
to 0.60, then increasing to 0.68 after its aforementioned $1.25 billion bond financing in October. This
increase in debt load, combined with the increased risk of being an unhedged producer, would likely
have worsened Barrick’s credit rating and increased its cost of debt.
4.4 Copper Mountain Mining’s Joint Venture with Mitsubishi

Background
In 2009, Copper Mountain Mining Corporation owned the mineral rights to a property near Princeton,
BC which had been the site of an operating mine from the 1970’s until 1996. Mitsubishi Materials
Corporation (MMC) had processed concentrate from this site while it was in operation. Copper
Mountain’s feasibility study recommended a 35000 tonne/ day operation, producing 105 million pounds
of copper per year for estimated mine life of 17 years. [Copper Mountain, 2010] At the time, some
members of Copper Mountain’s management team had business relationships with MMC over a 20-year
period.
As a small, single-deposit company, Copper Mountain was unable to secure debt financing from banks.
Copper Mountain CEO Jim O’Rourke also concluded that equity financing would have led to
unacceptable dilution for shareholders. *O’Rourke, 2010+
Decisions
34
On August 18, 2009: a memorandum of understanding (MOU) was signed between MMC and Copper
Mountain to enter an equity (unincorporated) joint venture. The terms of the agreement included:
a) Copper Mountain would give MMC a 25% interest in the project.

b) MMC would give Copper Mountain a $28.75 million bridge loan to keep project on schedule.
c) Copper Mountain would provide 75% of equity ($82.5 million) needed for project.
d) MMC would enter a life of mine off-take agreement to purchase copper concentrate.
e) MMC would attempt to arrange for a $250 million project financing loan.
[Copper Mountain, 2010]
Afterward, Copper Mountain issued 43.5 million common shares at a price of $1.15 per share to raise
$52 million and meet its equity requirements under the joint venture agreement.
A summary of these choices is shown in figure 9.
Figure 9: Joint venture financing plan after agreement between Copper Mountain and Mitsubishi *O’Rourke, 2010+
Subsequent to the creation of this plan, Copper Mountain and MMC decided not to pursue a $77 million
equipment loan and instead try to secure a larger project loan ($330 million).
Long-term Effects
The joint venture is allowing the project to go ahead with minimal share dilution. Mitsubishi has
arranged $332 million in project financing from a Japanese bank. Development is proceeding on
schedule and production is slated to begin by June 2011. [Copper Mountain, 2010] As of September
2010, Copper Mountain did not foresee any need to raise additional capital.
35
Analysis
In hindsight, the joint venture decision appears to be overwhelmingly successful. At the time of the joint
venture announcement, Copper Mountain had a market capitalization of $31 million. It would likely
have been impossible to raise sufficient capital in the equity markets to fund a $438 million project.
And, if it was possible, there would have been significant equity dilution. The final guarantor of the
project’s implementation was Mitsubishi’s project financing arrangement with a Japanese bank
syndicate. This would have been impossible for Copper Mountain to achieve without the connections
and good credit rating that Mitsubishi provided.
There do not appear to have been any better financing alternatives to the joint venture. The only other
course of action with a high likelihood of leading to production would be soliciting white-knight takeover
offers from other companies. However, this would not have satisfied Copper Mountain management’s
desire for operating control of the project.
Once the joint venture was made, its ability to secure project financing was greatly improved by the low
risks of the project. Since it was the site of previous mining operations, the Copper Mountain area
already has established infrastructure, tailings facilities, and well-known geological and geotechnical
information. As well, the mine is in a very stable regulatory environment. If the project did not have
such a low technical, political, and environmental risk, project financing might not have happened. The
joint venture parties may have had to use alternative means of debt financing such as bonds, precious
metals streams, and equipment leasing.
4.5 Xstrata’s $5.9 Billion Rights Offering and Coal Acquisition

