Financing of new Gold Projects

Sources of Financing

• Own resources
• Commercial banks
• Foreign investment
• External financing (credit in gold)

Credit in Gold: This type of financing is relatively new, given that it has been in operation for just over ten years now. it consists in that a small producer can open a mine with a loan and that he would start to give back that loan when his mine is already in production in other words with the results of production he will need to pay the pay off from the loan plus the interests just like you would in any other common credit. The particularity of this type of loan is that it is lent out in gold and needs to be given back in gold.

Functioning of Credit in Gold: The financial entity lends out an amount of gold that is the equivalent of one year of production (this is the general rule).

The system of credit in gold consists in that the small producer who is the beneficiary of the credit will not need to pay over 20 percent of the gold he produces on a yearly basis.

The grace periods are similar to that of an ordinary credit and normally the producer starts paying when his mine is in production, however this period should not exceed three yeas.

In order to give out the loan the financial entity fixes a price range for the gold and conditions the loan in the following way: when the international price of gold is in the established range, the financial entity deducts a prime of 15 percent of physical gold and turns in 85 percent so that the beneficiary of the credit is able to dispose of it.

However, when the international price of gold it at a higher range per ounce, the financial entity will deduct 15 percent of physical gold, and also deducts a 40 percent of the excess price above the amount per ounce.

When the international price of gold is below a certain amount per ounce, the financial entity commits to paying the normal amount per ounce and will obviously deduct the 15 percent of physical gold.

There are many variables in a mining country, but one of the most known of is the impossibility of knowing the price at which the product is going to be sold at. One of the advantages of this system is that it eliminates the price risk factor, since it is paid in gold and it assures us a minimum price and places a ceiling so that the utilities that are above this ceiling are shared.

Another one of the characteristics of credit in gold is that a very low interest rate is paid, in the past it used to be at 1 to 2 percent per year versus a dollar credit that the mining bank administers which was over the prime rate of the United States that used to be at 11.5 percent, plus 1 to 4 points above this rate in other words up to a 15 percent.

In other words that while in a case of credit you are paying a 2 percent of interest per year there are other cases that would be paying up to a 15 percent per year. For example, if we obtained credit of one million dollars, in the case of credit in gold, we would be paying an amount of 20,000 dollars per year and in another financial system we would pay up to 150,000 dollars per year which ends up being a very big difference.

There is a very important aspect and that is that the game rules need to be clear and serve as a base for the legislation like what occurs in the industrialized countries and not the other way around like what occurs in our country and in the Latin American countries where the laws are given without precisely establishing the game rules, and demand they be fulfilled without caring if they are possible or impossible or convenient or inconvenient, when the reasonable thing is first to fix the conveniences for the different parts and for the country, and only then legislate it. this way the game rules for credit in gold will be clear and will have to be legislated in a way that this type of financing is viable.