Surviving the Global Financial Crisis in the Mining Sector:

Surviving the Global Financial Crisis in the Mining Sector:

Strategies for Junior and Mid-Market Companies

28 February 2009

Daryl J. Hodges

Senior Managing Director

Investment Banking

2

This presentation is for discussion purposes only and is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by Jennings Capital. Neither this presentation nor part of its contents may be disclosed or used by any other purpose without the prior written consent of Jennings Capital.

The information in this presentation is based upon any management forecasts supplied to us and reflects prevailing conditions and our views on this date, all of which are accordingly subject to change. Jennings Capital’s opinions and estimates constitute Jennings Capital’s judgment and should be regarded as indicative, preliminary and for illustrative purposes only. In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to us by or on behalf of the Company or which was otherwise reviewed by us. In addition, our analyses are not and do not purport to be appraisals of the asset, stock, or business of the Company or any other entity. Jennings Capital makes no representations as to the actual value which may be received in connection with neither a transaction nor the legal, tax or accounting effects of consummating a transaction. Unless expressly contemplated hereby, the information in this presentation does not take into account the effects of a possible transaction or transactions involving an actual or potential change of control, which may have significant valuation and other effects.

Jennings Capital’s policies prohibit employees from offering, directly or indirectly, a favorable research rating or specific price target, or offering to change a rating or price target, to a subject company as consideration or inducement for the receipt of business or compensation. Jennings Capital also prohibits its research analysts from being compensated for involvement in investment banking transactions except to the extent that such participation is intended to benefit investors.

Jennings Capital Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of tax matters included herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone not affiliated with Jennings Capital of any of the matters addressed herein or for the purpose of avoiding tax related penalties.

This presentation does not constitute a commitment by Jennings Capital to underwrite, subscribe for or place any securities or to extend, arrange or provide any other services.

http://www.mineafrica.com/miningseminar/register.htm

3

Monday: September 29th, 2008…


4

… and More Recent Headlines (Feb 27th, 2009)


5

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

110.0

120.0

Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09

Rel

ativ

e P

erfo

rman

ce (

%)

SPX - Share Pricing S&P Midcap 400 Sector Indices - Materials Sector Index - Share Pricing

S&P 500 Sector Indices - Materials Sector Index - Share Pricing S&P SmallCap 600 Sector Indices – Materials Sector Index - Share Pricing

Aug 2007 – Credit Crunch News Hits the Eq. Markets

Credit Freeze & Financial Crisis – Markets’ Reaction

Aug 2008 – A slew of Negative News Hits the Markets – Freddie & Fannie

Source: Bloomberg Financial Markets

Jan 2008 – The First Major Sell-Off in the Eq. Markets –

Fed Slashes Rates in Emergency Meeting

Mar 2008 – Bear Stearns Fed

Brokered Deal

Apr-July 2008 – Certain Markets and Commodities

Make New Highs; Small Caps Left out of the Rally

Sept – Oct 2008: Lehman Fails, AIG Bailed Out/ TARP Passes After First Being Rejected,

Panic Takes Over

Feb 2009 – Nov 2008 Lows Retested


6

Liquidity Crisis – Different Toll on Different Metals

Source: Metalprices.com


7

Light Crude Oil (CL, NYMEX)

Source: NYMEX

After an all-time high of US$ 147.27 in July 2008, oil has fallen under US$ 40.00 by January 2009; prolonged recession

expectations coupled with US$ appreciation fuelled the dramatic fall in crude prices

If and when the global economy starts to recover, too many dollars chasing too few barrels will only lead to much

higher oil prices


8

$0.0

$60.0

$120.0

$180.0

$240.0

Global Mining Canadian Mining

Am

ou

nt

(US

$ B

)

2006 2007 2008

$0.0

$250.0

$500.0

$750.0

2006 2007 2008

Am

ou

nt

(US

$ B

)

$622.8B raised 3,283 Issues


$19.3B raised 184 Issues






Global Equity Markets

Over the last 3 years, Global, Mining and Canadian Equity Issuance – very strong; exception: 2008

While the overall global equity sales dropped significantly in 2008, it seems Mining issues, while lower, held better than the overall markets

1st half of 2008 saw decent volumes on Iron Ore, Potash and Coal financings

2nd Half of 2008 – NO IPO’s on the TSX

Equity Markets - Mining


Equity Capital Markets: 3 Year Review



9

$0.0

$50.0

$100.0

$150.0

$200.0

$250.0

Global Mining Canadian Mining

Am

ou

nt

(US

$ B

)

