Red Back Mining Inc. - s. 144

Headnote

Variation pursuant to section 144(1) of the Securities Act, Ontario (the Act) of relief previously granted under Rule 61-501 -- Related party transactions -- Exemption from minority approval requirement granted in connection with proposed loan to be made to issuer by a related party. Terms of the loan have been materially amended requiring a variation of the previous order.

Statutes Cited

Securities Act, R.S.O. 1990, c. S.5, as am., s. 144.

Rule Cited

Rule 61-501 -- Insider Bids, Issuer Bids, Going Private Transactions and Related Party Transactions, ss. 5.6 and 9.1.

IN THE MATTER OF

THE SECURITIES ACT

R.S.O. 1990, c. S.5, AS AMENDED (the "Act")

AND

IN THE MATTER OF

RED BACK MINING INC.

ORDER

(Section 144)

WHEREAS on August 12, 2004, the Director made a decision (the "Original Decision") pursuant to section 9.1 of Ontario Securities Commission Rule 61-501 ("Rule 61-501") that Red Back Mining Inc. ("Red Back") is exempt from section 5.6 of Rule 61-501 (the "Minority Approval Requirement") in connection with certain credit facilities, including the issuance of warrants of Red Back (the "Original Loan"), obtained by Red Back from Macquarie Bank Limited ("Macquarie"), a related party of Red Back for the purposes of Rule 61-501;

AND WHEREAS, except as otherwise provided, the "Corporate Loan Facility", "Standby Loan Facility" and "Gold Hedging Facility" are as described in the Original Decision;

AND WHEREAS certain terms of the Original Loan have been revised (the "Revised Loan") since the date of the Original Decision;

AND WHEREAS Red Back has applied to the Director to vary the Original Decision, pursuant to section 144 of the Act, so that Red Back is exempt from the Minority Approval Requirement in connection with the Revised Loan;

AND UPON considering the Application and the recommendation of the staff of the Commission;

AND UPON Red Back having represented to the Director as follows:

1. The Corporate Loan Facility will now be in the amount of USD$33,000,000. The interest rate on the Corporate Loan Facility will be 2.75% per annum above the USD LIBOR rate prior to the satisfaction of a completion test of Red Back's Chirano Gold Project in Ghana (the "Completion Test"). Once the Completion Test has been satisfied the interest rate will then be 2.25% per annum above the USD LIBOR for the remaining term of the Revised Loan.

2. Red Back must pay a Commitment Fee of 1.25% on the total Corporate Loan Facility. The Commitment Fee under the Revised Loan is payable in cash or may be satisfied by the issuance of common shares of Red Back (the "Red Back Shares") at a price that is not less than the market price of the Red Back Shares at such time. The price of the Red Back Shares on the TSX Venture Exchange as of October 5, 2004, was CDN$1.82.

3. Prior to the first draw-down of the Corporate Loan Facility, which must occur on or before December 31, 2004, Red Back will issue common share purchase warrants (the "Warrants") to Macquarie to purchase one million Red Back Shares. The Warrants will be exercisable at a price of CDN$2.25 per Red Back Share and shall have a term of three years from the date of issue.

4. The Standby Loan Facility will now be in the amount of USD$10,000,000. The interest rate on the Standby Loan Facility will be 2.75% per annum above the USD LIBOR rate prior to the satisfaction of the Completion Test. Once the Completion Test has been satisfied, the interest rate will then be 2.25% per annum above the USD LIBOR for the remaining term of the Revised Loan.

5. Within five business days of each draw-down of $1,000,000 of the Standby Loan Facility, Red Back will issue 345,000 Warrants to Macquarie.

6. All other terms of the Corporate Loan Facility, Standby Loan Facility and Gold Hedging Facility are as disclosed in the Original Decision.

7. Red Back's board of directors and management are satisfied that the terms of the Revised Loan are reasonable commercial terms that are not less advantageous to Red Back than if the Revised Loan were obtained from a person or company dealing at arm's length with Red Back. Red Back has held previous arm's length negotiations with other potential lenders within the last 12 months and has, in the opinion of Red Back's board of directors and management, accepted the Revised Loan on terms more favourable than the loan terms offered by other banks.

8. Red Back engaged an independent financial advisor who invited offers to provide debt financing for the construction and development of the Chirano Gold Project. Several offers were received and a total of nine potential lenders were put on a short list. Negotiations proceeded with those bidders and term sheets were presented by Macquarie and five other bidders. Red Back concluded, based in part on the advice of its financial advisor, that the terms of the Revised Loan were the most advantageous to Red Back.

9. Neither Macquarie, nor any of its affiliates, is represented on the board of directors of Red Back. The decision to accept the terms of the Revised Loan was made by a board consisting entirely of directors independent of Macquarie in consultation with Red Back's management and independent financial advisor.

10. The maximum number of Warrants that can be issued to Macquarie under the Revised Loan is 4,450,000 (including the Warrants issued prior to the first draw-down of the Corporate Loan Facility) representing less than 7% of the current issued and outstanding Red Back Shares (or 5% on a fully diluted basis). The maximum number of Warrants issuable under the Original Loan was 7,600,667 representing approximately 11% of the current and issued outstanding Red Back Shares (or 9% on a fully diluted basis).

11. The Warrants will be exercisable at a premium over the current trading price of the Red Back Shares. The Warrants will represent 5% of the number of Red Back Shares currently outstanding on a fully diluted basis. Red Back believes the issuance of the Warrants, and any subsequent exercise of these Warrants, will have an insignificant impact on the capitalisation of Red Back and the holdings of Red Back's shareholders.

12. The Minority Approval Requirement would impose significant additional delays that would adversely affect the financial position of Red Back. Red Back is party to certain construction contracts entered into in the ordinary course of business that impose penalties for delays. The requirement to obtain minority approval may cause significant penalties to be imposed. In the opinion of the board of directors and management of Red Back, these penalties would render its Chirano Gold Project economically unfeasible, resulting in serious financial distress for Red Back.

13. Macquarie is a related party of Red Back by virtue of Macquarie's ownership of 14.0% of the outstanding Red Back Shares on a fully diluted basis. The Revised Loan is therefore a related party transaction under Rule 61-501. Red Back would therefore be required, absent an exemption or discretionary relief, to comply with the Minority Approval Requirement. A formal valuation is not required as the Revised Loan falls under the provisions of subsection 6.3(2) of Rule 61-501. The non-cash consideration consists of securities of Red Back, and there is no material information regarding Red Back, the Warrants, or any other securities of Red Back that has not been generally disclosed.

14. The number of Red Back Shares to be issued upon the exercise of Warrants in connection with the Revised Loan represents less than 25% of the currently outstanding Red Back Shares, assuming the exercise of all the Warrants.

AND WHEREAS the Director is satisfied that to do so would not be prejudicial to the public interest;

IT IS ORDERED pursuant to section 144 of the Act that the Original Decision be varied such that Red Back is exempt from the Minority Approval Requirement in connection with the Revised Loan, provided that Red Back complies with the other applicable provisions of Rule 61-501.

October 6, 2004.

"Ralph Shay"