A venture loan programme has paved the way for
foreign investors to gain exposure to established companies in
Brazil’s middle market.
US-based Resource Holdings issued an $11.4 million
note last month, allowing it to make its first loan under a
unique capital programme targeting the country’s
gold mining operations, and which will be extended to small- to
mid-cap companies in other sectors.
The loan chain stretched from West Ventures, a US
asset-based lending company, to Resource Holdings and then down
to Reginaldo Luiz de Almeida Ferreira (RLAF), a 30-year gold
mine operator based in Cuiabá.
The collateral structure underpins the financing
which gives start-up Resource Holdings, and in turn smaller
mine operators, access to funds they would otherwise not have
in today’s market.
The $9.5 million loan from Resource Holdings was
secured by RLAF’s mine tailings and $5.5 million
of equipment which was purchased in accordance with the loan
document. As a smaller operator, the amount of gold left in
tailings at RLAF’s site is higher than at more
advanced and heavily-invested mines.
The mine’s tailings still contain a
high value of gold which can still be extracted, said Pryor
Cashman partner Eric Hellige who acted for West Venture on the
transaction. The new equipment and extra funds could lift the
extraction rate from around 30% to up to 60% or 70%.
Resource Holdings has extended the loan in exchange
for a percentage of the mine’s profits.
Further up the loan chain, West Venture benefits
from the increased extraction rate and Resource
Holdings’ profit share by virtue of its own
collateral structure. Its $11.4 million note is fully
collateralised, earning 15% interest, plus equity in Resource
"Venture capital investments in Brazil are
relatively new concepts; it’s been difficult for
many of them to get financing," said Hellige.
This loan chain, however, allowed a start-up to use
the backing of a well-established goldmine operator in Brazil
to obtain funds it wouldn’t normally have access
to in this market. For RLAF, it received foreign funding at a
time when foreign investment in Brazil is dominated by large
Resource Holdings is looking to start similar
programmes involving seasoned companies in
Brazil’s other middle market sectors including
agriculture, for which Brazil is one of the
world’s biggest exporters.
"The first one is always the hardest," said
Hellige, so the documentation, terms and timeframe will be
better for Resource Holdings going forward.
With the RLAF deal, Resource Holdings originally
intended for a subsidiary to purchase and then lease the $5.5
million of equipment to keep the assets on its books. But
Brazil’s withholding tax scheme made this more
expensive than having the mine purchase the equipment.
For small-cap focused venture capitalists that are
shifting their focus from China, Brazil’s
comparatively benign regulatory framework and good growth
projections make it an attractive alternative.
Resource Holdings’ programme has the
interest of other lenders looking to access
Brazil’s middle market. "People have wanted to do
that for a long time," said Hellige.