Money Morning Staff Reports
In the magical world of FinanceLand, it seems evil Dr. Doom has landed on the
capital (Stall Street), and with a zap from his freezing ray-gun, has permeated
the landscape with a thick layer of frost.
The effect: Traditional sources of financing – indeed, virtually every type
of credit – have been placed in an Ice Age-like deep freeze. Facing
a major crisis of confidence, banks underwent a 180-degree turn: Whereas they
were previously almost force-feeding us loans, banks are now terrified to even
include them on their menus.
If you are a company in search of bank lending, it basically doesn’t matter
how good your cash flow, profit projections or even your balance sheet might be.
It seems no bank cares whether you sell top-notch service skills, soft drinks,
crude oil, or gold ingots. Not even tremendous government pressure, the promise
of massive bailout outlays, or historically low U.S. central bank rates are
enough to get credit flowing. Yet business must move forward. So deals are
still getting done, but in non-traditional ways.
And no sector has shown a stronger ability to overcome this liquidity drought
than the mining industry.
The Mining Sector’s Wild Ride
In the past few months, natural-resource players have gone on a $42 billion
fundraising spree, in which every single dollar has come from outside the
regular banking system.
Instead, investment banks have been busy raising fresh capital for the mining
industry in truly a variety of ways. And in some cases, individual investors
have taken things into their own hands.
Most of the action has been in the form of private-equity placements.
Essentially, a consortium of investment banks agrees to buy an issue of shares
at a fixed price (called a “bought deal”), and to resell those on the secondary
markets to individuals and institutional investors. The issuer gets to keep the
cash raised, minus fees.
For some, this action got started early. It’s as if they anticipated that
these particular players predicted that the credit markets would morph into
glaciers, and that accessing capital might become akin to melting an
iceberg.
So let’s dissect a few of these deals to gain some clarity on the recent
goings-on. We’ll start with the more traditional financings.
How Heavyweights Get Financed
Kinross Gold Corp. (KGC),
the world’s fourth-largest gold producer, has also proven itself to be one of
the shrewdest players, especially in recent months. Its first coup was the
acquisition of Aurelian Resources
Inc., in mid-2008, an all-share offer that transferred to Kinross Aurelian’s
major gold deposit of 13 million ounces in Ecuador.
Then, this past February, as the broader U.S.
