Minera Andes, a Canadian-headquartered junior, owns 49% of project company Minera Santa Cruz, while Hochschild, which is listed in London but based in Peru, owns the rest. It wants Minera Andes and the Argentinean project company to sign the documentation for $65 million in debt it provided to the project from 2006, and stop interfering with repayment of the loan.

Behind the suit lies the struggle between Hochschild and Andes' chairman and substantial shareholder, Robert McEwen, over the valuation and ownership of the mine. San Jose, located in the province of Santa Cruz, produced 4,998,000 ounces of silver and 77,070 ounces of gold in 2009. Hochschild provided the mine with $55 million in debt, later increased to $65 million, after deciding against doing a commercial bank deal with Macquarie.

Until the loan documentation has been signed, the ownership of the project cannot be resolved, and neither sponsor can see a return from the project. Hochschild's suit, filed by law firm Paul Weiss in New York, argues that Andes has held up signing project documentation with the aim of either buying out Hochschild at an artificially low price or selling up to Hochschild at an artificially low one. According to Hochschild, Andes' insistence on approval of project expenditures is not envisaged in a letter agreement under which Hochschild, though a subsidiary called Lorenzon, provided funding to San Jose.

Andes says that it welcomes the suit, and provided Project Finance with a copy of Hochschild's complaint. It stresses that it remains willing to execute loan documentation for the project, but that the courts may provide it with the best means of recovering value for its shareholders. Hochschild is dealing with the 25 March loss of both its chief executive and chief financial officers for reasons that are unrelated to the suit.

Hochschild's suit says that the letter agreement, based in turn on a draft term sheet that the sponsors put together with Macquarie, and subsequent promissory notes from the project company to Hochschild, are sufficient to demand the signing of the loan. The Macquarie term sheet dates to February 2006, and built upon a $4 million early-stage development loan from Macquarie to Andes, which allowed it to put together a bankable feasibility study for the San Jose property. The development loan was priced at 200bp over Libor.

The mine's location in Argentina, which has been almost a no-go for project finance lenders for ten years, was not the stumbling point. The $40 million term portion of the $45 million Macquarie project loan was to be priced at 285bp over Libor, with a $20 million bridge to be repaid with the term debt priced at 300bp, and a $5 subordinated tranche priced at 300bp. In addition to fees of 200bp on the senior debt and 300bp on the subordinated debt, Macquarie insisted on the project using a price hedge for up to 75% of its output.

Hochschild, until 2006, was a privately-held, Peruvian-based mining concern, but in November 2006 it raised £275 million ($523 million at the then-prevalent exchange rate) in a listing on the London Stock Exchange. Flush with cash, anxious to move ahead with the mine's development, and wanting to be rid of a hedging agreement, it agreed to fund the loan itself.

Hochschild had considerable control over the project company, with a 51% equity stake, two of the project company's three board members, and few decisions requiring unanimous board agreement. Signing of the project loan documentation, however, did require unanimous agreement, and without it, there could be no repayment of either the project debt, or any other shareholder loans, by the project company.

McEwen, a manager of, and investor in, several mining companies, made an initial investment in Andes in early 2005, but did not take over as chief executive of Andes until mid-2009. Andes, facing an $11.3 million cash call from Hochschild to fund additional work at the mine, had closed an additional $17.5 million corporate credit facility with Macquarie. Without a signing of the Hochschild project loan documentation, this loan would have been in default. McEwen agreed to another C$40 million equity investment in Andes, which paid off the Macquarie corporate loan, and took over, first as chairman, and then as CEO.

According to McEwen, Hochschild's control of the project allowed it to unilaterally decide upon a doubling of the mine's capacity from 750 tonnes per day to 1,500, without a concurrent development of the mine's underground resource. The mine and its expansion came in late and over budget. While the letter agreement between Hochschild and Andes did not grant Andes approval over capital and operating expenses, McEwen argues that any commercial bank facility would have involved rigorous external control over project expenses, and that Andes needs to have approval rights to ensure that the mine is run properly.

McEwen's theory is that Hochschild, as a formerly privately-run company, is not prepared to invest in proving reserves to levels that reassure outside investors. "Private companies see it as an expense, rather than an investment. But listed company investors want to see eight years of reserves, not three. We'd like the San Jose project to be scaled back and operated more efficiently."

Hochschild insists that the letter agreement is enough to compel the project company to sign the loan, and the promissory notes include language that the project "will finalize expeditiously the documentation contemplated by the funding letter agreement to reflect the Lorezon/MSC PFL [Minera Santa Cruz project finance loan], Lorenzon/MAI [Minera Andes] PFL and the MAI/PFL." According to Hochschild, Andes has not been working in good faith to complete the project loan.

It argues that the delay in signing is driven by Andes' wish to gain control of the mine at a knock-down price, or alternatively, to sell out to Hochschild at an inflated price. The dispute involves one of the smaller properties run by Hochschild, which has a market capitalisation of roughly £950 million, but the suit is a distraction from its larger ventures.

The case, if it advances, may give sponsors signing letter and other less formal funding arrangements a moment's pause. Project loan documentation, because of its size and complexity, is meant to be a final step, and before that a variety of lesser agreements such as commitment letters, indicative term sheets provide both parties with common ground for negotiating a final agreement. But they are not the final agreement.

The suit is ultimately a product of the 2005 credit boom and commodities boom. Construction prices have soared since then, as have revenues at the mine. The rush to bring the mine into operations was the main cause of the current impasse, the result both of the cost overruns and the ambiguous suite of debt documentation. But it may set an important precedent.