Background
Like most mining companies, Xstrata was hit hard by the severe drop in commodity prices at the end of
2008. Most concerning was the effect on Xstrata’s ability to repay its debt. At the time, Xstrata CEO
Mick Davis said “It is clear that, while appropriate for market conditions experienced in the first three
quarters of 2008 and indeed in the past few years, in the aftermath of an unprecedented financial crisis,
Xstrata’s absolute level of debt is now perceived as a potential constraint on the Group” *Xstrata, 2009+
Davis’ statement was a good reflection of Xstrata’s situation. As of Dec 31, 2008, Xstrata had 25.9 billion
in debt, with only 24.4 billion in equity.
Decisions
Xstrata took the following actions in late 2008 and early 2009.
1) Dividends were suspended in early 2008 and most of 2009. This saved about $700 million.
36
2) Xstrata issued 1.96 billion new shares, at £2.10 per share. This tripled the number of shares in issue.
Shares were offered at a 66% discount to their market price. Issuing was underwritten by Glencore
(Xstrata’s largest shareholder), Deutsche Bank, and JP Morgan.
3) Xstrata allowed Glencore, to give Xstrata the Prodeco coal mine in Columbia instead of paying for the
$2 billion in rights issues it would have needed to maintain its 35% stake in Xstrata. This was done
because Glencore had little cash in the difficult economic climate. Xstrata agreed to give Glencore a call
option on the property for one year, during which time Glencore could repurchase Prodeco for $2.25
billion plus the value of any investments that Xstrata made on the property.
Effects
In the short term, shareholders expressed their disapproval by sending shares down by 8% on the day
that the issuance was announced.
In the longer term, the issuance caused Xstrata’s debt to fall from 16.3 billion to 12.6 billion. This
significantly improved its overall financial position. Due to the rights issue, no debt refinancing had to
be arranged until 2011.
In March 2011, Glencore exercised its call option on the Prodeco property and repurchased it from
Xstrata for $2.7 billion. Glencore and Xstrata are currently bidding against each other over other coal
assets in Columbia.
Analysis
The rights issue performed its intended purpose of strengthening Xstrata’s financial position and helping
to allow Xstrata to maintain an investment grade credit rating throughout the financial crisis.
Rights issues are rarely the preferred course of action for management, since they require shareholders
to put forth capital or else face a reduced equity stake in the company. In this case, though, there do
not appear to be any good alternatives. Xstrata had already taken most of the obvious measures for
improving its financial situation: suspended and reduced production in many higher-cost operations,
reduced sustaining capital expenditure, and a reduced capital budget. Re-financing of debt was also not
an option because Xstrata’s poorer financial situation would have meant that new debt would have had
a higher interest rate than the existing debt. An equity financing would have achieved a similar result to
the rights issue.
One of the negative consequences of the rights issue was that Glencore did not have enough cash to pay
for it. Xstrata would clearly have preferred to receive cash from Glencore in this exchange. Given that it
chose to accept assets instead of cash, Xstrata was wise to negotiate for the Prodeco property since it is
a low-cost operation that produced positive cash flows even in hard economic times.
Overall, the main mistake made by Xstrata was getting itself into an unnecessary debt-laden position
during the commodity boom prior to 2008. After the crash, the rights issue was the best of many poor
options for Xstrata.
37
5. CONCLUSIONS AND RECOMMENDATIONS
5.1 Conclusions
Mine financing options can be divided into 16 major types, which can be broadly divided into the
categories of debt and equity. Many financing types are unique to the mining industry. Public equity
financing is dominant, far more than it is in other industries. Debt financing plays an important role in
financing major producers, but is rare for juniors.
Analysis of the capital structures of mining companies showed that major base metal producers Teck
