In what’s probably one of the biggest equity financings in junior mining this year, Hummingbird Resources PLC (LON:HUM) has raised £45 mln (US$67 mln) for the development of its Yanfolila gold mine in Mali.
Some debt financing will still be required to get Yanfolila all the way into production, but the new money means at least that Hummingbird can press on with detailed engineering work and then move on right into construction in three months time.
It had been thought that the greater part of the funding for Yanfolila would come through a debt facility arranged through private equity group Taurus.
Taurus has already provided bridge finance and may yet come in for the remainder of the total US$80 mln that will be required to complete the project.
But in a sign that markets have shifted considerably during the course of this year, Hummingbird has changed tack and moved from a majority debt-funded option for Yanfolila to a majority equity-funded option.
Hummingbird’s Bert Monro explains why.
“This is a world class project,” he says. “It has a 66% internal rate of return [IRR] and a US$152 mln net present value. It’s ready to be built. We’d done all the studies and just needed to fund it. We have good strong support from shareholders and the company will benefit from a deleveraging of the balance sheet.”
Six months to a year ago the markets were in such a miserable state it’s hard to envisage investors coming in for such a large equity portion of any project, let alone one in West Africa.
But times change, equity markets have woken up and share prices are on the move. What’s more, there’s been considerable movement in the gold price too this year, first with a sharp uptick and then latterly with something of a correction.
It’s been slightly nerve-wracking, but on the whole the dynamics in the gold market have been helpful to Hummingbird.
“Fortunately the group of shareholders we have got together are committed to seeing us build a gold mine,” says Monro. And as far as movements in the gold price were concerned: “it wasn’t about weeks, it was about months and years.”
In December 2015 gold reversed its inexorable downward trend, and for cornerstone investors Odey and Capital Group that was enough.
After all, there’s a lot of room for manoeuvre in the modelling that’s been done for Yanfolila.
The plan is to produce an average of 107,000 ounces of gold per year over a seven and a half year mine life, with all in costs running at US$695 per ounce.
The gold price is currently holding at just above US$1,200 so that’s quite some margin that’s built into the project.
Even at US$1,100 gold the project still shows an IRR of 42% with costs coming in at what Monro terms “sub US$700.”
So, it’s no wonder the equity investors were keen. Once there was evidence that equity markets were alive and that the gold price wasn’t in terminal decline, the die was cast.
After all, as Monro says, with the debt portion reduced, more of the returns will now derive to shareholders. If you look at it from that perspective, it’s no wonder the appetite was so fulsome.