Banro Tumbles as Congo Gold Mine Projections Fall: Canada Credit

Banro Corp. bonds are suggesting the Canadian gold miner risks default after saying ore-processing forecasts may not reach projections at facilities in violence-ravaged Democratic Republic of Congo.

The $175 million in 10 percent bonds maturing in March 2017 trade at about 75 cents on the dollar for an equivalent yield of about 23 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That compares with an average dollar-bond price of $1.06 in Bank of America Merrill Lynch’s U.S. high-yield index.

The Toronto-based company said in a statement July 9 that the throughput capacity at its Twangiza mine may be closer to 1.5 million tons a year, below the 1.7 million tons the facility was designed for. Banro also warned that a plant at its Namoya site won’t run at capacity because of technical setbacks at the facility.

“With more cash needed from reduced revenue, decreased ability to push back local debt given operational uncertainty, and equity appetite diminished, the risk of default now increases,” Brock Salier, an equity analyst at GMP Securities in London, said in a note yesterday. Salier rates Banro the equivalent of a sell, as do the other three analysts who cover the company. GMP and Bank of Montreal’s BMO Capital Market unit were the underwriters of the bonds in 2012.

Financial Plan

“What we’re looking at is a delay in reaching full production at Namoya,” said Naomi Nemeth, a spokeswoman for the company. After discussions with top shareholders, Banro is working on a “holistic financial plan” to move toward full production, she said. The board plans to meet early next week, and more details may be available then, she said.

Banro’s troubles come as so-called junior miners access to the bond market is declining. Sales of speculative-grade bonds by Canadian miners peaked in 2012 at $4.9 billion and have been declining ever since, with just $1.74 billion since the start of 2013, according to data compiled by Bloomberg.

“Gold companies have to go out and do riskier stuff to find the next gold ounce,” Wen Li, an analyst at CreditSights Inc., said in a phone interview from New York. Banro’s “a very small company that’s unrated, so it’s a very risky name to begin with. They have one mine and gold prices have come down quite a bit in the last year and a half, so it’s a very risky company.”

Congo has been beset by violent conflict for more than a decade amid political and ethnic divisions.

Shareholder Fight

Banro last month fought a shareholder battle with Toronto-based Liberty Street Capital Corp., which had proposed new directors for the company’s board before its June 27 annual meeting. Liberty cited the “deeply troubling condition” of Banro’s operations and financing.

“Banro has consistently failed to meet its own expectations regarding production rates, capital expenditures and cash flow at both Twangiza and Namoya,” Liberty said in the June 18 statement. The firm said on June 25 it was withdrawing its nominees after learning more about a plan to rectify the situation.

Banro bonds yield more than the highest-yielding miner in Merrill’s U.S. Distressed Index -- coal producer Walter Energy Inc. Banro isn’t tracked by the index.

Loudon Owen, chairman of Liberty Street, did not return a message yesterday seeking comment at his McLean Watson Capital Inc. offices.

Banro Potential

While Banro has potential, it needs fresh management, GMP’s Salier said in his report. He couldn’t immediately be reached yesterday for comment.

“Despite our reduced equity valuation, the asset quality remains high so we do expect a new team/structure could unlock that value in the future,” he wrote.

Defaults by Canadian companies are relatively rare, with 16 miners defaulting since 1989, according to Moody’s Investors Service. The default rate for speculative-grade issuers fell each year from 2009 to 2.7 percent in 2012, before climbing to 4.1 percent in 2013, according to Moody’s.

Shares of Banro tumbled 29 percent to 36 Canadian cents in Toronto yesterday, bringing their decline this year to 37 percent.

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