2006 2007 2008

High-Yield Global Debt Markets saw a sharp drop in 2008 from 2006, 2007 levels

Canadian and Mining specific deal were somewhat more resistant to the downturn







High-Yield Debt Markets - Mining

High-Yield Debt Markets: 3 Year Review



10

Over the past few months - global mining stock raised more than US$ 34B in fresh non-bank cash

Largest chunk of that – US$ 19.5B: RioTinto-Chinalco deal (US$ 7.2B convertibles, plus US$ 12.3B in assets/ equity stakes)*

Gold and Silver stocks – very well received

Capital raising by Gold stocks – mainly by way of bought deals – almost US$ 4.0B:

CURRENT PRODUCERS:

Newmont Mining Corp US$ 1.7B public offerings of 34,500,000 shares and US$ 517.5M principal amount of 3.00% convertible senior notes due 2012

Kinross Gold Corp – US$414M

Silver Wheaton Corp – C$287.5M

(ADVANCED) DEVELOPERS:

Osisko Mining Corp – C$402M

Great Basin Gold Ltd – C$125M*

Uranium

Cameco Corp – C$400M*

First Uranium Corp – C$61.5M

Equity Capital Markets: 2009 YTD

*Deals not closed as at Feb 27th, 2009



11

Semafo Inc. - Share Price Performance(12 Sep 2008 - 25 Feb 2009)

0

1,500,000

3,000,000

4,500,000

6,000,000

7,500,000

25-Feb6-Feb21-Jan5-Jan15-Dec27-Nov11-Nov24-Oct7-Oct19-Sep

Vol

ume

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

Pri

ce (C

$)

Volume Price

Liquidity Crisis – Different Toll on Different Securities

Recently Filed for BankruptcyRecently Announced Very Dilutive Equity Financing

Ongoing Sale of Noncore Assets, Re-negotiating Debt Covenants, Layoffs


Performed Rather Well, Recently Announced Equity Financing

First Metals Inc. - Share Price Performance(12 Sep 2008 - 25 Feb 2009)

0

600,000

1,200,000

1,800,000

2,400,000

3,000,000


Vol

ume

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

Pri

ce (C

$)

Volume Price

Mercator Minerals Ltd. - Share Price Performance(12 Sep 2008 - 25 Feb 2009)

0

1,500,000

3,000,000

4,500,000

6,000,000

7,500,000

9,000,000


Vol

ume

$0.00

$1.20

$2.40

$3.60

$4.80

$6.00

$7.20

Pri

ce (C

$)

Volume Price

Teck Cominco Ltd (Cl. B). - Share Price Performance(12 Sep 2008 - 25 Feb 2009)

0

6,000,000

12,000,000

18,000,000

24,000,000

30,000,000


Vol

ume

$0.00

$8.00

$16.00

$24.00

$32.00

$40.00

Pri

ce (C

$)

Volume Price


12

First half of 2008: tough credit, softening commodities

Volatility and liquidity: trading volumes declining and share prices falling

Deal flow showed a sharp decline, transactions were closing under issue price

Second half of 2008: financial collapse, plunging oil and copper

Trading volumes dried up, sellers wanted out - immediately

Selling down on positive news as increased volumes provided a liquidity window

Traditional investors, retail and institutional, fled the market… to cash

Resource equity financings become nearly impossible

Debt market activity shrinks to lowest level in over a decade

Result: share price collapse, severe treasury drain on junior companies

First 2 months of 2009:

Gold is in favour

Base metals still struggling

Junior Natural Resources: The 2008 Meltdown


13

Don’t get a false sense of security from the recent uptick - the panic may be over (Recall ’98-’03)

Treasuries are drained, money is scarce

Shares trading at rock bottom prices, they have rebounded slightly

Industrial commodities – at low prices again

Precious metals weak, but gold and silver is starting to look attractive as the US dollar caps

Producers balance sheets – under increasing strain; start-ups struggling;

Risk re-pricing: analysts and investors – re-rating companies; target prices dropping

Bankruptcy protection for some, extreme dilution for others

Risk re-rating: caused perceived risk to move “up market”

Bank stocks and insurance companies are considered risky – credit ratings are dropping

Juniors resource developers are excluded from many portfolios

RESULT: For many, the cost of capital is the highest we have seen it

Given the chaos in global markets, and the ongoing freeze in debt markets, mining companies are deploying conventional and unconventional ways of raising fresh capital

Where Are We Now?


