Pike River plans $50m stock issue, bond sale

Pike River Coal is set to sell off shares and bonds in order to raise $50 million. Photo / Greg Bowker

Pike River Coal, the South Island coal mine developer that has run short of cash due to production delays, plans to raise $50 million selling shares and issue convertible bonds and a coal contract option to its biggest shareholder, New Zealand Oil & Gas.

The announcement ends weeks of speculation that has driven down Pike's shares by 6% in the past month. The equity issue will provide working capital to complete underground mine work at its Pike River site northeast of Greymouth.

Pike has no source of revenue until it can sell its coal overseas and separately today posted a $14 million first-half loss, up from a year-earlier loss of $9.6 million.

As well as the $50 million of equity, sold either via a placement or rights issue, Pike will raise the equivalent of US$28.9 million by issuing convertible bonds to NZOG, allowing the coal miner to repay its existing Liberty Harbor bond facility. Meantime, NZOG has agreed to provide interim funding of up to $15 million on commercial terms to cover Pike's funding needs during the period of the rights issue.

For Pike, what is effectively a bailout by NZOG means handing over part of its one asset, the premium coking coal it plans to sell into Asia. The convertible bond and coal contract are "interdependent" and in the event they don't proceed, Pike must pay NZOG a $1.2 million break fee.

"The independent directors have carefully weighed up the merits of NZOG's funding proposal and compared it to market alternatives," said Pike chairman John Dow.

"There are a number of advantages with the terms of the new convertible bond including a much better conversion price than alternatives thus minimizing equity dilution, no production condition, slightly lower interest at 10% and no establishment fees," Dow said. "In our view this adequately compensates Pike River for the grant of the coal contract option."

NZOG has agreed to support the equity raising at its 29.5% interest,
subject to a rights issue being fully underwritten.

It will subscribe to bonds that convert to ordinary Pike shares at a conversion price of $1.24. They mature on March 12, 2012 and pay 10% annual interest.

NZOG would be granted a two-year option to purchase Pike's coking coal "at market prices negotiated annually."

The maximum volume bought under the contract would be the currently uncontracted coal quantities for the period to March 31, 2013 and "up to
30% of annual coal production for the remainder of the Pike River
mine life."

"NZOG will receive an attractive return on its secured convertible bond," said NZOG chief executive David Salisbury. "The potential for NZOG to hold a coal contract will enhance NZOG's overall investment in Pike."

The equity issue will provide working capital for the completion of mine development until steady state production from hydro-monitor
mining is achieved.

"It will include a substantial cash buffer of approximately $20 million to ensure additional operational flexibility during the build up to normal production levels," Pike said.

Gujarat NRE, one of the founding customers of the mine, has also agreed to support the rights issue at its 7.55% interest, subject to the issue being fully underwritten.