Kingsgate Consolidated, an Australian-listed gold miner and explorer signed the Bt3 billion ($100 million) refinancing of its Chatree mine expansion on 4 May 2011. The financing is for Thailand’s largest gold producer, and is the first for a gold mine in the Thai market. It indicates how competitive Baht financing can be, even for assets like a gold mine with dollar revenues.

Chatree is located in central Thailand, 280km north of Bangkok, and is the country’s first modern gold mine. It has been operational since 2001, and uses an open cut, bulk mining, carbon-in-pulp processing and a cyanide-based extraction process. The output of this process, silver-gold bars known as doré, is then exported to Hong Kong for purification.

The expansion will take the processing capacity of the project from 2.4 million tonnes per year (tpy), the level at which it has stood since 2006, to 5 million tpy. The project, for which Ausenco is engineering, procurement and construction management contractor, involves building a new plant and upgrading existing infrastructure. The Thai government approved the expansion, as well as a new tax regime for the mine, in June 2010.

Kingsgate owns 48% of Akara Mining, the project company for the mine, with Thai investors, owning the rest, though Kingsgate has operational control of the mine and enjoys the majority of its economic benefits. It initially financed the expansion in part with a one-year $60 million corporate revolving credit from Investec. The sponsor has operations in other markets, including the Challenger property in Australia, and projects in both Australia (Bowdens) and Chile (Nueva Esperanza) wanted to finance the Chatree expansion on the balance sheet of Akara.

Kingsgate’s preference is to use as much local content as possible at its subsidiaries, and this preference extends to financing, so it looked to finance the expansion in Baht, even though the price of gold is in dollars, and the proceeds of the refining agreement are deposited in a London-based account. It mandated Investec, CIMB, the expanding Malaysian bank that owns 93% of CIMB Thai, the country’s tenth-largest bank, and Sumitomo Mitsui Banking Corporation, through its Bangkok branch, as lead arrangers of the project-level facility. At the same time that the project level debt closed, and the draws on the one-year revolver were repaid, Investec replaced the facility with a three-year $50 million corporate revolver.

The debt has a four-year maturity, and is repaid in semi-annual installments. The documentation includes no mandatory hedging requirements, and is secured upon land, plant and machinery at the project site, as well as the refining agreement and the accounts for the proceeds of that agreement. The debt is priced at 250bp over the THB Fixed benchmark, and features no cross- currency hedging.

Thai banks, which have become increasingly dominant in domestic project finance, lack experience of the mining sector. While the debt is exposed to currency risk, a large component of the mine’s low operating costs are in Baht, and the interest rate is competitive enough to outweigh this risk. Given the potential for additional mining development in both Thailand and its neighbour Laos, local banks may be called upon to become more active in mining.

The developer has had to deal with several operational and regulatory challenges. The expansion approval went through during a period of political instability in the country, and there were delays to government approval of Akara’s plans to access mining areas at Chatree, which was finally forthcoming in June. Shortly after the financing took place, in May 2011, the failure of a crusher motor combined with the early onset of the country’s rainy season to reduce production at the mine. The sponsor took advantage of the halt to move forward scheduled upgrading work.

The floods of late 2011 also complicated the expansion, by affecting logistics networks, though the impact was much lower than the disruptions suffered by the computer hard drive industry, and the flooding did not affect the mine itself. The project was completed 7% within budget, thanks in large part to Kingsgate’s experience and the high level of local content, and first gold took place on 28 October 2011.

Production at Chatree is estimated to be about 150,000 ounces in the 2012 financial year. The mine has a cash cost of $604 per tonne, making it one of the lowest-cost producers in the industry. The expansion will make Chatree more productive than Challenger, which Kingsgate acquired in February 2011.

With the Chatree expansion complete, the sponsor can now turn to its two new development projects in Australia and Chile. Bowden, in New South Wales, has an estimated resource of 99 million ounces of silver, while technical feasibility studies are underway at Nueva Esperanza, a gold-silver project in north- central Chile. At the end of February 2012, Kingsgate completed a A$70 million placement of 9.85 million shares at $7.10 per share. It hopes to use the proceeds to turn itself into a mid-tier gold and silver producer.

Akara Mining Limited
STATUS: Signed 4 May 2011, funded June
SIZE: Bt4 billion
DESCRIPTION: Expansion of Thai gold mine with second 2.7 million tonne processing plant
SPONSOR: Kingsgate Consolidated
DEBT: Bt3 billion ($100 million)
LEAD ARRANGERS: CIMB, Investec, SMBC
SPONSOR LEGAL ADVISER: Chandler & Thong-ek
LENDER LEGAL ADVISER: Clifford Chance
INDEPENDENT ENGINEER: Gemell Mining