14

And the Casualties are Starting to Pile Up… First Metals Inc. “Files Notice of Intention to Make a Proposal Under the Bankruptcy and

Insolvency Act” (January 2009)

Adanac Molybdenum Corporation to “Evaluate Strategic Alternatives Under CCAA Protection”

(December 2008)

Giant metals miner Teck Cominco cuts 1,400 jobs …“A big concern surrounding Teck is its ability

to pay off nearly $10 billion in debt it incurred with the purchase of Fording last fall. This includes a

$4-billion term loan and a $5.8-billion bridge loan.” (Globe and Mail, January 9, 2009)

Rio Tinto commits to reduce net debt by $10 billion in 2009 …Reduces workforce by 14,000 –

(company press release, December 10, 2008)

Boart Longyear misses earnings, reduced workforce by 20%

Anglo American scraps its dividend and cuts 19,000 jobs worldwide

Xstrata’s shareholders to vote its proposed £4.1bn rights issue next week (Mon) – might not pass


15

The “New” Cost of Capital: Yield and Dilution Recent High Yield Debt Issues:

Petaquilla Minerals: USD $60 million (October 3, 2008)

(initial YTM, not including the warrant sweeter – 17.8%)

Northern Star Mining Corp: USD$42 million (September 11, 2008)

(initial YTM, not including the warrant sweeter – 22.4%)

Farallon Resources Ltd: $25 million (September 3, 2008)

(initial YTM, not including the common shares attached – 15.0%)

Recent Equity Financings:

Yamana Gold Inc: $100 million @ $6.00/ sh. (3.00% dilution)

(52-week range: $4.29 to $19.79) Semafo Inc.: $23 million @ $1.20/ sh. (10.00% dilution)

(52-week range: $0.75 to $1.72)

Kinross Corp: US$414 million @ US$17.25/ share (5.00% dilution)

(52-week range: US$7.77 to US$27.00)

Osisko Mining Corp: C$402 million @ $4.55/ share (54.00% dilution)

(52-week range: $1.40 to $6.29)

Farallon Resources Ltd: $10 million @ 0.20/ sh. (14.00% dilution)

(52-week range: $0.10 to $0.84)

Mercator Minerals Ltd.: $23 million @ $0.70/ sh. (56.00% dilution)

(52-week range: $0.29 to $12.94)


16

Surviving the Downturn Two choices:

Hunker down: slash spending, husband cash, and weather the storm

Seek creative, or non-traditional, financing strategies in the secondary market to

continue advancing the company, and prepare for the next upturn Actually, there is only one choice… do both!

High Yield Debt Financing Convertible Debentures Flow-through Shares

Off-take Agreements, Strategic Investors Royalty Agreements Forward Sales M&A

Where to Seek the Funds (Who is Providing Funds) Requirements Deal Structures Recent Examples

Consider which of these could suit your Company, and get advice


17

Most commonly issued for project financing, situations in which banks – not willing to

lend, or conditions too onerous and time is of essence

Broad distribution – multiple buyers/ lenders, can be issued as a private placement or

more broadly under a prospectus:

Market to a wide cross section of equity, debt, and high yield portfolios

Retail demand – strong

Domestic and international exposure

Customize to the majority of lenders, no single party drives the process

Debt instrument is secured (commonly) or unsecured (rarely), provides a high priced

coupon, offered at a discount, and often accompanied by an equity “kicker”

Typically less onerous covenants compared to a classic project financing or bank debt: Full bankable feasibility study not necessary, but assurances of success need demonstration

Metal hedging can take place at a future date, at the Company’s discretion

Less onerous reporting requirements – reasonable financial stress tests

The high coupon and wide distribution can make the situation stressful, if deadlines are

difficult to meet or the issuer needs to negotiate changes to the original deal

Current conditions – leading to extremely costly financings; difficulty in meeting debt

obligations: ALL lenders have become extremely nervous

Use as a bridge loan until other forms of financing are available

Alternative Sources: High Yield Debt


18

Similar application as High Yield Debt, Convertible Debentures: a hybrid debt – equity instrument

Debenture: secured and pays a coupon over its term

Conversion feature: can convert into shares of the company at a future date, usually at a higher price

