Is a 12% interest rate by Glencore to itself in Mauritania “normal”?

Glencore has a 79% stake in an iron ore project at Askaf North in Mauritania, via its 88% owned subsidiary Sphere Resources, which is incorporated in Australia. Sphere states in its 2014 annual report that it took a loan from Glencore at an interest rate of 12% per annum for the project. Separately, in March 2014 Sphere announced the loan facility was for $186 million.

We don’t have access to Glencore’s agreement with the government so it is not possible to tell if these interest charges are tax deductible in Mauritania. This note addresses the question of under what circumstances loans at 12% have been made to extractives companies in recent years, when generally low interest rates have prevailed.

Here are some examples from Aleph, Open Oil’s extractives corporate filings database holding 1.2 million filings from companies in 11 jurisdictions around the world, of 12% interest rate instruments – loans, promissory notes, convertible bonds – issued by companies.

RESEARCH QUESTION


Glencore has a 79% stake in an iron ore project at Askaf North in Mauritania, via its 88% owned subsidiary Sphere Resources, which is incorporated in Australia. Sphere states in its 2014 annual report that it took a loan from Glencore at an interest rate of 12% per annum for the project. Separately, in March 2014 Sphere announced the loan facility was for $186 million.


We don’t have access to Glencore’s agreement with the government so it is not possible to tell if these interest charges are tax deductible in Mauritania. This note addresses the question of under what circumstances loans at 12% have been made to extractives companies in recent years, when generally low interest rates have prevailed.


WORKING SUMMARY


Interest of 12% per annum does seem used in recent years when general interest rates (LIBOR and associated) are much lower.


But the pattern seems to be early stage companies with very high risk – and in smaller amounts ($5 million or less) relation to raising funds from external investors. The question then is would these conditions apply to Sphere in Mauritania – and at nearly $200 million? In other words, is Glencore treating Sphere Resources as though it were an “arms length” investor and effectively ensuring lower risk… while already having committed to a risk-reward ratio through its initial investment in the project – when the risk-reward ratio should already have been factored into its own original calculation to invest? Is there a possibility, in other words, that Glencore seeks to make a project which is in a marginal space on the cost production curve more viable by locking in higher revenue flows much earlier in a cycle (interest rate repayments coming under cost recovery rather than share of profits made after all costs are recovered)… and with less exposure to tax?


Here are some examples from Aleph, Open Oil’s extractives corporate filings database holding 1.2 million filings from companies in 11 jurisdictions around the world, of 12% interest rate instruments – loans, promissory notes, convertible bonds – issued by companies


Indus Resources

http://www.asx.com.au/asxpdf/20130129/pdf/42cnnl309l2362.pdf

Indus Resources in the Jambi coal field in Indonesia: issues a convertible bond of about $4 million with an applicable interest rate of 12%


RNI NL

http://www.asx.com.au/asxpdf/20150617/pdf/42z7vz0r554x9p.pdf

Australian company with copper gold projects in Western Australia, mid-2015: http://rninl.com.au/projects/the-grosvenor-gold-project/overview/

Company has unsecured loans which are turned into convertible bonds at 12% per annum?


Odin Energy

Listed in Australia, 2010 report apparently lists work in Galveston (Texas?)

http://www.asx.com.au/asxpdf/20101026/pdf/31tdsnt47t51f4.pdf

Loan to Kilgore Oil and Gas Limited which was originally 15% up to 2010 and then became 2012. No immediate info on relationship of Kilgore to Odin.


Alloy Resources Limited

Australia, mainly active in Australia but exploration license in Laos

http://www.asx.com.au/asxpdf/20081023/pdf/31d2jx0cjcd8q1.pdf

$400k issued in note convertible at 10%. The interesting thing is company seems to be in trouble – laying off staff etc. So if 10% under these circs, what would justify 12% (in other loans)?


Finders Resources

Wetar Copper Project in West Papua, Indonesia: http://findersresources.com/wetar-copper-project/project-description/

EGM May 2009 mentions Convertible Note facility – several tranches with “coupon” repayable at 12% – maybe $10 million USD.


IsramCo Inc

Registered in Delaware, active in Israel since the 1980s.

http://www.sec.gov/Archives/edgar/data/719209/000118518512001681/ex33-1.htm (April 2012)

Promissory note in which 12% is one of the interest rates mentioned. Isramco seems to have been connected to Tamar, which was discovered 2008-9 – so presumably would have good prospects? Not sure of context…


America Sands Energy Corp

http://www.sec.gov/Archives/edgar/data/1432001/000101968713003241/amse_10q-ex1003.htm (2013)

Loan at six percent for 12 months; if not repaid by then move to higher rate of 12%


Daybreak Oil and Gas

http://www.sec.gov/Archives/edgar/data/1164256/000151597115000003/dbrm10q113014.htm (2015)

Originally Daybreak Uranium, now with exploration assets in the Appalachians. Promissory notes in annual accounts at 12% – $5 million.


Placer del Mar

http://www.sec.gov/Archives/edgar/data/1336282/000116552714000348/g7423a.txt (April 2014)

BBridge Notes and Investor Notes will generate 12% interest upon default of repayment schedules

Listed on NASDAQ where it states under risks it has generated “minimal revenues” http://biz.yahoo.com/e/140604/urhy10-q.html


Magellan Gold Corporation

http://sec-edgar.openoil.net.s3.amazonaws.com/mining/edgar_filings_text/1515317/8-K_2014-04-29_0001011034-14-000069.txt_extracted_1.txt (Jan 2014)

Promises to pay John Power $50k at 12% – individual investor.


Balaton Power Inc

Listed in the US, mining in the state of Orissa in India

http://sec-edgar.openoil.net.s3.amazonaws.com/mining/edgar_filings_text/1132704/6-K_2010-08-10_0001062993-10-002572.txt_extracted_2.txt (March 2010)

“During the period ended March 31, 2010, the Company received a
loan in the amount of $15,000 from three shareholders of the Company for the
purposes of financing the CompanyÂ’s trip to India that occurred during the
period. The loan bears interest at a rate of 12% per annum and is payable at
maturity on January 28, 2010.”


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