Discovery Metals Limited (DML) said it will soon start drawing money from the debt facility it sanctioned earlier in the year and added it has entered into copper and silver price hedge contracts as it moves to expedite Boseto Copper Project and meet the commissioning timeline.
The BSE listed company said it has completed the conditions precedent to the US$180 million (about P1.2 billion) financing solution and has delivered the first debt utilisation request to the banking syndicate.
“The progress on the construction at Boseto is pleasing and the availability of the debt finance will allow construction to continue in line with our published timetable,” Brad Sampson, Discovery MD, said.
“Shareholders should gain further confidence that Boseto complies with the extensive due diligence processes of such a well?credentialed debt syndicate,” he added.
The loan is intended to be drawn down as funding is required. The interest rate margin over LIBOR is 3.75 percent. Discovery said no political risk insurance for this debt is provided in Botswana, which provides opportunity for lower margins on debt finance.
LIBOR, or The London Interbank Offered Rate, is a daily HYPERLINK “http://en.wikipedia.org/wiki/Reference_rate” \o “Reference rate” reference rate based on the HYPERLINK “http://en.wikipedia.org/wiki/Interest_rate” \o “Interest rate” interest rates at which HYPERLINK “http://en.wikipedia.org/wiki/Bank” \o “Bank” banks borrow HYPERLINK “http://en.wikipedia.org/wiki/Unsecured_loan” \o “Unsecured loan” unsecured funds from other banks in the London wholesale HYPERLINK “http://en.wikipedia.org/wiki/Money_market” \o “Money market” money market (or HYPERLINK “http://en.wikipedia.org/wiki/Interbank_lending_market” \o “Interbank lending market” interbank lending market).
The company has also entered into copper and silver price hedge contracts as required under the Boseto finance package.
The hedging counterparties are the 3 banks in the debt finance Standard Chartered Bank, Standard Bank and Credit Suisse. Caterpillar Finance is not part of the hedging syndicate.
Discovery has hedged approximately 40 percent of copper and 65 percent of silver (for the scheduled period of the loan repayment). The hedge contracts provide downside price protection on a portion of the Boseto production.
Approximately 60 percent of the copper production will be sold at spot market prices. The total hedged quantities are 40,000 tonnes of copper and 1,850,000 ounces of silver.
The current market has enabled the company to secure the required hedging at prices one?third higher for copper and nearly double for silver than those contained in the BFS prices.
“These enhanced economics for Boseto justifies the rapid development path the Company is currently executing,” the company argued.
Discovery said it has chosen a simple form of hedging contract, being a swap, where, for an agreed tonnage, it will receive an agreed forward price and will receive or pay a cash amount based on the average price in the nominated future period.
“If the spot price at the time the hedging instrument is due for settlement is lower than the agreed forward price, the bank will pay the company the difference in price for the agreed tonnage. If the spot price is higher, DML must pay the bank the difference in price for the agreed tonnage.”
Physical delivery of 100 percent of Boseto concentrate production for the first 5 years of operation is contracted to Transamine, a Geneva-based metal trader.
Concentrate sales are priced at the average monthly price of dispatch from the Boseto facility and therefore, there is no Quotational Period (QP) risk to Boseto revenue.
However, Sampson warned that whilst the company remains bullish about the copper price over the foreseeable future, it is prudent that some copper and silver price protection was secured as insurance against any unexpected price volatility during the debt repayment period.
“The level of hedging is appropriate to protect shareholders’ interests in the debt repayment phase of the Company’s development,” he said.
The Boseto loan is scheduled to be repaid in 10 quarterly payments from December 2012.
In addition to scheduled repayments, it has been agreed with the syndicate that 30 percent of excess cash flow from the project will be repaid as mandatory loan prepayments with the remaining 70 percent available for Discovery Metals’ discretionary use.
At current metal prices, this results in the loans being projected to be repaid in full in the second half of 2014.