Rosemont Copper's parent company could face a cash squeeze later this year, but company officials say they're confident of obtaining more money to continue their push to get permits for the proposed Rosemont Mine.
Augusta Resource Corp.'s available cash to carry out its permitting and other efforts has dwindled sharply over the past year, just as the mine project has hit some major snags, most notably two highly critical letters from the Environmental Protection Agency last winter.
Augusta could run out of cash in the fall or early winter if it spends at its pace of the past year and gets no new cash infusions.
It has received no major new investments since March 2011. It recently won approval for a $10 million loan or line of credit from RK Mine Finance Fund that won't be available until the Rosemont Mine has all its permits.
Augusta had about $19 million cash on hand at the end of March 2012, says the latest quarterly financial statement the publicly traded company filed with Canadian securities authorities. That's less than 40 percent of year-ago totals, and the company is spending at an average of about $7.5 million a quarter.
But Augusta officials say they're still confident in their ability to get cash, and this confidence was ratified at the company's annual shareholder meeting on June 12 in Vancouver, B.C., where Augusta is based. There, all management recommendations were approved by a significant majority of shareholders in attendance, company officials said.
While the company doesn't discuss how it intends to spend in the future, "it should be noted that past spending is not necessarily indicative of future spending," Augusta CEO Gil Clausen said in a written statement. "We are comfortable with our current funding and ability to access additional funds when necessary."
The Rosemont project "is one of the best in the world, economically and environmentally. It will be permitted and built," Rosemont Copper President and CEO Rod Pace said in a separate statement.
Two mining analysts who follow Augusta, Christopher Chang of Laurentian Bank and John Hayes of BMO Capital Markets, both from Toronto, agree that the company should be able to get additional money at some point. But the analysts' forecasts aren't entirely positive.
Chang, Hayes and a third mining analyst also predict a further pushback of the mine's already delayed permitting schedule, and that the mine's opening won't come until early 2015. Augusta has said it hopes to get all permits by the third quarter of 2012 and to start mining in 2014.
In addition, the third analyst, T.D. Securities of Toronto, said in a report that due to environmental issues involving two streams east of the mine site, a negative decision from the U.S. Forest Service on the mine's most important permit "cannot be ruled out."
Cash on hand is down
Specifics from the company's financial statements:
• August's $19.6 million cash on hand as of March 31 is down from about $31 million at the start of 2012 and about $50.4 million at the end of the first quarter of 2011.
• In the first quarter of 2012, the company spent about $10 million on expenses related to mine development, on top of about $39 million in similar expenses for 2011. The first quarter expenses included $8.5 million for "permitting, engineering and ongoing support activities."
• The company reported a $29 million working capital deficiency - representing liabilities exceeding assets - for the first quarter of 2012. That compared to a $17.6 million working capital deficiency at the start of 2012 and $17.79 million in available capital at the start of 2011. The latest deficiency means that financing committed for the project's current phase - before full permitting - is short by the $29 million.
The increased working capital deficit is due to spending on administration, permitting and operating costs and on deposits on mining equipment, Augusta financial statements say.
Tighter situations
Augusta has faced a tighter cash situation before - and overcome it.
At the start of 2010, the company's cash on hand was about $6.4 million. But in August 2010 and again in March 2011, Toronto-based HudBay Minerals Inc. agreed to sink a total of $51 million into Augusta, primarily for operating expenses. In September 2010, the Korean consortium of the corporation LG International and the government-based Korea Resources Corp. formed a joint venture to invest another $176 million into the mining company.
Of that money, $70 million was for current operating expenses. The remaining $106 million can't be tapped until Rosemont receives all permits needed to start construction. But all the $70 million was spent by the end of third quarter of 2011, Augusta's year-end 2011 financial statement said.
In Augusta's last three quarterly financial reports, the company has said it is negotiating with the Korean consortium to fund Rosemont's additional "ongoing permitting and operating costs." So far, however, the only arrangement agreed to requires Augusta to provide funding to their joint venture with Korean the consortium - which would be repaid once the Forest Service issues its decision. Twelve million dollars in such funds were invested by Augusta in the first quarter.
Augusta will need additional investments - either loans or outright cash - "to meet its current obligations as they come due," its first quarter financial statement said. But recent upheavals in the financial markets worldwide could make it very difficult to raise funds, the company said.
"Such funding may not be available on commercially acceptable terms or at all," Augusta said. "The company's failure to meet its ongoing obligations on a timely basis or raise additional funds that may be required could result in delay or indefinite postponement of further exploration and development of the company's property or the loss or substantial dilution of any of its property interests."
