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EMED Mining shares advance on US$175 mln Goldman Sachs deal

EMED Mining (LON:EMED, TSE:EMD) shares shot up as much as 12 per cent today as it secured sufficient funding for the restart of the Rio Tinto copper mine in Andalucía, Spain.

It agreed a deal with banking heavyweight Goldman Sachs in relation to a US$175 million financing package. 

Goldman will give EMED a US$175 million upfront payment. And in return EMED will deliver the equivalent value of copper once the Rio Tinto mine is up and running, by making monthly deliveries over a seven year period.

Basically, it is lending EMED the project financing money and it will be repaid in copper rather than cash.

Having explored a number of different financing options over the past year EMED decided to take an innovative approach to funding the mine restart project, managing director Harry Anagnostaras-Adams told Proactive Investors.

EMED looked at conventional bank financing, high-yield bonds and convertible debt before settling on the copper pre-sale deal with Goldman.

“The Goldman Sachs deal stands today as our favourite option because it imposes less equity dilution than any of the alternatives. It also imposes less hedging, unless we want to do it,” he says.

“Importantly it also locks in a relationship with a global leader in finance that has a very strong presence in Spain, and has begun to be very supportive of us informally in the country.

“So from our point of view it serves a number of objectives.”

Given the Rio Tinto mine’s current ‘permit pending’ status the deal is an endorsement of EMED’s prospects. 

And having one of the world’s largest banks onside may help the firm as it works to establish its operations in Spain in the coming years, Adams explains.

“It is just one factor, but the fact is Goldman Sachs is a very strong institution in Spain.

“It is closely involved in advising the Spanish government, in respect of the country’s dealings in the bond markets, so it would be difficult to find a better established global institution in Spain than Goldman Sachs.

“Goldman brings its own networks, perceptions, and advice to our table. That is useful.”

From Goldman’s point of view, the pre-sale deal secures future physical commodity deliveries which can in turn be used in the group’s commodity derivatives trading business and for hedging purposes.

Adams says this kind of deal represents one part of a broader securitisation of the copper market, much like the explosion of gold loans.

“About 20 years ago, banks started being repaid in gold, and after that the derivatives market for gold became a very prominent part of the global financial market,” he adds.

“That is now starting to happen with copper and Goldman Sachs is being a fairly aggressive and innovative leader in that progression.”

The amount of copper payable to Goldman, at current prices, equates to around 15 per cent of the mine's expected production during that period.

Today’s deal follows last month’s agreement with Chinese firm YangguXiangguang Copper Co (XGC).

The Chinese firm invested US$30 million, through equity and debt, and in return it got a 10 per cent stake in EMED and bought the rights to 25 per cent of the Rio Tinto mine’s current copper reserves. 

This could potentially be worth around US$1.2 billion, at current prices, should the Chinese firm exercise its rights in full.

As a result of the two deals, EMED has now potentially pre-sold 40 per cent of the mine’s production in the early years.

Once operational, the mine is expected to produce 37,000 tonnes of copper each year from 9 million tonnes of ore.

The permitting process is now drawing to a close and one way, or another EMED expects to move on to start the re-development work by the end of this year.

Adams says there are two possible scenarios in which the permits will be handed out by the government. 

The preferred option, for EMED, the first approval - long awaited granting of administrative standing - will come by the end of this month, with the remaining permits and approvals following in the third quarter.

EMED will then be able to set the ball rolling on the compulsory purchase process for the parts of the tailings facilities that are currently owned by third parties. 

The legal process will take at least six months to complete once EMED has ‘administrative standing’. So if it is granted in the coming weeks EMED will be on schedule to start copper production next year, Adams says.

Alternatively all the permits, including administrative standing, will be issued in the third quarter of this year. In this case copper production will begin during 2014. 

EMED is in the hands of the local administrative bureaucrats, who are not noted for their transparency and efficiency.

The incumbent regime acts like it prefers the longer slower timetable whilst the opposition party that is seeking election on March 25 says it will speed things up.