Measuring the True Cost of Mining Finance

Some extraordinary costs are being incurred by small miners as they face unprecedentedly tough capital market conditions. In May, gold miner Blackham Resources agreed to grant 33.3 million options as well as pay 11.5% for a $6 million loan facility. Valuing the options by conventional methods implied a total cost of $5.0 million over 30 months or the equivalent of 32% a year. Blackham Resources subsequently rewrote the generous options deal cutting the options component of the deal by half. In June, Pilbara Minerals raised $5.7 million also at an effective cost of over 30%. Last week, Potash West raised $1.8 million at an effective 12%. To avoid confusion and be able to compare the true cost of finance, companies should make clear to shareholders how much deals are costing in much the same way as they disclose remuneration costs via grants of stock options. The wide variation in terms warrants some form of standardised reporting in the interests of having informed shareholders.