Woolyback Mines Ltd (“Woolyback”) is a 100% owned subsidiary of Rural Mining PLC (“Rural”), one of a number of Rural’s subsidiaries (together, “the Group”). Woolyback operates a tin mine in County Durham. It has recently discovered a seam of tin ore near the village of Stanhope, which it plans to exploit (“the Project”). It needs to raise £35 million to finance the Project.
As the Group’s finance facilities are dealt with through Rural, Rural will raise the necessary money. This will either be by way of debt finance or equity finance. The board of Rural is discussing possible further equity finance with its major shareholders, and possible debt finance with Wearside Finance Ltd (“Wearside”).
Rural’s Balance Sheet is set out at Document A. It owns the freehold to all of the land and mines worked by the Group. The shares it owns in its subsidiary companies are recorded at their original cost. The amounts due to creditors, both in the next year and thereafter, are mainly the amounts due to Tyneside Bank PLC, which is owed £30 million. Tyneside Bank PLC has security over the freehold interests in the land and mines. Stocks are principally stocks of tin ore. The remaining items are book debts, cash at the bank and trade creditors. As part of the Project, Woolyback will enter into a number of “off-take” contracts to supply tin ore (“the Off-take Contracts”), to ensure that there is a buyer for the ore produced. These contracts are set at a market price less 5% for the next ten years. Woolyback hopes that the Off-take Contracts will ensure that it has income of approximately £5 million per annum whilst the new seam is being exploited. This is based on a market price of £18,000 per tonne of tin. A graph showing the tin price over the last ten years is set out in Document B.
You have been requested by the board of Rural to prepare a report about the proposed financing arrangements. Having regard to Documents A and B, and the proposals for the Project, prepare a report which:
(a) identifies any assets which could be offered as security by Rural or Woolyback for any debt finance raised from Wearside and, in respect of each class of asset, briefly explains the type of security which might be taken over it;
(b) with appropriate reference to the facts, explains any advantages and disadvantages of raising the funding for the Project by way of equity finance or debt finance