As lenders balk, big miners step up

Terrane Metals Corp. head Rob Pease knows exactly what would happen if his junior mining company asked to borrow $40-million (U.S.) from a major Canadian bank.

"It would be a very short conversation," Mr. Pease, Terrane's president and chief executive officer, said in an interview this week, highlighting the financial squeeze most junior miners face these days.

With share prices already depressed, risk-averse investors are showing little appetite for junior mining equity issues. The credit crunch has made debt financing just as difficult for these companies in desperate need of cash to advance their development projects.

Enter the major gold producers. The seniors are becoming the sector's sugar daddies, offering financing help to the juniors for significant equity positions or options on development projects.

Vancouver-based Terrane, for example, secured a $40-million loan from Bank of Montreal on favourable terms only after senior producer Goldcorp Inc. had guaranteed the loan.

In exchange for the backstop, Goldcorp was awarded a "one-time option" to exchange its 240 million convertible shares in Terrane for a potential joint venture interest.

This venture interest would involve up to 60 per cent in Terrane's Mount Milligan copper and gold project in British Columbia.

The deal will benefit both Terrane and Goldcorp, Mr. Pease said, because if the major exercises its option on the $917-million project, Goldcorp's shares, which account for roughly 65 per cent of Terrane's equity, will be cancelled.

The former Placer Dome executive said the challenging financing conditions have forced juniors to come up with creative way to raise money.

"It pushes you more to do things like this. Even though we are living in an era of very strong commodity prices for copper and gold, the equity markets are not as supportive," he said.

If it exercises the option to take the stake in Mount Milligan, Goldcorp could add more than half of the potential mine's 4.6 million ounces of gold and 1.6 billion pounds of copper to its reserves.

Charles Jeannes, Goldcorp's head of corporate development, said more junior miners have knocked on the Vancouver gold producer's door in search of financing assistance.

"Certainly what we've seen happen in the credit markets has made traditional debt financing for projects like [Mount Milligan]more difficult. Us stepping in and backstopping the loan has certainly provided them with an opportunity they might not have had," he said.

Kinross Gold Corp. is another major that has taken advantage of the juniors' woes. The Toronto gold producer has recently snapped up stakes in junior miners through private placements.

In April, Kinross bought three million shares of BCGold Corp. or 12.8 per cent of the junior for $1.05-million (Canadian).

In May, it bought five million shares of Rye Patch Gold Corp., representing a 15-per-cent stake, for $1.25-million.

Finally, yesterday Kinross invested $1.5-million in Riverside Resources Inc. for a 7-per-cent stake.

"We recognize that short-term financing is difficult these days for the junior miners. We think that has created a very good opportunity to take equity positions on a very select basis in promising junior companies," said Kinross spokesman Steve Mitchell.

Fund manager Charles Oliver of Sprott Asset Management, whose gold and precious minerals fund invests in junior miners, said it has been "annoying" to watch the seniors buy significant stakes at discounted prices. "It's pocket change and it gives [the seniors]a good option on the potential future upside," he said.

While he believes the junior mining market is starting to turn the corner, Mr. Oliver said he has been reluctant to increase positions in some companies recently because of the volatile markets.