Google Web Alert for: recourse "non-recourse" project "development loan"

StockHouse.com : StockHouse BullBoards | RE: Recourse/Non-Recourse ...
Non recourse loans don't require even your confidence that the project would ... the property that you are operating to the major, for the development loan. ...

It's not a paid subscription, just go to www.jsmineset.com to read his bio and daily commentaries. He can't mention specific companies because he's CEO of a public company himself, Tan Range Exploration, and won't put himself in a litigious situation.

This is an excerpt from a speech he gave with the introduction provided by head of the equity group at the AMEX:

"Moderator: Okay, I hope you enjoyed the morning session. Again, I'm John McGonigal, head of the Equity's Group at the AMEX. Up here, I'm going to introduce someone that does not need an introduction probably to 99.9% of the folks in this room. He is a noted author, a noted speaker, he is involved with an AMEX listed Company, and can actually trace his roots back to when we had folks outside the AMEX trading on the curb. His dad was a trader at that time, on the curb, a predecessor of the American Stock Exchange. So without any further delay, I know all of you are here to hear him speak and not me, please give a big warm welcome for Jim Sinclair. (applause)"

he gives his speech but before opening the session for questions, he makes the following statement due to the obvious interest in the subject shown prior.

Jim Sinclair:

"..........I know there is going to be a Q&A session, so I'd like to make a warning and a definition for you. In the means of financing most of the new production, silver, gold and in some cases base metals, has been to obtain non-recourse lending. We all know that there isn't a bank around alive who is willing to take risk on a loan for interest return. It was in the old days, that we finance by equity issues for new production, because we believed firmly that bringing on this new production was economic. Non recourse loans don't require even your confidence that the project would be economic, because you actually sold the product in the future, in order to guarantee to the bank the economics of the entity in order to give them comfort that you would pay the debt. Because if the economics didn't support your payment of the debt, the market profit on the gold sold for the future, the silver sold for the future or the copper sold for the future, would cover the banks liability. For that reason, they banks took only that project as their collateral making the loan non recourse to the producer's other assets.

Now, this has come home to roost. But the companies that say they don't have any margin call are legally telling you the truth. They don't. Because a margin call is generally involved with the price of the final product versus some contractual relationship. In this case, the banks have made the loan predicated on the condition of the company's balance sheet and the rating of the company's bonds. As long as the balance sheet is kept liquid and the bonds maintain their present rating level or don't drop significantly in credit rating, they will have no problem at all with any of the gold or silver or copper that is sold forward. However, if the balance sheet should weaken in a simple liquidity sense, where the liquidity ratios that measure the health of the balance sheet begin to change, then according to what was negotiated to be embedded in the loan contract, there will be a demand for funds. Ashanti is your test case, if you want to know how this happened and what it means, then you need to study step-by-step how brokers became creditors in the Ashanti case, and how that outstanding debt was settled in shares of the Company. It is very important to understand.

Now as junior companies in production, mostly on a percentage transaction, where you have taken your 30% of a project, and you have entered a relationship with a major company to obtain financing by subordinating your percentage of the property as collateral for the loan.

The question that you need to ask is very simple. Does the major in the project have a loan which is recourse or non-recourse? If the answer is non-recourse, than you as the percentage junior have a derivative risk. The reason why you would have a derivative risk is because you have collateralized your percentage, as you must, in the property that you are operating to the major, for the development loan. So you actually have of that loan 30% and all of the characteristics of the loan. If embedded in that loan there is a short of gold or silver derivative, then what you own is 30% of that risk. Should that risk come to fruition, ask yourself whether the major is a philanthropic and merciful entity. If your answer comes up not a chance, then recognize that you do have the potential of losing your property to the major, who will then water down their stock to their creditors and keep just paddling along very nicely, especially if the price of the final product is rising. As in the case of Ashanti, the stockholders didn't really get creamed, they ended up with a watered down item, and if the bull market continues, they should be able to get their price or better back.

So the derivative risk means more to the junior than it means to the major. I'm not making any statement of catastrophic risk, but I am telling you that your majors are not of the character to fail, to take advantage of opportunity. In that sense, consider renegotiating your contracts. If there is a non-recourse loan then you have your percentage of that derivative risk. I would renegotiate to exchange the percentage for royalty, because 3% royalty, is really more money down to the bottom line than you will ever see with 30%, because no mine makes money in the developing world at the mine head. You already know what the expenses look like that you are getting from your majors as you begin to produce. So my particular message is to those who represent the companies that are beginning to grow, beginning to become something of significance, who are fulfilling what the mission of the American Stock Exchange has really always been, and that is to nurture and provide a place of trading for solid young companies that seek to become old major companies. Then you need to protect yourself from a nuance of our industry, which in fact has put everyone in that sense and definition into danger. The question is easy. Is the loan of which I am part non-recourse? If the answer is yes it is non-recourse and isn't that wonderful, the real reply is, then let's go back to my board and see what kind of renegotiation we can make on this, because in the final analysis, your stockholders would benefit infinitely more from having money to the bottom line than counting ounces that don't really mean anything.

