Dec '12/Jan '13


Greenfield projects in the new financing world

By Mauro Chiesa

As mining projects get larger and riskier, capital markets become more conservative. Markets are thus very fragmented, leaving mining companies, large and small, to consider piece-meal funding and bundling options from numerous sources. Here are some sources of funding to consider:

Bank financing: Due to economic unrest in Europe, coupled with fluctuating commodity prices and increased risk, banks – which have historically been the main source of long-term lending – can no longer afford to make large, long-term commitments. While some banks can offer revolving credit ­facilities – which provide the liquidity essential for a company’s working capital needs and interim construction – these are only available if the company has existing solvent operations to offer as collateral, if there is an assurance of a payout from either medium-term debt issues or asset sales, or if the company has a strategic equity partner. A non-producing junior does not have this option available.

Project-completion financing equity: Equity markets are bearish, especially for a mining company with opaque results or capital spending in excess of its means. Still, companies can obtain project-completion financing, provided that financial and technical disclosure in their data room is clear and complete. Osisko, Detour Lake and Rubicon are good examples of this.

Stream financing: Greenfield projects can receive cash up front in exchange for metal deliveries at discounted prices over the production life of the project. The upsides of stream financing include fewer restrictive conditions to qualify for the loan and a lender that shares the production risk. However, a junior with a greenfield project must approach this option with caution in order to avoid being locked into a single source of partial financing. Juniors should make stream financing arrangements in tandem with other financing agreements to ensure sufficient funding can be secured.

Existing assets: Many companies are now matching capital expenditure plans to operating cash capacities or selling existing assets to finance new assets. Examples of the latter include Taseko’s sale of equity in Gibraltar to finance New Prosperity as well as Sabina’s sale of Hackett River zinc/silver assets for cash to support the Back River development. Large mining companies, including BHP, RTZ, Iamgold and Kinross, are also putting assets up for sale. Another strategy recently adopted by majors is to offer stream financiers a delivery assurance on the metal liability in the form of production from existing mines. Metal financings by Barrick and Teck in 2008, and then by HudBay and Inmet in 2012, suggest a new trend is developing, whereby metal financing is no longer just for the juniors. Yet another strategy, adopted by both Barrick in Africa and SouthGobi in Asia, is issuing shares in emerging stock markets. As such markets have a better understanding of projects in their region, they offer higher proceeds and lower risk.

Strategic partner capital: A strategic partner can bring technical, financial and commercial values to the table. For instance, Quadra FNX and Sumitomo’s recent joint venture, which reflects current industrial interest in securing exclusive supply, provides Quadra FNX with a secure source of financing. But much planning is required by the lesser partner. The failure rate for joint ventures is high, as fluctuating market conditions can often create divergent interests for partners.

Export credit agencies (ECA) and international financing institutions (IFI): Countries, including Canada, support their goods and services exports with financing via their respective ECAs, such as Export Development Canada (EDC). These organizations offer fixed-rate, long-term financing that is both very competitive and often available for projects in countries where private financiers fear to tread. Canada’s EDC is an exception; it has been approved to also finance projects situated in Canada.

IFIs, such as the International Finance Corporation of the World Bank Group, focus on benefits to the recipient country’s development, offering competitive financing to projects that can demonstrate a positive economic impact. While both groups require competitive procurement on the goods and services – meaning that receiving the funding will take more time – they offer terms with sizeable soft benefits, including deterrents to political interference and re-financing flexibility should circumstances require. For instance Eximbank, the U.S.’s ECA, financed Baja Mining’s Boleo project with a 3.02-per-cent fixed interest rate and a 14-year total term, which compare favourably with current market rates and restructuring ­flexibility.

Supplier financing: Given the recession, many manufacturers and in-house financiers can offer supplier financing on their supplied goods and services. They can also co-finance with banks, ECAs or IFIs to provide a more complete financing package.

Mauro Chiesa has over 33 years of experience in financing and advising extractive and infrastructure projects around the world. He has worked with multinational banks, the World Bank Group and EDC.

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