Rosemont parent firm gets more cash

RK Mine Finance Trust, more commonly known as Red Kite, agreed to add $40 million to an existing $43 million loan to Vancouver-based Augusta Resource Corp., which owns the site of the proposed Rosemont Mine southeast of Tucson. Augusta announced the expanded loan last week.

Augusta, amidst a five-year struggle to obtain permits for the mine, had $9.6 million cash on hand at the end of the second quarter of 2012, down from $31 million at the start of 2012 and $49 million a year ago. That's according to the company's new financial statement, which was filed last week with Canadian securities regulators.

At its current spending rate, the company would have had no cash by the end of September without the expanded Red Kite loan or another outside investment. Augusta's $53.3 million total liabilities, including the original Red Kite loan, exceeded its assets by more than $37 million at the end of the second quarter before the expanded Red Kite loan was announced, the company's new financial statement said.

News of the loan comes on top of other good news for Augusta that includes a decision Aug. 3 by the Arizona Department of Environmental Quality to take over the mine's air quality permitting process from Pima County. County officials oppose the mine, while the state agency is proposing to approve the air permit.

The mine's stock price has risen sharply in the past month, following a precipitous decline earlier this year.

The expanded loan gives Augusta enough to spend $47 million through March 31, 2013, as it heads into the home stretch of efforts to get mine permits from the U.S. Forest Service and Army Corps of Engineers.

Under the new loan agreement, Red Kite has extended repayment to July 21, 2014. The original $43 million loan had already been extended from an original repayment deadline of April 22 of this year until April 13, 2013.

This is the first new outside investment Augusta has received since March 2011 that it can use before getting all its permits. The money is available once the transaction closes, which is expected to happen in the third quarter of 2012, said Augusta.

"Red Kite is a strong advocate of the Rosemont Copper Project and we appreciate their continued support," Augusta President and CEO Gil Clausen said in a written statement. "This expanded loan provides us with the funding needed to continue development of Rosemont through to the start of construction, expected in early 2013.

"Our entire focus can now be placed on finalizing the project debt financing and completing the permitting process," Clausen said.

The company's hope of starting construction by early 2013 depends on the Forest Service making a decision to not prepare a supplemental environmental impact statement on the mine, which has been requested by the U.S. Environmental Protection Agency. If the service decides to prepare such a statement, it won't be able to meet its December 2012 timetable for making its decision on the mine. The Army Corps can't legally make a decision on a Clean Water Act for the mine until after the Forest Service publishes its final environmental impact statement.

Red Kite's parent company, London-based RK Capital Management LLP, is a major metals-trading hedge-fund firm with $1.3 billion of assets under management, said a recent article about the company in Bloomberg Markets magazine. RK Capital specializes in the buying and selling of copper and prospered by betting accurately that its price would fall in 2011 as the pace of construction in China slowed, the article said.

The new loan agreement gives Red Kite first crack at 30 percent of Rosemont Mine's gross annual production, up to 1.5 million tons. In the previous loan agreement, Red Kite would buy 16.125 percent of the mine's annual production up to 483,750 tons.

Under this loan, Red Kite gets Rosemont Copper's assets in case of a default. Then, Red Kite would be entitled to sell, lease or dispose of the collateral. Augusta could lose its only material property and its shareholders could lose their entire investment, the Canadian company said in a second, management analysis report filed last week with Canadian securities regulators.

Mine opponents, who had hoped the company would run out of cash due to permitting delays, said they believe the company remains a risky investment. Rosemont Mine Truth, a blog run by the group called Save the Scenic Santa Ritas, pointed to a statement in Augusta's management analysis report that delays in permitting or unplanned expenses could force the company to raise more funds, and that unforeseen market events and conditions could make loans harder to get or more expensive.

"These events could have an adverse effect on Augusta's ability to fund its working capital and other capital requirements and hence, there is no assurance that these initiatives will be successful," said the analysis report.

But stockholders have been flocking to the company in the past few weeks, particularly since ADEQ's announcement it was taking over Rosemont's air quality permit.

On Friday, Augusta's stock closed at $2.98 a share on the American Stock Exchange, up 10 cents from Thursday, more than a dollar more than a month ago and $1.40 from May. The price remains well below the stock's 52-week high of $4.30 a share, reached in summer 2011.

BY THE NUMBERS

Augusta Resource Corp. spending plans:

• $47 million total from July 1, 2012 to March 31, 2013, assuming the U.S. Forest Service makes a decision on the Rosemont Mine by the end of 2012 and construction starts following a 105-day appeal period.

• $15 million of that for support activities, including the hiring of more people as the company prepares to start construction.

• $12 million for mine site preparation.

• $8 million for environmental impact study and permitting.

• $7 million to buy mining and mining plant equipment.

• $5 million for engineering.

Source: Augusta Resource management discussion and analysis report for the second quarter of 2012.

Contact reporter Tony Davis at tdavis@azstarnet.com or 806-7746.