Resources and BHP Billiton enjoyed a relatively low cost of capital for the mining industry (10-12%).
Junior explorer Noront Resources had a much higher cost of capital (20.6%) due to its total reliance on
equity financing. The world’s largest gold producer, Barrick Gold, enjoyed a very low cost of capital
(4.1%) due to the low credit risk on its debt and the low cost of equity associated with producing a
commodity that is used as a hedge.
In case studies of individual financing decisions, the optimum financing type is rarely obvious. Case
studies of four financing decisions showed the mine financing decisions cannot be viewed in isolation,
but rather must be considered in the context of the commodity markets and the company’s overall
finances and operations.
5.2 Recommendations
For mining companies in need of financing, a wide range of options must be considered. Important
considerations include the time and cost to arrange the financing, interest rate, position in the
company’s capital structures, and the effect on balance sheet and equity dilution. Additional attention
must be paid to timing in the commodity price cycle, since the availability and cost of all types of capital
varies significantly with commodity prices.
38
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Facts and Figures 2010: A Report on the State of the Canadian Mining Industry. The Mining Association
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Global Mine Finance Magazine, 2010 edition.
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41
7. APPENDIX A
Calculations for Beta
BHP Billiton Barrick Gold
Monthly Monthly %
Date Price % Change Date Price Change
01-Dec-10 89.15 8.19 01-Dec-10 52.65 -0.49
01-Nov-10 82.4 -0.21 01-Nov-10 52.91 7.98
01-Oct-10 82.57 8.19 01-Oct-10 49 3.29
01-Sep-10 76.32 16.27 01-Sep-10 47.44 -4.80
02-Aug-10 65.64 -7.94 03-Aug-10 49.83 18.50
01-Jul-10 71.3 16.52 02-Jul-10 42.05 -12.54
01-Jun-10 61.19 -4.39 01-Jun-10 48.08 9.45
03-May-10 64 -10.93 03-May-10 43.93 0.11
01-Apr-10 71.85 -9.37 01-Apr-10 43.88 13.68
01-Mar-10 79.28 10.76 01-Mar-10 38.6 -1.73
01-Feb-10 71.58 5.72 01-Feb-10 39.28 6.83
04-Jan-10 67.71 -9.42 04-Jan-10 36.77 -10.47
01-Dec-09 74.75 1.70 01-Dec-09 41.07 -7.58
02-Nov-09 73.5 14.83 02-Nov-09 44.44 15.70
01-Oct-09 64.01 -0.65 01-Oct-09 38.41 -3.90
01-Sep-09 64.43 7.38 01-Sep-09 39.97 7.30
03-Aug-09 60 -1.06 04-Aug-09 37.25 0.43
01-Jul-09 60.64 15.04 02-Jul-09 37.09 -3.91
01-Jun-09 52.71 -2.68 01-Jun-09 38.6 -5.37
01-May-09 54.16 16.82 01-May-09 40.79 20.47
01-Apr-09 46.36 7.94 01-Apr-09 33.86 -15.35
02-Mar-09 42.95 22.43 02-Mar-09 40 6.13
02-Feb-09 35.08 -0.93 02-Feb-09 37.69 -16.67
02-Jan-09 35.41 -12.48 02-Jan-09 45.23 3.22
01-Dec-08 40.46 7.18 01-Dec-08 43.82 18.53
03-Nov-08 37.75 2.95 03-Nov-08 36.97 37.90
01-Oct-08 36.67 -25.22 01-Oct-08 26.81 -29.28
02-Sep-08 49.04 -25.31 02-Sep-08 37.91 5.45
01-Aug-08 65.66 -5.57 01-Aug-08 35.95 -14.79
01-Jul-08 69.53 -12.35 02-Jul-08 42.19 -6.97
02-Jun-08 79.33 1.01 02-Jun-08 45.35 16.43
01-May-08 78.54 4.55 01-May-08 38.95 3.95
01-Apr-08 75.12 22.50 01-Apr-08 37.47 -13.76
03-Mar-08 61.32 -10.02 03-Mar-08 43.45 -12.33
42
01-Feb-08 68.15 9.16 01-Feb-08 49.56 -1.18
02-Jan-08 62.43 -3.52 02-Jan-08 50.15 24.01
03-Dec-07 64.71 -7.64 03-Dec-07 40.44 3.61
01-Nov-07 70.06 -13.10 01-Nov-07 39.03 -3.61
01-Oct-07 80.62 11.02 01-Oct-07 40.49 5.14
04-Sep-07 72.62 25.49 04-Sep-07 38.51 16.34
01-Aug-07 57.87 -0.99 01-Aug-07 33.1 -2.01
02-Jul-07 58.45 6.76 03-Jul-07 33.78 13.09
01-Jun-07 54.75 13.50 01-Jun-07 29.87 -0.30
01-May-07 48.24 7.77 01-May-07 29.96 0.30
02-Apr-07 44.76 0.81 02-Apr-07 29.87 -5.44
01-Mar-07 44.4 12.86 01-Mar-07 31.59 -5.67
01-Feb-07 39.34 5.70 01-Feb-07 33.49 0.30
03-Jan-07 37.22 3.13 02-Jan-07 33.39 -2.88
01-Dec-06 36.09 -4.07 01-Dec-06 34.38 0.26
01-Nov-06 37.62 -2.66 01-Nov-06 34.29 3.28
02-Oct-06 38.65 12.39 02-Oct-06 33.2 1.22
01-Sep-06 34.39 -9.26 01-Sep-06 32.8 -7.21
01-Aug-06 37.9 -0.24 01-Aug-06 35.35 6.51
03-Jul-06 37.99 -2.01 04-Jul-06 33.19 5.37
01-Jun-06 38.77 -0.49 01-Jun-06 31.5 -1.87
01-May-06 38.96 -5.00 01-May-06 32.1 -0.83
03-Apr-06 41.01 14.33 03-Apr-06 32.37 7.04
01-Mar-06 35.87 11.50 01-Mar-06 30.24 2.30
01-Feb-06 32.17 -8.53 01-Feb-06 29.56 -13.03
03-Jan-06 35.17 18.06 03-Jan-06 33.99 10.18
21-Dec-05 29.79 21-Dec-05 30.85
Correlation 0.77035 Correlation 0.210562

