NGD » Topics » Subordinated Convertible Debentures

These excerpts taken from the NGD 6-K filed Nov 15, 2007.

Subordinated Convertible Debentures


The Company issued 55,000 Convertible Subordinated Debentures (“Debentures”) for an aggregate principal amount of $55 million. The Debentures, which were issued pursuant to a Debenture Indenture dated June 28, 2007 (the “Debenture Indenture”), each have a principal amount of $1,000, bear interest at a rate of 5% per annum and are convertible by the holders into common shares of the Company at any time up to June 28, 2014 at a conversion price of $9.35 per share. The Debentures do not allow forced conversion by the Company prior to January 1, 2012 but after that date the Company may redeem the Debentures if the market price of the Company’s shares is at least 125% of the conversion price. The Debentures are classified as compound financial instruments for accounting purposes because of the holder conversion option.


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Interest is payable in arrears in equal semi-annual installments on January 1 and July 1 in each year, starting January 1, 2008.


The Debenture Indenture provides that in the event of a change of control of the Company, as defined therein, where 10% or more of the aggregate purchase consideration is cash, the Company must offer to either (i) redeem the outstanding Debentures at a redemption price equal to 100% of the principal amount, plus accrued and unpaid interest up to but excluding the date of redemption, or (ii) convert the outstanding Debentures into common shares at a conversion price ranging from $7.48 to $9.35, based on a time formula specified in the Debenture Indenture


The Debentures are subordinate to the Notes and any secured indebtedness incurred subsequent to the issue of the Debentures.


The Company has allocated the $52.6 million net proceeds of the Debentures of $34.2 million as a liability based on the fair value of a similar debt instrument without an associated conversion option. The fair value of the conversion option of the Debentures on June 28, 2007 was estimated using the residual value method at approximately $18.4 million.  The debt component of the Debentures is accreted over the term to maturity using the effective interest method. During the third quarter of 2007 and accretion costs of $0.5 million were added to the convertible debt balance.


The Debenture Indenture requires the Company to comply with certain reporting and other covenants.


The Company has allocated the costs associated with the financing against the component parts of the instruments issued, being the Notes, Warrants, Debentures and the fair value of the conversion option of the Debentures.


As a result of the Notes and Debentures debt financings, the Company has incurred accrued interest charges of $6.6 million and recognized $10.6 million in accretion costs to September 30, 2007. These amounts were charged between the Statement of Operations and mineral properties based upon the relative values of the deferred costs related to the Project and the face value of the debt issued as follows:



Accretion

($ millions)

Interest


Total

Statement of Operations

$7.0

$4.4

$11.4

Mineral Properties

$3.6

$2.2

$5.8

 

$10.6

$6.6

$17.2




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Subordinated Convertible Debentures


The Company issued 55,000 Convertible Subordinated Debentures (“Debentures”) for an aggregate principal amount of $55 million. The Debentures, which were issued pursuant to a Debenture Indenture dated June 28, 2007 (the “Debenture Indenture”), each have a principal amount of $1,000, bear interest at a rate of 5% per annum and are convertible by the holders into common shares of the Company at any time up to June 28, 2014 at a conversion price of $9.35 per share. The Debentures do not allow forced conversion by the Company prior to January 1, 2012 but after that date the Company may redeem the Debentures if the market price of the Company’s shares is at least 125% of the conversion price. The Debentures are classified as compound financial instruments for accounting purposes because of the holder conversion option.


Interest is payable in arrears in equal semi-annual installments on January 1 and July 1 in each year, starting January 1, 2008.


The Debenture Indenture provides that in the event of a change of control of the Company, as defined therein, where 10% or more of the aggregate purchase consideration is cash, the Company must offer to either (i) redeem the outstanding Debentures at a redemption price equal to 100% of the principal amount, plus accrued and unpaid interest up to but excluding the date of redemption, or (ii) convert the outstanding Debentures into common shares at a conversion price ranging from $7.48 to $9.35, based on a time formula specified in the Debenture Indenture


The Debentures are subordinate to the Notes and any secured indebtedness incurred subsequent to the issue of the Debentures.


The Company has allocated the $52.6 million net proceeds of the Debentures of $34.2 million as a liability based on the fair value of a similar debt instrument without an associated conversion option. The fair value of the conversion option of the Debentures on June 28, 2007 was estimated using the residual value method at approximately $18.4 million.  The debt component of the Debentures is being accreted over the term to maturity using the effective interest



9



New Gold Inc.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the three and nine month periods ended September 30, 2007

(Unaudited and in Canadian dollars except as indicated)


method. During the third quarter of 2007 accretion costs of $0.5 million were added to the convertible debt balance.


The Debenture Indenture requires the Company to comply with certain reporting and other covenants.


The Company has allocated the costs associated with the financing against the component parts of the instruments issued, being the Notes, Warrants, Debentures and the fair value of the conversion option of the Debentures.