Distribution: investors view convertible debentures as a trade off between perpetual, low-cost capital

(equity) and time-limited, costly (high yield) form of capital

In the current market it reflects both yield and dilution components of financing and can reduce both

slightly

Terms of coupon and conversion: trade–off between expected equity return, liquidity of underlying

shares, stability of cash flow (if any), and security of underlying assets

In many deals, the short-sellers/ arbs gets involved:

Sell short the underlying shares and buy/ go long on the convertible security (if the stock rises, they convert the

bond to cover the short. If not, they continue to earn % coupon rate)

As with debt the current market conditions are making these products very expensive for issuers and

the providers are very nervous

Alternative Sources: Convertible Debentures


19

Attractive especially to gold companies on the cusp of production

Similar application as High Yield Debt, Convertible Debentures: a hybrid debt – equity instrument

Debenture: secured and pays a coupon over its term

Conversion privilege: Common Shares or physical Gold

Upon Conversion or Maturity - transfers the leverage of increasing gold prices to the investor

With (higher) expected gold conversion, the actual coupon might be lower, helping companies

manage the overall cost, particularly so in the pre-commercial production stage

Also the choice of conversion between shares or gold, puts less pressure on a balance sheet, therefore reducing

the risk of bankruptcy if depressed commodity prices continue

Alternative Sources: Gold-Linked Convertible Debs


20

Canadian exploration and certain development projects: can be funded by FT shares that “flow”

the exploration tax deductions, normally claimed by corporations, “through” to investors

Funds must be spent on specific allowable tasks (drilling, surveying, etc) and are thus restricted

Flow through funds, and retail investors: main purchasers

Issuer must be a Canadian company, and

Projects must be in Canada

Additional provincial tax credits can be available

Not really a new alternative, since these have been available off and on for twenty years, but

traditionally confined to exploration Co’s and strictly to the ones having Canadian properties/ assets

More mid–cap companies may need to explore this avenue for exploration financing

Deals typically done around year-end but also whenever a fund raises capital (which is becoming more

difficult)

Pricing is market dependant; many companies expect premiums, given the tax advantage inherent

For exploration companies this is often the only method of financing

Many investors buy flow through for the tax advantage with no concern for the underlying issuer or its

project

The shares often re-enter the market as soon as the investor can sell

Alternative Sources: Flow-Through Shares


21

Mostly done by European, Asian smelter companies/ or metal trading houses

The company must have a mining project with measurable production expected

Usually companies get an up-front cash payment, plus fixed price on the metals/minerals

Overseas strong financial partner providing both equity/ debt financing, combined with an off-take

contract, represents pure relationship business (essentially important in bear markets):

Mitsubishi Materials Corp. purchased 25% equity interest in Copper Mountain Project (CUM: TSX) for

$28.75m, arranged a $250m project loan, and contract to purchase all the copper con from the mine for 10 yrs

Korea Resource Corp (KORES) 30% acq. of Baja Mining Corp. (BAJ: TSX) for US$435m of project funding

and 30% Off-Take Rights on Commercial Terms & 30% Completion Guarantee on Project Debt

Tata Steel Global Minerals purchased 19.9% of New Millennium Capital Corp. for $23.5 million and an option

to acquire 80% equity interest in the DSO project, by paying 80% of cost, investing a further $300 million in

exchange for 100% off take

Trafigura Beheer BV Amsterdam, off-take agreement with Farallon Resources Ltd. (FAN: TSX)

Chinalco, Jinchuan and Glencore AG are cashed up and currently making strategic investments in base

metals producers

Alternative Sources: Off-Take / Strategic Investors


22

Company gives up a portion of future income or revenue stream – exchange for current financing

Usually completed just in front of production, but are not unusual on exploration projects

Often used in early “prospector” transactions, so very important to search for lingering or multiple royalties on

title, since a royalty is most commonly recorded as a lien against a property

Typical royalty: Net Smelter Royalty (“NSR”) of 2% of the proceeds net of smelting and refining

charges

Net Profits Interest (“NPI”) of 10% to 15% is paid after all expenses from operations are deducted

Generally royalties are considered non-dilutive, but equity investors are not keen on them, and often

they do not raise that much money relative to the payout stream

Typical NSR deals would have been struck at anywhere between 1.25% to 2.00%, recent negotiations

have started @ 2.00%, with a sliding-scale NSR, that could reach as much as 3.25%-3.50%

