Golden Band offers gold-linked debenture to put La Ronge into production

In a sign of the times, Golden Band Resources (GBN-V) is trying to sell investors physical gold it hasn’t yet produced through a $30-million gold-linked convertible debenture.

If the move is successful, the company will be able to put its La Ronge gold project, located near the town of Brabant, Sask., into production without diluting current shareholders. At the same time it’s a high but necessary price to pay to woo investors in the tough credit markets.

The company came up with the structure of the private placement itself, says Golden Band president and CEO, Rodney Orr. He says the company has shopping around since last November to strike a deal that didn’t require heavy equity portions in combination with debt.

“People were talking in terms of 30-35% equity on top of debt structure for the full amount and we weren’t keen on doing that,” Orr says. “We didn’t want to do a dilutive equity financing and it provides a very attractive structure for potential investors.”

Blackmont Capital has agreed to be the lead agent on a commercially reasonable efforts basis, Golden Band says.

Barry Allan, a mining analyst at Research Capital says the gold-link, convertible debenture is an expensive type of financing for companies in general.

“The company has to give up a substantial amount to induce investors to get involved,” Allan wrote in an email, later noting “It is a reflection of tough credit markets and weak equity interest for the particular issuer.”

Golden Band is aiming to sell 15-30,000 units as a private placement for $1,000 per unit. Each unit will consist of a gold-linked debenture with a face value of $1,000 and 400 detachable warrants. Interest of 7% will be paid semi-annually.

Warrants can be exercised at 75¢ per share before Jan. 1, 2012 or for $1 apiece between Jan. 1, 2012 and Jan. 1 2013, when the debentures are due.

Investors have a lot of options. They can convert each unit into cash at face value, convert to 1.1 troy oz. gold based on the closing price of gold on Dec. 31, 2012, convert to 1,333 Golden Band shares before Jan. 1 2012, or to 1,000 shares at the maturity date (Jan 1, 2013).

Golden Band will have some protection if the gold price rises significantly but starting only one year after the deal closes. At that time, if the company has escrowed 33,000 oz. of gold and gold has traded at a minimum of US$1,250 per oz. for five consecutive business days, the company can accelerate the maturity date of the debentures, giving 30-60 days notice.

Orr says the company could have done an equity financing but says it would have been a much bigger risk. “Given our share price is in the 30-cent range it would have been very attractive financing for people on that side,” Orr says of new investors, but it wouldn’t have benefited existing shareholders or the company.

Allan says that equity financing is the simplest way to raise money for a project but that for companies concerned with dilution, a simple debenture is can be issued.

“But only the strongest creditworthy companies can issue a simple debenture,” Allan writes, giving Barrick Gold and Newmont Mining as examples.

Otherwise, Allan says senior bank debt can be used but covenants may be unappealing to the issuer, particularly if the issuer does not have a good credit rating.

But for most start up projects, neither of these options are available because they are too risky.

Allan says that both banks and investors demand interest rates that are too high for the company in need of financing.

“The issuer must add additional features to the funding instrument to attract investment interest – these being warrants, conversion features, and/or gold-link options,” Allan says.

Golden Band completed a prefeasibility study for its La Ronge project in January looked at only the first four years of production. The company hopes to produce 75,000 oz. gold per year over 8-10 years from two open pit deposits and one underground at estimated cash costs of US$475 per oz. Golden Band continues to do exploration work to expand and upgrade resources into reserves.