As a result of the Notes and Debentures debt financings the Company has incurred accrued interest charges of $6.6 million and recognized $10.6 million in accretion costs to September 30, 2007. These amounts were charged between the Statement of Operations and mineral properties based upon the relative values of the deferred costs related to the New Afton mine and the face value of the debt issued as follows:

     (in millions)

 

Accretion

Interest

Total

Statement of Operations

$7.0

$4.4

$11.4

Mineral Properties

$3.6

$2.2

$5.8

 

$10.6

$6.6

$17.2


These excerpts taken from the NGD 6-K filed Aug 9, 2007.

Subordinated Convertible Debentures


The Company issued 55,000 Convertible Subordinated Debentures (“Debentures”) for an aggregate principal amount of $55 million. The Debentures, which were issued pursuant to a Debenture Indenture dated June 28, 2007 (the “Debenture Indenture”) (a copy of which may be viewed under the Company’s filings at www.sedar.com), each have a principal amount of $1,000, bear interest at a rate of 5% per annum and are convertible by the holders into common shares of the Company at any time up to June 28, 2014 at a conversion price of $9.35 per share. The Debentures do not allow forced conversion by the Company prior to January 1, 2012 but after that date the Company may redeem the Debentures if the market price of the Company’s shares is at least 125% of the conversion price. The Debentures are classified as compound financial instruments for accounting purposes because of the holder conversion option.


Interest is payable in arrears in equal semi-annual installments on January 1 and July 1 in each year, starting January 1, 2008.


The Debenture Indenture provides that in the event of a change of control of the Company, as defined therein, where 10% or more of the aggregate purchase consideration is cash, the Company must offer to either (i) redeem the outstanding Debentures at a redemption price equal to 100% of the principal amount, plus accrued and unpaid interest up to but excluding the date of redemption, or (ii) convert the outstanding Debentures into common shares at a conversion price ranging from $7.48 to $9.35, based on a time formula specified in the Debenture Indenture.


The Debentures are subordinate to the Notes and any secured indebtedness incurred subsequent to the issue of the Debentures.




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The Company has allocated the $52.6 million net proceeds of the Debentures of $34.2 million as a liability based on the fair value of a similar debt instrument without an associated conversion option (assuming a 13% interest rate). The fair value of the conversion option of the Debentures on June 28, 2007 was estimated using the residual value method as approximately $18.4 million.  The debt component of the Debentures is accreted to its face value over the term to maturity using the effective interest method at 13.5% interest.


The Debenture Indenture requires the Company to comply with certain reporting and other covenants.


The Company has allocated the costs associated with this financing against the component parts of the instruments issued, being the Notes, Warrants, Debentures and the fair value of the conversion option of the Debentures.


The Company believes it has adequate funds available to complete the pre-production construction phase and the majority of the expansion phase of the mine development and meet its corporate and administrative obligations.  The Company will have to obtain additional financing to finance the remainder of the Project construction and debt service prior to the commencement of commercial production.  The annual debt service cost of the Company is approximately $27 million per year and the Company is not projected to have significant positive cash flows until the year 2010. The combined project and debt service short fall is approximately $80 million in the aggregate based upon the published feasibility study metal prices and exchange rates. There can be no assurance it will be able to raise sufficient funds as and when these funds are required.

 

Subordinated Convertible Debentures


The Company issued 55,000 Convertible Subordinated Debentures (“Debentures”) for an aggregate principal amount of $55 million. The Debentures, which were issued pursuant to a Debenture Indenture dated June 28, 2007 (the “Debenture Indenture”), each have a principal amount of $1,000, bear interest at a rate of 5% per annum and are convertible by the holders into common shares of the Company at any time up to June 28, 2014 at a conversion price of $9.35 per share. The Debentures do not allow forced conversion by the Company prior to January 1, 2012 but after that date the Company may redeem the Debentures if the market price of the Company’s shares is at least 125% of the conversion price. The Debentures are classified as compound financial instruments for accounting purposes because of the holder conversion option.


Interest is payable in arrears in equal semi-annual installments on January 1 and July 1 in each year, starting January 1, 2008.


The Debenture Indenture provides that in the event of a change of control of the Company, as defined therein, where 10% or more of the aggregate purchase consideration is cash, the Company must offer to either (i) redeem the outstanding Debentures at a redemption price equal to 100% of the principal amount, plus accrued and unpaid interest up to but excluding the date of redemption, or (ii) convert the outstanding Debentures into common shares at a conversion price ranging from $7.48 to $9.35, based on a time formula specified in the Debenture Indenture


The Debentures are subordinate to the Notes and any secured indebtedness incurred subsequent to the issue of the Debentures.


The Company has allocated the $52.6 million net proceeds of the Debentures of $34.2 million as a liability based on the fair value of a similar debt instrument without an associated conversion option. The fair value of the conversion option of the Debentures on June 28, 2007 was estimated using the residual value method as approximately $18.4 million.  The debt




8



New Gold Inc.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the three and six month periods ended June 30, 2007

(Unaudited and in Canadian dollars except as indicated)



component of the Debentures is accreted over the term to maturity using the effective interest method.


The Debenture Indenture requires the Company to comply with certain reporting and other covenants.


The Company has allocated the costs associated with the financing against the component parts of the instruments issued, being the Notes, Warrants, Debentures and the fair value of the conversion option of the Debentures.


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