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| Q | Please explain the difference between a non-recourse loan and a recourse loan in the mining industry. |
| A | A non-recourse loan is a loan that in the mining industry looks only to the specific project for repayment. If the loan fails and the borrower cannot pay because the project fails economically, the lender takes that specific project only. For instance, if gold project Bully is financed using a non-recourse loan then there is by definition a derivative sale of all the gold at a price for 10 years. This is because the repayment period on the project loan is ten years. By selling the gold forward for 10 years the profit is locked in for the repayment period therefore guaranteeing the repayment can be made. The loan is then granted by the lending institution as non-recourse to any other asset of Hedge Hog Gold Inc. other than the singular gold project Bully. This then guarantees the bank that the project on cost versus revenue can repay the loan. The bank then lends the USD $400,000,000 in development funds to Hedge Hog Gold Inc. to build the mine. The problem is that as gold rises gold project Bully having already sold the gold forward, will not benefit from the increase in the price of gold. The other problem is that Hedge Hog Gold Inc. has to account for the loss on the sale of gold which Hedge Hog Gold Inc. has not mined therefore does not own. At present Hedge Hog Gold Inc. has a $261,000,000 loss on their derivative hedge book for the 2nd quarter at gold $314. today gold is trading at $325.50. This loss on the hedge book of Hedge Hog gold Inc. could easily go to one billion US dollars or more if the minimum projection I have for gold is reached. However Hedge Hog Gold Inc. cannot remove this short gold position because it is mandated by their agreement contractutally with the lending institution that financed gold project Bully. Even if the derivative structure never fails, but the increase in the gold price holds, that possible one billion dollar or more derivative hedge book loss is sacrificed future earnings. This is the reason that Hedge Hog Gold Inc., the major gold producer, has fallen badly out of it previous market leadership position.
A Recourse loan then would have no derivative sale of gold attached to it, but if gold project Bully was to fail because gold went to $35, Hedge Hog Gold Inc, the major producer, would be liable on every other asset Hedge Hog Gold owns to the bank.
The answer is simple. Do not bring on production when it is not economically warranted. Bring on projects only when you believe that the price of the final product warrants that. Hedge projects on a revolving basis only two years out using listed instruments with a clearinghouse funding. |
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