A London-listed, Finland-based mining company, Talvivaara, needed additional funds to expand the size and scope of its operations. After considering all the options, a speedy convertible bond issue was seen as the way to do it.

Talvivaara is a London-listed mining company based in a remote part of eastern Finland, an area of outstanding natural beauty and very little else. The population is sparse and unemployment is a recurrent issue.

Mining specialists have known for decades that the region is rich in natural resources but the quality of the ore found in the ground is rather poor and the cost of processing it has historically been simply prohibitive. Now, Talvivaara has found a solution to this problem. Nickel, zinc and even some uranium have been unearthed in eastern Finland but nickel is probably the metal with the most potential. Talvivaara has pioneered a way of turning the low-grade nickel that comes out of its mines into acceptable-quality metal through a process known, rather off-puttingly, as bioheapleaching. This process transforms the economics, purifying base metal using a combination of bacteria that occur naturally in rock, water and air.

Ramping up

Talvivaara listed on the London Stock Exchange in 2007 and is already delivering metal to customers. The quantities are small, however, and the company intends to ramp up production significantly from about 12,000 tonnes of nickel last year to 50,000 tonnes or more from 2012.

The target is ambitious and expensive.

“Throughout the year, we were thinking about how we would grow organically and how we could develop the size and scope of our mining operations. We wanted to have the flexibility to expand and we realised that some additional financing would be necessary,” says Talvivaara's chief financial officer, Saila Miettinen-Lähde.

Need for funding

The need for additional financing intensified late last year, when Talvivaara announced a significant increase in resources, meaning that its production targets could be raised substantially over the next few years.

“We started thinking about raising new money in the autumn at the same time as we discovered additional resources. In view of the bigger resources that we found, we saw the opportunity to grow our mine beyond its current capacity. We would like to expand in the region and we are evaluating other options,” says Ms Miettinen-Lähde.

The group decided to take advantage of relatively benign market conditions and launch a €200 million five-year convertible. The bonds carry a coupon of 4%, the conversion premium was set at 30% and, if the bonds are not converted, purchased or cancelled, they will be redeemed at 114.5% of the principal amount in 2015.

“We have raised money in a variety of ways already and this time we considered bank debt, rated and unrated bonds and even metal loans. We considered all the options but, when we considered the terms we could achieve, the speed of execution, documentation, the management of the facility and even the question of rating versus no rating, a convertible seemed the smartest way to go,” explains Ms Miettinen-Lähde.

Speed of issuance

Talvivaara was particularly attracted by the pace of convertible issuance. “Typically, they’re done very quickly. There is no road-show and very little pre-marketing. This was one of the factors that most appealed to us,” says Ms Miettinen-Lähde.

Convertibles are frequently bought by hedge funds and other nimble-footed investors but Talvivaara wanted a book dominated by long-only institutional investors and priced its issue with them in mind.

“We discussed optimal terms with our lead managers but the range was obviously guided by the market in terms of the coupon, the maturity and the redemption yield. Overall, we were looking for a balance that was suitable for us but also appealed to long-only investors: hence the high redemption price,” explains Ms Miettinen-Lähde.

“In the end, investors included hedge funds, specific convertible bond funds and large, traditional institutions,” she adds.

Pleasing response

Nonetheless, the company was pleased with the response. Market enthusiasm was sufficient for a €25m greenshoe option to be exercised, meaning that Talvivaara ended up raising €225m. Even at that level, the book was oversubscribed.

A year after listing in London, Talvivaara tapped the convertible bond market for the first time. That issue went reasonably well but this deal was an improvement.

“Market conditions were better this time round and we have more of a track record, which made the process a little bit easier,” admits Ms Miettinen-Lähde.

The issue was lead-managed by Talvivaara’s broker, JPMorgan, and Bank of America Merrill Lynch, which had worked with the mining company before. “We were very happy with both banks. The issue was well managed and swiftly executed,” says Ms Miettinen-Lähde. 

Now the company is sufficiently well capitalised to be able to explore a wide range of possibilities for the future. “The deal confirmed our experience of convertibles as flexible, affordable and effective funding,” says Ms Miettinen-Lähde.


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