ZincOx Jabali: Pretty in zinc

The $120 million bond financing for ZincOx Resources' Jabali zinc oxide mine closed in January 2008, and had the advantage of a brief halt in the downward slide in credit markets. The deal, led by emerging markets boutique Exotix, proved that the hedge fund market was open to ambitious junior miners. This market is now closed again, but ZincOx raised – albeit briefly – the possibility of emerging markets mining finance that dispenses with the services of commercial banks.

ZincOx took several of the risks that commercial banks shun – political risk, commodity price risk, and completion – and found a new set of lenders willing to embrace, them. It used a mixture of high-yield debt, structured to make lenders' commitments tradable, and an unprecedented commodity-linked instrument to market these risks to lenders.

The $216 million Jabali mine is located in Yemen, with ZincOx as 52% owner and regional conglomerate Ansan Wikfs as 48% owner. It took the management of AIM-listed ZincOx a little over ten years to bring the project to fruition. Since zinc oxide is usually made, not mined, and is thinly traded, finding banks with a sufficient confidence in the project's fundamentals was difficult.

In 2007, the sponsor turned to Exotix to find a way of dispensing with the expensive hedging arrangements, turnkey construction contract, and political risk insurance that the banks wanted. By the end of that year, however, the ructions in credit markets had forced the departure of two of the funds that were set to support the deal.

The financing is split into two elements, a six-year high-yield bond with a coupon of 11% and 10-year Zinc Indexed Price Payment Obligations, which pay out $0.16 for every dollar above $1,300 that the per pound price of zinc reaches. At the time the deal closed the price of zinc was hovering near $4,000. It subsequently plunged to nearer $1,100 and has since settled below the ZIPPO floor. The mine breaks even at about $1,000.

The project signed a debt facility in January 2008 with a special purchase issuer known as Pemberley Finance, which in turn issued the high-yield bonds to a group of unnamed hedge funds. None have so far sold on their commitments, although the bonds can trade through Euroclear. The mine is on track for completion, despite credit and commodity market uncertainty, and despite using an unwrapped engineering, procurement and construction management contract, with SNC Lavalin.

Investors with a higher risk appetite, be they private equity firms, hedge funds, or even banks, will emerge in time, though maybe not even in the medium term. Their favoured investment route could be through straight equity, mezzanine debt, or other instruments such as preference shares. The Jabali structure, however dusty, will serve them well.

Jabal Salab Company (Yemen) Limited
Status: Signed 21 January 2008
Size: $216 million
Location: Yemen
Description: 800,000 tonnes per year zinc oxide mine
Sponsors: ZincOx Resources (52%), Ansan Wikfs (48%)
Debt: $120 million
Arranger: Exotix
Maturity: 2013
Facility legal adviser: Herbert Smith
Issuer legal adviser: Orrick
Borrower legal adviser: Eversheds
Technical adviser: Saint Barbara
Environmental impact assessment: Scott Wilson
Contractor: SNC Lavalin