Covariance 40.4287 Covariance 11.3061
Beta 1.71585 Beta 0.479846
Teck Resources Noront Resources

Monthly
%
Date Price Change Date Price Monthly % Change
01-Dec-10 57.51 13.32 40513 0.96 -4.95
01-Nov-10 50.75 11.88 40483 1.01 -10.62
01-Oct-10 45.36 7.74 40452 1.13 -9.60
01-Sep-10 42.1 18.62 40422 1.25 6.84
03-Aug-10 35.49 -1.42 40393 1.17 1.74
43
02-Jul-10 36 14.94 40361 1.15 1.77
01-Jun-10 31.32 -13.34 40330 1.13 -15.04
03-May-
10 36.14 -8.48 40301 1.33 -6.99
01-Apr-10 39.49 -9.78 40269 1.43 -13.33
01-Mar-10 43.77 14.34 40238 1.65 20.44
01-Feb-10 38.28 10.54 40210 1.37 -18.45
04-Jan-10 34.63 -4.91 40182 1.68 -18.84
01-Dec-09 36.42 0.91 40148 2.07 -9.61
02-Nov-09 36.09 16.16 40119 2.29 40.49
01-Oct-09 31.07 6.48 40087 1.63 -6.86
01-Sep-09 29.18 11.67 40057 1.75 -10.26
04-Aug-09 26.13 -6.81 40029 1.95 -22.31
02-Jul-09 28.04 52.81 39996 2.51 304.84
01-Jun-09 18.35 8.20 39965 0.62 -11.43
01-May-
09 16.96 36.88 39934 0.7 -18.60
01-Apr-09 12.39 77.76 39904 0.86 19.44
02-Mar-09 6.97 57.69 39874 0.72 -12.20
02-Feb-09 4.42 -5.76 39846 0.82 -19.61
02-Jan-09 4.69 -21.18 39815 1.02 61.90
01-Dec-08 5.95 0.34 39783 0.63 6.78
03-Nov-08 5.93 -50.04 39755 0.59 -35.87
01-Oct-08 11.87 -60.29 39722 0.92 -33.33
02-Sep-08 29.89 -31.88 39693 1.38 -49.08
01-Aug-08 43.88 -5.67 39661 2.71 -17.88
02-Jul-08 46.52 -4.36 39631 3.3 10.37
02-Jun-08 48.64 1.06 39601 2.99 -20.69
01-May-
08 48.13 12.22 39569 3.77 -15.28
01-Apr-08 42.89 4.10 39539 4.45 -19.82
03-Mar-08 41.2 7.18 39510 5.55 -20.14
01-Feb-08 38.44 19.79 39479 6.95 62.38
02-Jan-08 32.09 -7.47 39449 4.28 7.00
03-Dec-07 34.68 -6.12 39419 4 -22.48
01-Nov-07 36.94 -19.04 39387 5.16 -12.98
01-Oct-07 45.63 0.20 39356 5.93 47.15
04-Sep-07 45.54 4.93 39329 4.03 374.12
01-Aug-07 43.4 -4.87 39295 0.85 70.00
03-Jul-07 45.62 4.63 39266 0.5 -13.79
01-Jun-07 43.6 1.04 39234 0.58 -3.33
01-May-
07 43.15 7.50 39203 0.6 11.11
02-Apr-07 40.14 4.48 39174 0.54 -22.86
01-Mar-07 38.42 -2.41 39142 0.7 1.45
44
01-Feb-07 39.37 -4.95 39114 0.69 -10.39
02-Jan-07 41.42 -1.29 39084 0.77 22.22
01-Dec-06 41.96 3.27 39052 0.63 110.00
01-Nov-06 40.63 4.10 39022 0.3 87.50
02-Oct-06 39.03 18.09 38992 0.16 6.67
01-Sep-06 33.05 -4.89 38961 0.15 -16.67
01-Aug-06 34.75 -1.73 38930 0.18 5.88
04-Jul-06 35.36 20.60 38902 0.17 0.00
01-Jun-06 29.32 -9.92 38869 0.17 -5.56
01-May-
06 32.55 -9.05 38838 0.18 -33.33
03-Apr-06 35.79 2.58 38810 0.27 0.00
01-Mar-06 34.89 5.76 38777 0.27 -12.90
01-Feb-06 32.99 -3.28 38749 0.31 40.91
03-Jan-06 34.11 18.40 38720 0.22 -8.33
21-Dec-05 28.81 38707 0.24
Correlation 0.785523546 Correlation 0.2440813

