Golden Band Offers Investors $30M Gold-Linked Debenture

Tight credit markets and wary investors have forced Golden Band Resources (GBN-V, GBRIF-O) to try to sell investors physical gold it hasn’t yet produced through a $30-million gold-linked convertible debenture.

If successful, the company will have enough cash to put its 75,000- oz.-per-year La Ronge gold project, near Brabant, Sask., into production without diluting current shareholders.

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 been 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 to 35 percent 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 (the goldlinked debenture) 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 goldlinked, convertible debenture is an expensive type of financing.

“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 15,000 to 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, to 1.1 troy oz. gold based on the closing price of gold on Dec. 31, 2012, to 1,333 Golden Band shares before Jan. 1 2012, or to 1,000 shares at the maturity date (Jan. 1, 2013).

Starting one year after the deal closes, Golden Band will have some protection if the gold price rises significantly. 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 taken the equity financing route but says it wouldn’t have been a good idea. “Given our share price is in the 30-cent range. . . it would have been very unattractive for us as a company and for our existing shareholders,” Orr says.

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 can be issued.

“But only the strongest creditworthy companies can issue a simple debenture,” Allan writes, giving Barrick Gold (ABX-T, ABX-N) and Newmont Mining (NMC-T, NEM-N) 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 startup projects, neither of these options are available because they are too risky — both investors and banks demand interest rates that are too high for startups.

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

In January, Golden Band completed a prefeasibility study for La Ronge that looked at only the first four years of production from three deposits. The company is still working to upgrade and expand resources. Orr says the company hopes to produce 75,000 oz. gold per year over 8-10 years at an estimated cash cost of US$475 per oz.