Talvivaara: Baby bio

Finnish junior miner Talvivaara closed the $320 million financing for its eponymous nickel property to an aggressive timetable. It also rolled out a processing technology that had never been used before, and in a country where project financings for mining assets are rare. It has, if not a prescription for a rapid takeover of Finland's mining industry, at least a mining and financing method that could be much more widely emulated.

Talvivaara's arrangers, Société Générale, Standard Bank, Nordea and Unicredit/HVB, had done little work on the project before the start of 2007, and took the deal to close on 7 May. The project financing was completed in time for its initial public offering on the London Stock Exchange on 30 May. Both deals closed simultaneously, and brought in a total of roughly $680 million, since the IPO raised £182 million ($360 million).

Talvivaara's path to financial close was a little different to many of its peers, since it is employing untested technology in a market dominated by larger competitors. It not only impressed upon banks the need for speed and understanding, but was able to retain a little of its exposure to nickel prices, a priority for any listed metals group.

Talvivaara's management took over its resource in early 2004, buying it for a nominal sum from steelmaker Outokumpu, and providing Outokumpu with an attractive option to buy stock in Talvivaara in any future IPO. Talvivaara, however, preferred not to go for an early small-scale listing, because this would not value its processing technology properly.

The processing technology, called bioheapleaching, uses locally-occurring bacteria to break down ores into constituent metals to allow for easier and cleaner processing. So, Talvivaara moved quickly to raise the grant money, including a tranche from the European Union, to build a pilot project at the site. It had raised an initial Eu7 million ($10 million) equity placement, followed by a Eu33 million pre-IPO financing, which allowed the developer to begin initial site work and fund a feasibility study.

The bioheapleaching technology is not completely novel, since it has appeared at copper and gold mines, and offers benefits to developers, since it uses less energy, and makes permitting a project much easier, since its environmental impact, while not negligible, is much lower than a process relying entirely on chemicals. For banks, whose mining activities have been hardest to reconcile with their self-projected image as good corporate citizens, this is a big point in the project's favour.

The management of Talvivaara had to present a viable containment plan to banks and the Finnish authorities, and also convince banks that it was the party best placed to build the project. Since its principals all have experience at Outokumpu, which balked at the technical challenges of developing the resource, they felt that they knew how to build the project better than an engineering procurement and construction (EPC) contractor.

Not using a fixed-price, turnkey, EPC contract is edging closer and closer to becoming market standard in project finance, though some industries are more accommodating of the practice than others. In mining, juniors are still often forced into such arrangements by their lenders. In Talvivaara's case, in part because of the experience of its principals, their ability to fix around 80% of equipment costs, and the record of demonstration plant, the lenders agreed to go ahead without a the full contract.

With respect to hedging, the sponsor did not get the full exposure to metals prices that its investors would have liked. In this instance the banks have been able to insist on an undisclosed portion of the project's output being sold forward. The offtaker, Norilsk Nickel, which is also a shareholder in Talvivaara, is taking all of the nickel output (75% of revenues) and all cobalt (5%) at the prevalent London Metal Exchange price for ten years.

The eight-year debt financing is priced at 275bp over Libor before completion, and drops to 200bp after the mine becomes operational. According to Saila Miettinen-Lähde, the developer's chief financial officer, the project is proceeding on time and on budget, with mining operations set to start at the beginning of April this year, and first metal coming in the fourth quarter of 2008.

The speed in the financing was a product of the developer's need to complete its listing by the end of June, since it needed to present accounts no older than six months at the date of listing. Talvivaara's stockbroker, JP Morgan Cazenove, priced the issue well within the timetable, allowing the debt to fund, and construction to commence.

The mine, a sulphide nickel resource, has an estimated reserve of 266 million tonnes of ore, and is projected to produce 33,000 tonnes of nickel per year, 60,000 tonnes of zinc per year, 10,000 tonnes of copper per year, and 1,200 tonnes of cobalt per year. The resource is likely to last far beyond the 10 years of the Norilsk contract, and Talvivaara will also explore nearby properties for expansion opportunities.

The financing introduces no radical new financial instruments, and structurally adds little to the canon of mining finance. But it is a strong indication of how responsive and flexible banks can be in the current commodities price environment. Moreover, if banks continue to face pressure on the environmental records of their clients, methods such as the Talvivaara leaching process could become less a curiosity than a prerequisite for closing financing.

Talvivaara Mining Company
Status: Closed 7 May 2007, in syndication
Size: $500 million
Description:  Financing for cobalt nickel project using advanced bioheap leaching technology
Sponsor: Talvivaara Mining Company
Debt: $320 million
Lead arrangers: Société Générale, Standard Bank, Nordea, Unicredit/HVB
Maturity: 8 years
Margin: 275bp over Libor precompletion, 200bp thereafter
Technical consultant: SRK
Sponsor legal counsel: Norton Rose (international), White & Case (Finnish)
Lender legal counsel: Mayer Brown (international), Dittmar & Indrenius (Finnish)