Covariance 77.71736479 Covariance 79.736537
Beta 3.298430726 Beta 3.3841271
S&P/TSX Composite
Index
Date Open Adj Close*

Monthly
%
Change
01-Dec-10 13,067.03 13,148.35 0.62
01-Nov-10 12,725.90 12,952.88 1.78
01-Oct-10 12,400.11 12,676.24 2.23
01-Sep-10 11,978.29 12,368.65 3.26
03-Aug-10 11,829.32 11,913.86 0.71
02-Jul-10 11,245.26 11,713.43 4.16
01-Jun-10 11,702.20 11,294.42 -3.48
03-May-10 12,273.98 11,762.99 -4.16
01-Apr-10 12,069.91 12,210.70 1.17
01-Mar-10 11,682.78 12,037.73 3.04
01-Feb-10 11,147.49 11,629.63 4.33
04-Jan-10 11,847.34 11,094.31 -6.36
01-Dec-09 11,574.65 11,746.11 1.48
02-Nov-09 10,896.74 11,447.20 5.05
01-Oct-09 11,403.33 10,910.75 -4.32
45
01-Sep-09 10,840.89 11,394.96 5.11
04-Aug-09 10,943.30 10,868.21 -0.69
02-Jul-09 10,290.54 10,787.15 4.83
01-Jun-09 10,530.80 10,374.91 -1.48
01-May-09 9,369.15 10,370.07 10.68
01-Apr-09 8,647.56 9,324.83 7.83
02-Mar-09 7,997.63 8,720.39 9.04
02-Feb-09 8,602.98 8,123.02 -5.58
02-Jan-09 8,951.85 8,694.90 -2.87
01-Dec-08 8,816.36 8,987.70 1.94
03-Nov-08 9,841.26 9,270.62 -5.80
01-Oct-08 11,730.65 9,762.76 -16.78
02-Sep-08 13,558.84 11,752.90 -13.32
01-Aug-08 13,645.14 13,771.25 0.92
02-Jul-08 14,573.50 13,592.91 -6.73
02-Jun-08 14,673.89 14,467.03 -1.41
01-May-08 13,920.25 14,714.73 5.71
01-Apr-08 13,337.71 13,937.04 4.49
03-Mar-08 13,622.46 13,350.13 -2.00
01-Feb-08 13,202.58 13,582.69 2.88
02-Jan-08 13,907.73 13,155.10 -5.41
03-Dec-07 13,671.55 13,833.06 1.18
01-Nov-07 14,485.67 13,689.12 -5.50
01-Oct-07 14,113.13 14,625.00 3.63
04-Sep-07 13,673.69 14,098.89 3.11
01-Aug-07 13,751.77 13,660.48 -0.66
03-Jul-07 14,001.37 13,868.63 -0.95
01-Jun-07 14,084.53 13,906.57 -1.26
01-May-07 13,430.18 14,056.78 4.67
02-Apr-07 13,185.32 13,416.68 1.75
01-Mar-07 12,919.95 13,165.50 1.90
01-Feb-07 13,090.74 13,045.02 -0.35
02-Jan-07 12,924.53 13,034.12 0.85
01-Dec-06 12,757.40 12,908.39 1.18
01-Nov-06 12,023.30 12,752.38 6.06
02-Oct-06 11,767.40 12,344.59 4.90
01-Sep-06 12,121.58 11,761.27 -2.97
01-Aug-06 11,864.09 12,073.75 1.77
04-Jul-06 11,670.17 11,830.96 1.38
01-Jun-06 11,695.02 11,612.87 -0.70
02-May-06 12,240.98 11,744.52 -4.06
03-Apr-06 12,200.68 12,204.17 0.03
01-Mar-06 11,694.70 12,110.61 3.56
46
01-Feb-06 11,962.83 11,688.34 -2.29
03-Jan-06 11,304.64 11,945.64 5.67
01-Dec-05 10,868.20 11,272.26
47

