Two recent equity financings by gold companies, one that is near commercial production and the other that is many months away, demonstrate the willingness by such companies to bolster balance sheets in the wake of the dramatic drop in gold prices.
Put simply, the $153-million deal by Detour Gold Corp. and the $25-million offering by Colossus Minerals, both of which were relatively surprising but will ensure that both have enough cash to get them to the next stage in their development – despite the dilutive nature of both financings and the costs to long-term investors.
From the perspective of both issuers, the rationale for the financing runs this way: we have to ensure that we will be around, which means we have to raise additional equity even if the price is significantly below the recent trading price for the stocks. Panic is too strong a word but at a time when cash is needed — either to offset reduced revenues because of gold price drops or to help with the final stages of ramp-up — equity is attractive: it can be raised quickly, a situation that doesn’t apply to alternative financing options.
Of course, if both companies had been aware ahead of time of the dramatic mid-April fall in the spot gold price, then both would presumably have raised equity earlier this year. Given that both issues are still in registration, both companies declined comment.
As things have materialized, the share price of Detour has rebounded (the shares closed Monday at $10.17, up 16% from the $8.75 issue price) but not so in the case of Colossus which closed Monday at $1.60 or the same as the issue price. Detour is set to start large-scale production at its northern Ontario mine over the summer while Colossus is developing the Serra Pelada gold mine in Brazil.
For Colossus, whose share price one year back was between $3 and $4, the equity financing was the most normal it has done over the past two years. Financial innovation has tended to be its key. For instance:
— September 2012. It raised US$75-million from NYDSE-listed Sandstorm Gold under a plan to sell refined precious metals (platinum, palladium and gold) over the life-of-mine. In effect Colossus sold 35% of its platinum and palladium and 1.5% of its gold output forward.
Aside from the upfront US$75-million deposit, Colossus also received ongoing payments for each ounce of metal delivered. From Colossus’s perspective, the financing represented an attractive source of capital, as well as providing “the remaining funding required for the construction and ramp up of production,” at its Brazilian property. But the financing wasn’t so attractive to Sandstorm that there will still be enough commodity exposure to shareholders of Colossus.
— November 2011. Colossus raised $86.3-million from the sale of units. Each unit, which had a term of five years, consisted of $1,000 gold-linked note gold-linked notes plus 60 warrants. The interest rate on the notes was variable in the range of 6% to 13% but dependent on the price of gold. The warrants have an $8.50 strike price.