It’s taken a while but last week the European banking crisis arrived in Australia via a cancelled funding deal, a sign that raising money for resource developments is about to become a lot tougher.
The failed funding saw a German bank, WestLB, withdraw from a two-member syndicate which had agreed to provide up to $38 million to the emerging silver miner, Cobar Consolidated.
WestLB has been a long-term participant in resource funding in Australia, and with assets of more than €191 billion and 4400 employees is one of the biggest banks in Germany with roots that date back to 1832.
Size and history count for nothing in the disaster enveloping the European banking system which is struggling to deal with the pincer effect of excess government debt and tighter lending rules being introduced by the Basel Committee on Banking Supervision.
The first problem, too much government debt which has crippled Greece, Iceland, Ireland and Portugal, and is starting threaten Italy and France, has been well reported.
The second problem, known as Basel 111, is a third round of tough new rules which will apply to every bank in the world, and some of those rules will effect lending to mine developments and commodity trading.
There are already reports emerging that some big French banks, such as BNP Paribas and Societe Generale, which traditionally fund a major portion of the global commodity trade are phasing down that side of their business because under Basel 111 banks will need to hold capital equal to 100% of a commodity-trading letter of credit, a whopping increase on the 20% currently required under the prevailing Basel 11 rules.
The problem encountered by Cobar Consolidated is an early sign of what will come as Europe’s banks are forced to retreat deeper into their home markets, and cancel loans which appear to carry the slightest level of risk – especially risk in far away placed such as Australia.
What WestLB did in walking away might be understandable from the bank’s perspective (it has a crisis in its back yard) but it was rough on Cobar.
The small Melbourne-based silver miner announced as far back as March 1 that it “achieved a significant milestone with the funding requirements for its Wonawinta silver project” in NSW.
“Terms have been agreed with Commonwealth Bank of Australia and WestLB AG Sydney branch to provide a secured loan of $22 million for project development. Additional facilities for cost overruns, working capital and bonding/guarantee requirements (taking the total to $38 million) have also been agreed,” Cobar said in a statement filed at the Australian stock exchange.
On the day of the funding announcement, Cobar shares added 5.5c, rising from 96.5c to $1.02, eventually rising to a 12-month high of $1.18 on April 20.
Today, Cobar is trading around 71c having been forced by WestLB’s withdrawal to quickly arrange a $16.9 million share placement at the discount price of 65c, an 18% mark down on the company’s prevailing share price at the time.
As Cobar’s banking crisis unfolded the Commonwealth Bank stuck with the company, putting up a $6 million bond for the Wonawinta mining lease, but a replacement bank for WestLB’s component of the banking package was not found.
Cobar managing director, Ian Lawrence, described WestLB’s withdrawal as unexpected. “The (share) placement funds essentially replace the debt funding that WestLB would have provided,” he said. “This will reduce the company’s gearing and allow us to continue with development of the Wonawinta silver project.”
It is highly likely that other funding deals will encounter similar problems, whether dealing with a European or a bank from anywhere else as the global financial system pauses for Europe to resolve its sovereign debt crisis.
Bannerman Resources, an emerging uranium producer, hit a similar snag on Monday when it reported that a takeover proposal from the Chinese company, Hanlong, had foundered because the China Development Bank reportedly wanted “greater certainty regarding the timing and conditions of a mining licence before finalising commitments”.
Hanlong is probably a special case given internal management problems, but the fact that a bank’s “comfort level” was used as a reason for a deal to collapse is significant.
The message for all resource companies is that until Europe resolves its banking problems it will become increasingly difficult to use debt for project developments which will, in turn, place greater demands on equity investors – and pressure on share prices.
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Apologies for errors in last week’s Analysis column on Iron Ore Holdings http://www.wabusinessnews.com.au/article/How-to-make-500-million-without-really-trying. While some of the calculations were wrong, as pointed out by astute readers, the central theme remains intact – values obtained by selling iron ore in the ground mean that the stock is significantly under-valued. As the famous American architect, Frank Lloyd Wright said: “A doctor can bury his mistakes but an architect can only advise his clients to plant vines” – and a journalist can only say sorry.