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FINANCING FROM THE PERSPECTIVE OF MINING COMPANIES

A thesis submitted to the Department of Mining Engineering

Copyright © Eric Low, 2011

Table 1: Considerations for equity and quasi-equity financing options ..................................................... 16

Figure 1: Distribution of mining equity financings by exchange .................................................................. 3

Location and Regulatory Environment

Figure 1: Distribution of mining equity financings

Meeting an exchange’s admission requirements is a necessary prerequisite for equity financing.

Figure 3: TSX flow-through financings. [Bogden, 2010]

Rights Issues (Rights Offerings)

Private equity financing refers to investments by individuals or institutions in non-listed companies or

Joint Venture (Strategic Alliance)

2.3 Debt and Quasi-Debt

Convertible Bonds (i.e. Convertible Notes, Convertible Debt, CV’s)

Earn-ins (Property Options)

Typical examples of earn-in contracts are shown in figure 5.

Figure 5: Selected earn-in contracts from 2010 [Bogden, 2010]

Prepaid Forwards (Off-Take Financing)

Prepaid by-product Calls

Royalty Sales (Commodity Streaming)

Commodity Exchangeable Bond

International Financial Corporation (IFC)

Export Credit Agency (ECA) Financing

Mergers and Acquisitions

2.5 Comparison of Major Financing Types

Table 1: Considerations for equity and quasi-equity financing options

Equity and Quasi-Equity

Cost of Cost of Cost of Cost of Cost of N/A

Position in Subordinat Subordinate Subordinate Subordinate Subordinate N/A

Table 2: Considerations for debt and quasi-debt financing options

Debt and Quasi-Debt

Bonds/ Convertible Commodity- Preferred Mezzanine

Time for 10 weeks 10 weeks

Size of Capital Large Large Small Small Medium

Typically 2 to Slightly As above 1 to 8% + non- 15 to 30%

Position in Senior, secured Senior, Senior, secured After bonds Subordinated

Credit Rating Worse Worse Worse None Worse

Shareholder No Yes No Yes Sometimes

Most popular More popular Rare, but Very Mainly used

Table 3: Considerations for debt and quasi-debt financing options (continued)

Debt and Quasi-Debt

Give up Give up % Typically

Position in Secured Senior, N/A Most senior Subordinated

Limited Mostly for Tied to Has the most Repayment

3. COMPARISON OF CAPITAL STRUCTURES

Table 4: Comparison of cost of debt

Table 5: Beta values and correlation coefficients

5-year beta Correlation Beta Beta

Capital Asset Pricing Model (CAPM)

A summary of the CAPM-predicted cost of equity values is shown in table 6.

Table 6: Cost of equity results

Alternative Models for Cost of Equity

Weighted Average Cost of Capital (WACC)

Wd = Proportion of Capital that is Debt

A summary of the results is shown in table 7.

Table 7: Weighted average cost of capital results

3.2 BHP Billiton

A summary of BHP’s debt securities is shown in table 8.

2010 Fair Value

Cost of Debt* 5.46%

Weighted Average Cost of Capital (WACC)

3.3 Barrick Gold

A summary of Barrck’s debt instruments is shown in table 9.