Rosemont CEO Pace wrote in his statement that such comments amount to "general risk disclosure" the company puts in its financial reports because it relies on outside financing while it's not drawing revenue from selling copper.
"We believe the risk is low, however, as with all investments, there is always a potential risk and Augusta Resource's quarterly reports to investors include all the stock disclosures regarding risk," Pace wrote.
The company is considering several "bridge financing" options to tide it over until permits are issued, Pace said. The only such option discussed in its reports is the already mentioned Korean financing. Augusta did not respond to requests from the Star for details on other options.
A Canadian investor in Augusta, Silver Wheaton, said through a spokesman, "We do believe that very high-quality mining projects, such as Rosemont, will have success sourcing financial support, if required." Silver Wheaton has agreed to pay Augusta $230 million once the permits are granted for the right to all of the mine's silver and gold production.
For the mine's opponents, an Augusta without cash would fulfill a long-held hope - that the company would be bled dry by its tough environmental issues.
"Based on the fact that EPA and the Corps (of Engineers) are concerned about the possibility of them polluting the water, the longer this drags on, the more people realize what a bad deal this is for the mountain range and the public, and for investors," said Tom Purdon, a board member of opposition group Save the Scenic Santa Ritas.
Mining firms face woes
Augusta is one of many mining companies facing difficulties in raising capital at this time, due to Europe's financial problems and the Chinese slowdown, said mining analyst Adam Graf, of New York City.
Today's investors aren't very risk tolerant and are less speculative, making it more challenging to raise capital, said Graf, of Dahlman Rose & Co. Also, the more a company's stock price declines - Augusta's sold at $1.81 per share on Friday, down from a 52-week high of $5.55 - the less a company would want to issue more shares to raise capital because that dilutes the existing shares' value, said Graf, who declined to discuss Augusta specifically.
Also, while many investors think of the United State as a safe haven for mining because of its political stability, it's very difficult in the best of circumstances for a U.S. mine to get permits, Graf said, and the time to get permits seems to grow every year.
"In the United States, nobody seems to want a mine near them," Graf said. "Even in a location where there is overwhelming support for a mine, because of jobs and tax revenues it will provide, there are always some local people who will say 'not in my backyard'. The way the legal system is set up in the U.S., those people can hold up the whole process. You see this time and time again."
Yet analysts Chang and Hayes say that high quality projects should still be able to get financing, and Rosemont is an example of such a project because of its high quality copper deposit.
In a report on Augusta, Hayes wrote that Rosemont is a large, low-grade deposit, located close to several other actively producing copper mines. Arizona is a key mining state in the U.S., and the surrounding area's Infrastructure is well developed including highways and a rail line running to Los Angeles, Hayes wrote.
Said Chang, "Most people believe it will get into production sooner or later. When people have to make decisions on whether to invest in that asset versus another project, a lot of people choose Rosemont, given its very superior quality project. in the worst case, Rosemont will also have offtake - metal produced at the mine - and they can sell that in advance to a smelter. A lot of smelters are operating under capacity and are dying for more."
But in its report on Augusta, TD Securities took strong note of EPA's concerns in its February 2012 letters about the mine's potential impacts to water quality at Davidson Canyon and Cienega Creek downstream of the Rosemont site. Rosemont Copper has said these concerns are exaggerated. But TD also noted the two creeks' status as Outstanding Arizona Waters, where under state law no degradation of water quality is allowed.
Even a positive Forest Service decision may not have acceptable terms for Rosemont, since it could require more environmental mitigation measures bringing "materially higher costs," and driving down Augusta's value, TD's May 2 report said.
Compensation
Total compensation for top Augusta Resource Corp. officers, 2009-11. Compensation includes salaries, incentives, stock options and restricted stock shares.
• Gil Clausen, CEO: 2009: $578,871; 2010: $1,052,459; 2011: $1,880,783.
• Richard Warke, executive chairman: 2009: $358,759; 2010: $479,473; 2011: $1,325,637.
• Raghunath Reddy, just-retired senior VP and chief financial officer: 2009: $318,794; 2010: $380,349; 2011: $751,994.
• Rod Pace, Augusta executive VP and chief operating officer (also Rosemont Copper president, CEO): 2009: $287,903; 2010: $344,550; 2011: $1,049,801.
• James Sturgess, senior VP, corporate development and government affairs: 2009: $259,294; 2010: $308,337; 2011: $852,945.
In its 2012 management proxy circular, Augusta said total compensation for its top officers has risen particularly over the past three years due to a tight labor market for experienced mining executives, and due to the company's continued push to get permits to build the Rosemont Mine on its time schedule.
Contact reporter Tony Davis at tdavis@azstarnet.com or 806-7746.
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