Red Kite: Off-Take Model Fills Financing Void
Issue 30, February 2013
In unimposing offices above a betting shop close to the London Metal Exchange, Red Kite Capital Management quietly operates one of the world’s most aggressive copper trading houses.
Founded by Michael Farmer, David Lilley and Oskar Lewnowski in 2004, the partnership is said by investors to on average borrow six times its asset base (which is undisclosed) in pursuit of directional bets: early last year, Red Kite is reported to have shorted copper in a bearish stance on Chinese inventories and in 2011, pushed hard against Barclays’ view that copper prices would rise, leaving the bank to shoot the wounded on its metals trading desk.
Alongside its coarse trading business, Red Kite has also quietly cultivated a mine finance division (with assets of $1.6bn) that is increasingly striking deals centred on lending in exchange for off-takes. “The skills to build a mine are not necessarily the same skills to sell mine output,” Oskar Lewnowski, Red Kite’s partner responsible for the business, told Global Mining Observer in a rare interview. “We fill that role.”
A deal being finalised with Panama focused gold miner Petaquilla Minerals is typical of Red Kite’s model: Red Kite will lend Petaquilla $140m for 5 years at LIBOR plus 7.5 to 8.5 per cent, earning a 7-year off-take on output. The loan will allow Petaquilla to pay off an existing agreement with Deutsche Bank, freeing cash flow of $30m per annum.
For Red Kite, such agreements feed physical collateral, at a slim, negotiated discount to the market price, into the warehouse network of its metal trading business. “For smaller mining companies,” Lewnowski says, “their life’s work is exploration, delineation, feasibility, getting the process engineering correct and digging ounces out of the ground. Most mining companies are not structured to deal with shipping, duties, or deliveries on adjusted time basis. That is not really what they do.”
In exchange for a royalty-like claim on output, Red Kite therefore offers its counterparties financing and a global sales channel. “If you have copper coming out of Arizona [where Red Kite has a 25 per cent off-take agreement with Toronto-listed Curis Resources] and the customer is a wire manufacturer in China, the mine doesn’t want to deal with all that. They’re all too happy to go and get some more dynamite and blow a hole in the wall, as long as the copper leaves the mine.”
Red Kite’s offering to junior miners has broadened to that of a merchant bank. “We run a gamut of potential financing deals,” says Lewnowski. “We’ve done everything from straight equity to payment-in-kind loans, milestone driven cash loans, streaming deals and royalty transactions.” The flexibility is arguably afforded by Red Kite’s private ownership, which shirks the burden of reporting a strategy to common stock holders, allowing Lewnowski and his team of 15 to tailor every deal to its counterparty. “All our transactions are bespoke,” he explains.
In November last year for example, Red Kite paid Oracle Mining $10m for a copper royalty, in conjunction with a $10m share subscription; it also has share purchase warrants over Toronto-listed Augusta Resource Corp, coupled with a 20 per cent copper off-take up to 1.5m tonnes.
Perhaps Lewnowski’s most accretive agreement to date however, for all parties, was a $49m gold prepayment to Rio Alto Mining, in exchange for 61,000 gold ounces delivered by 2014, subject to sensitivity to the gold price. Based on current prices, Red Kite has roughly doubled its investment. For Rio Alto, the deal raised non-dilutive money for its La Arena deposit in Peru, which produced 201,000 gold ounces in its maiden year. “Everybody that is involved with that asset should be pretty happy,” Lewnowski observes.
“People are starting to appreciate that there’s not just equity and debt,” he adds. “There are useful alternatives to vanilla project finance. Red Kite has a fairly holistic view about financing: we’re happy enough to accommodate the counterparties we deal with in a very flexible way.”
Carefully choosing his words, he attributes Red Kite’s success in striking deals to the “decreased ability of some large banking institutions to continue to finance this area.” As investment banks have retrenched their loan books since 2008, territory has been left open to niche financing houses. “The climate for structured mine finance is very positive. It certainly hasn’t got cheaper to extract metals out of the ground, so there’s plenty of demand for capital.
“Mining itself is a very good asset,” Lewnowski concludes. “If you have an identifiable resource base, the gold or the copper is not going anywhere, so you have great collateral. That’s why banks used to love this stuff.”
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