So that simple part of the presentation is, really I believe for this unique audience, the most important part. This industry has gotten into a situation because of the need to maintain the liquidity of the balance sheet of the major, where exploration has come to a screeching end. If the company announces that they are doing exploration, that means they are approaching bankable feasibility or at bankable feasibility, because the majors cannot allow their balance sheet to deteriorate. They can take over, and accumulate, and purchase other companies with ease, because that simply puts more assets into a pot, and a creditor doesn't give a darn about how many shares are outstanding because all the creditor looks at are the total assets within the corporation. So the consolidation of the industry is in proof the natural byproduct of the fact that the derivatives were set at infinitely lower prices. So the round you've seen of companies accumulating other companies doesn't produce 1 ounce more reserves, it simply consolidates the known reserves at that price of the entity within the one company. But how many major new projects have started in the last 16 to 18-months from a grass roots type of exploration? The answer is, very, very few, except the ones that you have undertaken. That makes your industry infinitely more important as time goes along. Therefore, 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 built into or embedded within that loan because the derivative short of gold has come home to roost."

I've emailed SGV asking the question, we'll see what they say.

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Welcome to Jim Sinclair's MineSet
If the development loan is non recourse the derivative risk is there for all those that benefit from that loan on that project. ...

Drivers Jonas - Financial Products
90% of total project costs available including site acquisition, construction and professional costs and rolled up interest; Non recourse except cost ...

Kiwi Envoys Recourse GOLD miners thread. - Kitco Forums
He announced to his stockholders with great pride that the development loan negotiated by the major for his company's project was a non-recourse loan. ...

Kiwi_Envoy:

Running tab

Strawboss:

There are 2 other companies that bear consideration for addition to the list.

The first is Silver Wheaton. SLW in the US. Even though the company is worth a few billion, they only have 2 employees.

The other is Sinclair's company, TRE in the US. If he is right, the sky is the limit for his companys share value. With what he has going on over there, it would be reasonable to expect major finds in the coming years.

Great Lakes Commercial Mortgage Corporation | Wisconsin's Low Cost ...
Elderly Project Based Section 8 Apartments. CBRF Assisted Living ... Most loan programs are non recourse. Past results are not an indication of future ...

Land Acquisition and Development Finance Part 4 - 11/1/2005 ...
Assuming that the rate of return for the project is greater than the interest ... A non-recourse loan is one in which the borrower is not personally liable ...

Also relevant to the debt and equity balance is the risk related to recourse lending. A recourse loan is a loan in which the borrower is personally liable for the debt in the event of a default. A non-recourse loan is one in which the borrower is not personally liable for the debt. A non-recourse loan is more risky for lenders because they must look only to their collateral, or any other signer on the loan, for repayment in the event of a default.

Generally a smaller developer will be required to personally guarantee the loan. As in all investments, builders must balance risk with return. Debt financing has the lowest cost, but the highest risk. With debt financing, if the payments are not made in accordance with the agreements, the lender may chose to foreclose on its collateral. The borrower can lose the property, all its equity and may be liable for any deficiency to the lender. Equity financing has a much higher cost, but a lower risk.

With equity money, equity investors assume more risk. They often lend without requiring collateral to secure the loan and offer more timeline flexibility for receiving a return. The more equity in a deal, the less risk of an unsuccessful project due to cash flow needs. There is less return because the equity investor requires a higher rate of return than a lender. The more debt financing (the greater the leverage), the higher the total return to the developer because the lender's interest cost is significantly below the rate of return that would be paid to an equity investor. There is higher risk because if the lender is not paid in time, the entire project can be lost. Thus, the combination of over leveraging and a cash shortage is a common cause of project failure. To maximize your return on a project, use a strategic mix of equity and lender capital.

Public Financing

The public sector offers a wide variety of land development financing alternatives to the real estate developer. These alternatives are covered below and on page 36.

Tax Increment Financing

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4. Mezzanine Lender

A mezzanine lender provides a second loan, subordinate to a first lender, for the balance of the equity portion needed to complete the financing of a project that is not provided by the first lender.

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