Royalty Companies are not very fond on NPIs, even though mining companies were willing/ ready to

do deals in the range of 10%-15% NPI participation/ profit interest

Recent Transactions: International Royalty Corp. (IRC: TSX) $2.85m acq. of additional gold royalties from Barrick/ Atna Resources Franco-Nevada Corp. (TSX: FNV) $103.5 m acq. of 7.29% NSR on the Gold Quarry Royalty Property/ Nevada

International Royalty Corp. (IRC: TSX) $2.6m acq. of additional Skyline Coal Mine royalties located in Carbon and Emery Counties, Utah

Alternative Sources: Royalty Sales


23

Company sells forward portion of future revenue stream, usually by-product at a pre-

determined price, in exchange for current financing

An excellent way to monetize future minor revenue from a project

Can be made to downstream consumers (i.e. smelters), but more recently specific gold

and silver companies have been purchasers of metal from would–be or existing

producers: Silver Wheaton, and Gold Wheaton

Usually completed just in front of production, usually done on by product precious metals

Generally forward sales – considered non-dilutive; equity investors and analysts –

satisfied with them, provided negotiated metal prices – not too deeply discounted

Typical gold or silver deals would involve a substantial pre-payment in exchange for

most of metal revenue, with residual revenue stream

Recent examples include: Silver Wheaton purchase of Mercator Minerals’ silver stream at Mineral Park US$42m

Gold Wheaton purchase of 50% of FNX’s gold, platinum and palladium: C$175m in cash, 350m Gold Wheaton shares & C$50m in Gold Wheaton warrants

Gold Wheaton purchase of 25% First Uranium’s 2.1m Ozs gold stream: C$125m in 2 tranches, C$75m due Feb 27/ ‘09

Silver Wheaton purchase of 75% of Farallon’s silver stream from Campo: C$80m in several tranches

Alternative Sources: Forward Sales


24

Alternative Sources: Mergers and Acquisitions Many companies – shrunk to puny market caps, well below many institutional investors’

thresholds

Risk re-rating has resulted in funds drying up and a reluctance to finance juniors

The current order of least to most likely to get financed is:

Early stage exploration – pre drilling: pass the hat!

Pre – resource drilling: difficult and only superb results attracting attention (area where good

news has caused sales on liquidity)

Resource drilling and pre – production: equity very difficult, pro-forma economics must be

robust, must be in “safe” jurisdiction, will be financed by existing investors or “value

investors”, debt very difficult, expensive and typical plant and equipment are being marked

down extensively as collateral

Production: can get financed, especially to take advantage of “vulture opportunities”, but

capital IS expensive (excluding dealer commissions!)

This is the time for companies to look at preparing for next recovery and metal cycle:

Create critical mass that investors will want to own

Those with cash and healthy balance sheets to look for opportunities

Those with weakened balance sheets to face reality


25

Alternative Sources: Mergers and Acquisitions What the market wants to see, and how to position for that:

Cash on balance sheet: find a partner with a healthy balance sheet, and be extremely stingy

with that cash,

Explorers with good projects should seek those trading below cash value

Limited debt on balance sheet: beware of leverage, unless its manageable

Stable cash flow: find a partner with robust operations, and a track record

Reduce operating risk: make multiple, quality, producing assets a priority CRITICAL MASS – annual production and market caps

100,000 + oz gold, 5 – 10 mm oz silver

50,000 tonnes copper, zinc, 10,000 tonnes nickel

$50 million market caps as a minimum

Growth opportunities: find assets that have upside, not retreads

Growth opportunities: find quality exploration properties

Strong management: find management teams with proven success

Strong board: find board members with depth and success

Sell your assets (projects, or future revenue/income)

Sell your company – give your investors flexibility


26

Funds are scarce and expensive

Budget with care – watch every non-essential expenditure, and at a last resort, wind down or

temporarily close production/ operations

Consider the financing alternatives suggested, how does your Company’s profile fit?

Consider strategic partnerships – either with private pools of capital (NovaGold) or state backed

enterprises (Chinalco)

Merge with or acquire cashed up shells or other cash rich(er) companies

It may be necessary to sell assets, or all of the business

Even with all these different options, some of the current juniors will be extinct by the time the

bottom in equity and commodity markets is over

Conclusions:


27


Documents

Surviving the Global Financial Crisis in the Mining Sector: