http://www.mineweb.net/mineweb/view/mineweb/en/page67?oid=19552&sn=Detail
MINING SHARES PLAYGROUND OF HEDGE FUNDS
Precious metals specialist Jim Sinclair recently warned the needs of major mining companies to maintain the liquidity of their balance sheets have brought exploration to a screeching halt.
Author: Dorothy
Kosich
Posted: Monday , 16 Apr 2007
RENO, NV -
In a recent speech to investors, analysts and junior mining companies at the AMEX 4th Annual Precious Metals and Base Metals Conference, Sinclair warned that junior mining and exploration companies need "to protect yourself from a nuance of our industry which in fact has put everyone...into danger."
To uncover the nuance "the question is easy," Sinclair declared. "Is the loan in which I am part of non-recourse?"
In the old days, Sinclair explained mining project development joint ventures were largely financed by equity issues based on new production "because we believed firmly that bringing on this production was economic while recourse loans didn't even require confidence that the project would be economic" because once mine production commenced, the banks were comfortable the debt would be paid.
"If the economics didn't support your payment of the debt, the market profit on the gold, silver or copper sold in the future would cover the bank's liability," according to Sinclair. "For that reason, they took only that project as the collateral."
When a short of a gold or silver derivative is embedded in a non-recourse project loan, and loan risks come to fruition, Sinclair suggested that junior JV partners should "recognize that you do have the potential of losing your property to the major, who will water down their stock to their creditors, and keep padding along very nicely, especially if the price of that final product is rising."
"Your contracts must be solid, need to be known, must have work-to-be-done clauses, have to have binding arbitration, have to easily be able to exist in case of a non-performance," he warned. "The industry must survive by examining what their liabilities are--having subordinated their percentage of the property to the development loan-and what type of entity is indebted within that loan."
Sinclair asserted that mining shares have "been relatively weak lately ...as they have become the playground of the hedge funds." Meanwhile, exchange traded funds (ETFs) have attracted away new money, "the combination of which allowed the hedge funds to play their game," he said.
The flurry of M&A activity has not benefited exploration, according to Sinclair, who is the chairman of the Tanzanian Royalty Exploration Corporation (AMEX: TRE). ‘The rounds you've seen of companies accumulating other companies doesn't produce one ounce more of reserves, it simply consolidates the known reserves at that price of entity within that company," he said.