Phu Kham Copper-Gold: Large in Laos

Pan Australian Resources' Phu Kham Copper-Gold project is only the second major resources project financing in the Lao People's Democratic Republic. The $242 million debt facility demonstrates that the obstacles of an embryonic legal system and political risk are surmountable for ambitious miners with patience and a well-structured financing package.

The greenfield project, located in Vientiane Province, 120km north of capital Vientiane, follows Oxiana Limited's co-located Sepon gold and Khanong copper projects. After feasibility studies by Ausenco in 2005, the mine is forecast to have 12 million tonnes per year capacity. PanAust decided to raise both debt and equity capital, underwritten by ANZ and Goldman Sachs JBWere, respectively.

The deal went through an exhaustive due diligence process, with a focus on technical aspects,performed by Behre Dolbear Australia (BDA). ANZ was able to negotiate a package deal for PanAust to ensure that the technical findings could be used for both the debt and equity markets.

One of the most time-consuming aspects of the deal was resolving the natural conflict between senior lenders and equity with regard to hedging. PanAust was sensitive to giving away too much upside, particularly with regard to successfully raising future equity capital.
"This was a large financing for PanAust in a challenging jurisdiction, particularly with the corporate imperative not to hedge copper price risk," says David Hairsine, CFO Pan Australia Resources.

A consensus gold hedging package was eventually sealed that minimised the quantum of equity raised by GSJBW. The mine is completely un-hedged in respect of copper output which is expected to contribute 80% of mine revenues.

Hairsine adds: "The target bank list was widened beyond the initial group when it was clear copper hedging was a requirement to fully syndicate."

All of the debt is covered by private political risk insurers. As is typical for an emerging market transaction, the project uses offshore accounts to mitigate political risk and extensive PRI cover because Laos suffers from a perceived lack of a doctrine of separation of powers and a nascent administrative law.

Aon was appointed as PRI broker for a package to cover the debt and hedging exposures. With the market for PRI coverage in Laos still developing, a flexible package from commercial providers was deployed, albeit with tenor constraints.

The senior facilities comprised a $160 million construction facility with a margin of 250bp, a $25 million cost overrun facility with a margin of 325bp, a working capital facility of $20 million and a $2 million letter of credit facility, both at 200bp.

On completion the construction facility converts into a two-tranche term facility, comprising a fully amortizing Tranche A term loan of $110 million at 225bp with a maturity at December 2014, and a Tranche B of $50 million at 285bp with the same nominal maturity.

Tranche B benefits from a cash-sweep, whereby 75% of excess cashflow is applied to reduce the facility, with Tranche A benefiting from 45% of excess cashflow after the tranche B cash sweep is applied. Under base modeling, the cash sweeps should enable full repayment by 30 September 2009, within one-and-a-half years of completion.

The sponsor also closed a $35 million equipment lease facility that amortises over five-years from December 2008, has a margin of 225bp, and has a parent guarantee over the life of the facility.

According to ANZ, Phu Kham's model uses the conservative assumptions of copper prices in AME's independent forecast of $2.60lb in 2008, $2.00lb in 2009 and $1.50lb thereafter.

There is a sales and agency agreement in place with BHP Billiton. The first sales contracts for 2008 tonnage were entered into in late 2007. Further concentrate offtake contracts for production will be entered into as 2008 unfolds.

In March 2007, ANZ launched the early bird syndication, after which four banks joined at financial close in late June. The early banks in the facility were BCEL (a government-owned Lao bank), DZ Bank, nabCapital and Standard Chartered, which were also allocated a pro-rata apportionment of the hedging.

A second round of syndication signed in August and brought the total number of banks in the deal to 10. Bank commitments had to be scaled back marginally, indicating that the debt had been pitched at the right level. The banks and commitments on the $207 million project financing are: ANZ ($37 million); BCEL ($10 million); National Australia Bank; DZ Bank; Standard Chartered (all $25 million); Fortis; China Construction Bank (both $18.75 million); KBC ($26.25 million); KfW ($11.25 million); and SMBC ($10 million).
KfW also joined ANZ on the $35 million equipment lease facility, with a $28.5 million commitment.

The Phu Kham transaction represents a number of firsts – the largest single underwriting for a project in Laos and the first limited-recourse leasing transaction – and features incremental PRI cover for hedging.

In December 2007, PanAust announced that the target completion date for the planned phase 2 mine expansion had been brought forward by six months to the final quarter 2009, following the confirmation of an earlier-than-anticipated delivery date for a ball mill.

In order to finance the acceleration of the $40 million capital works for the expansion of Phu Kham and an increased exploration budget of $30 million for 2008, Pan Australian agreed terms for an $80 million subordinated debt facility with Goldman Sachs JBWere. The consideration for the debt is the potential phased granting of 15 million share options in the company. First concentrate production from the project is expected as Project Finance Magazine went to press.

"Project finance is a fact of life for assets in countries like Laos," says Hairsine. PanAust is now considering developing the Ban Houayxai gold-silver project, located 30km from Phu Kham, and the Phuthep copper project in Thailand. "PanAust will likely project finance the other projects as required in the near to medium term."

If the Phu Kham financing is a bellwether of things to come, PanAust's outlook looks rosy – the deal has underpinned a tripling of its share price since a May 2006 rights issue.

Phu Kham Copper-Gold project
Status: Closed 26 June, syndication signed 10 August 2007
Description: A $242 million project and lease financing of a copper-gold mine located 120km north of Vientiane, Laos.
Sponsor: Pan Australian Resources Limited
Mandated lead arranger and structuring bank: ANZ
Legal adviser to lenders: Allens Arthur Robinson
Legal advisers to sponsors: Corrs Chambers Westgarth (Australian law); Minter Ellison (Laos law)
EPC contractor: Ausenco Ltd
PRI broker: Aon
Technical consultant: Behre Dolbear Australia
Environmental consultant: Graham A Brown & Associates