Bankers to decide fate of Rio’s tin project

The fate of Rio Algom Ltd.’s East Kemptville tin project is now rest ing in the hands of its bankers with a decision on its future expected in one month’s time.

Continuing low prices following the collapse of the world market for tin late last year is the major reason for Rio Algom to deliver notice to its 6-member banking group, Ken Culver, manager of corporate relations for Rio, tells The Northern Miner.

At approximately $2.50-$2.60(C) per lb, the current tin price does not cover interest and debt repayment costs, though it does manage to cover current operating costs, but just barely,” says Mr Culver.

A victim of bad timing, North America’s only primary tin producer, located near Yarmouth, N.S., started production in October, 1985, just days before the trading in tin was suspended on the London Metal Exchange. Prior to the suspension of trading, tin was fetching approximately $5.25(C) per lb.

According to Rio’s 1985 annual report the cost of the project when completed was well below the budget of $170 million. A total of $142.5 million had been spent at Dec 31, 1985.

Rio’s financing arrangement for the East Kemptville project, according to the same annual report, comprises a $154.6-million limited recourse facility. The loans and acceptances outstanding at Dec 31, 1985, carry an average interest rate of 9.37% and are repayable in instalments from June, 1986, to December, 1995. The figure outstanding at the end of 1985, according to the annual report, was $116.9 million. These loans are secured by a mortgage and charge on the assets of the property. This financing is without further recourse to Rio Algom.

Mr Culver says that non-recourse financing is not an uncommon practice for Rio. For instance, out of its long term debt of $283.3 million, just over 70% is attributed to limited recourse financing.

There are no precise statistics on how many mining projects, Canada- wide, are financed by non-recourse loans, but Vay Jonynas of Moss Lawson and Co. notes bank financing is the most common method of financing mining projects, even more common than equity financing. Most of the junior mining companies use equity financing, while the banks have been willing to finance the majors, he says.

However, now that Rio has walked away” from East Kemptville, the company

might find it more difficult” to approach the banks again for further financing, Mr Jonynas points out.

While the banking group decides just what to do with East Kemptville, Rio is still operating the mine and will continue to do so until a decision is made, says Mr Culver.

The 6-member banking group is led by Bank of America. Rick Goulard, a spokesman for that bank, told The Northern Miner from his New York office that the group is reviewing East Kemptville’s options for the future, but neither he nor Rio Algom would speculate on just what those options are.

Rio, however, does say that its net after tax investment in the project is $20 million.

Mines and metals analyst with Walwyn Stodgell Cochran Murray, James Perrone, says the banking group could decide to maintain control of the mine with Rio continuing as operator on some sort of a contract basis. Shutting down the project and selling it is another option, he notes, adding that at the moment it may not be the most viable. He points out that the mine is still managing to cover its operating cash costs, though it is not recovering capital.

Another option may be for the banks to restructure the loan.

Another possibility sees the bank taking over the project itself, Mr Jonynas points out. The group could high grade the mine to get their money out. This may offer a short-term solution, but it would be for the long-term detriment of the mine, he says.

Ultimately, the decision hinges on what the banking group believes the future holds for the price of tin, notes Tom Komlos, vice-president of Gardiner Watson, a division of Dean Witter Reynolds (Canada). Obviously, Rio is pessimistic on that metal’s outlook. Indeed, Rio’s Ken Culver says the prospect for low tin prices to prevail is excellent.

Amidst the speculation, the East Kemptville project is at present producing at a capacity of about 9,000 tonnes of ore per day with an ore grade of about 0.2% tin.