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Take note, junior mining investors – the cost of capital to stay alive is extraordinarily steep.
The deal Colossus Minerals Inc. just cut with New York mining private equity fund Arias Resources Capital Management may well keep the once highly touted company alive a little while, but other investors in the company are going to have to take a lot of pain.
A few weeks ago, analysts were wondering whether Colossus Minerals would survive. It's been a long decline for the company, which is developing the rich Serra Pelada deposit in South America. The stock has gone from over $8 in early 2011 to less than 20 cents today.
The company just doesn't have the $70-million it says it needs to get to production and handle other obligations, and Clarus analyst Jamie Spratt wrote about two weeks ago that there is "significant doubt as to its ability to fund its immediate business needs."
In steps Arias, with a loan and a private placement, to provide some of the capital required. But here is what it costs when things get to this stage:
-Arias is lending up to $4-million for three months at an interest rate of 20 per cent.
-Colossus will also issue the lenders up to 12.5-million warrants. The warrants will have an exercise price based on the share price at the closing of the loan, expected as soon as next week. Odds are that means a sub-20 cent exercise price, with a five-year term.
-For 21 months, the lenders get the right to buy up to half of any private placement or public offering.
-Arias has agreed to purchase between $10-million and $15-million of units in a private placement seeking $21-million in total. The units being sold consist of one common share and a warrant and "will be priced in the context of the market but will reflect the maximum discount permitted by the TSX." The warrants "will be exercisable at the market price of the common shares at the time of pricing of the units."
Colossus Minerals currently has about 175-million shares outstanding. If Arias funds the full loan, and buys its full lot of units, it could easily end up owning close to half the company.
The fund could ultimately own most of a deposit once valued at more than $1-billion for something less than $20-million.