Financial close for the $2.1 billion debt financing for the Ambatovy nickel project took place on 23 August. The financing is one of the largest mining project debt facilities ever, and certainly the largest for a nickel project. It provides a useful picture of how large base metals projects in emerging markets must now be structured.
Ambatovy is a large nickel/cobalt resource located on the Eastern side of Madagascar, roughly 80km east of Antananarivo, the island's capital. The project is one of the largest potential mining projects on the island, rivalled only by Rio Tinto's Mineral Sands resource at Madag on the Southern tip of the island.

Moreover, the project is the first to go forward under the country's Loi des Grands Investissements dans le Secteur Minier (LGIM). The law, on which the World Bank was a key adviser, brought in a reduction in taxes on income and dividends, caps on local taxes, and reduced or eliminated customs duties and VAT.

The project involves the development of an open pit mine, an ore slurry preparation plant at the mine site, a 220km pipeline to move the ore slurry to the coast, a pressure acid leach processing plant, a metals refinery, and all the additional infrastructure, including water, power and steam generation, acid production, tailings disposal, and port facilities.

The sponsors of the project are Sherritt International (45%), which bought out the original developer Dynatec in June, Sumitomo Corporation, and Korea Resources (each 27.5%). SNC-Lavalin has an option to purchase 5% of the project's equity from Sherritt at funding, and is the contractor for the project. At completion it would have the option to sell this stake to Sumitomo, or Sumitomo and Sherritt.

Dynatec had been involved in the project since 2003, when it formed a joint venture with Phelps Dodge to produce a feasibility study and ultimately develop the resource. It spent enough on the study to earn the right to a 50% stake, and in early 2005 bought Phelps Dodge out altogether. In May that year, Dynatec brought in Implats as an equity partner, and Sumitomo in August. By November, Implats had withdrawn, and a year later, with an agreement with SNC and Korea Resources, itself a consortium of Daewoo International Corporation, Keangnam Enterprises and STX Corporation, among others, the final shareholder structure was complete.

The Sumitomo and Korea Resources investments were key to making the project financeable. Not only are the two major consumers of nickel, but they bring with them the involvement of two major export credit agencies. The Japan Bank for International Cooperation has a long background in such projects, and was among the lenders to Antamina, the previous largest multisourced base metals project financing to date. The increasingly active Export-Import Bank of Korea also came in to support the financing.

Even at a time of high commodities prices, and even with a production cost as low as Ambatovy's, the financing is 100% covered by political risk insurance. Of the $2.1 billion total senior debt, $700 million comes from JBIC, $650 million comes from Kexim, $300 million comes from Export Development Canada, $150 million comes from the African Development Bank and $300 million equivalent in euros comes from the European Investment Bank. Of the Kexim and JBIC tranches, 30% of the funding comes from covered co-lenders SMBC (facility agent), BTM UFJ (administration agent), Mizuho, Calyon, ING, SG and BNP Paribas. Shinhan and Woori are lending under the Kexim tranche.

Assembling this package from five separate lenders proved much less frustrating for the developer than would have been the case seven years ago. Where once a sponsor might have to negotiate five separate loan agreements, sometimes with their own set of terms, for Ambatovy all five lenders shared counsel (Milbank Tweed), and common terms, although they funded under separate facilities.

Most significantly, according to Sherritt, the environmental best practice, which the sponsors modelled explicitly on World Bank guidelines, proved sufficiently robust to satisfy each lender's sets of environmental standards. The project, while it is located in an ecologically fragile island, where other resource extraction projects have attracted considerable criticism, has been relatively free of comment from non-governmental organisations.

The financing features an impressively long tenor, at 17 years, the result both of the export credit agency and multilateral involvement, and the mine's 27-year life. The two Asian sponsors are providing offtake agreements to the project, since Korea Resources has the right and obligation to purchase 30,000 tonnes per year of nickel from the mine, and Sumitomo guarantees another 30,000 tonnes. Together the two agreements account for the entirety of the mine's 60,000 tonnes per year capacity.
SNC-Lavalin's construction project is structured as an engineering, procurement and construction management agreement, which encourages the contractor to minimise potential cost overruns, but shares these between the sponsors in the event they take place. The sponsors provide pro-rata guarantees of the mine's completion, and the other three in turn guarantee $598 million of Sherritt's $840 million exposure.

The project's equity funding arrangements are also complex, since Kexim is lending Korea Resources another $100 million towards its share of the project's $1.2 billion equity funding. The three outside sponsors are also lending Sherritt $236 million to fund its share of the equity commitment. This loan will be repaid through the proceeds of Sherritt's share of the mine's revenues.

Ambatovy illustrates that junior and emerging mine developers can now bring the largest resource projects to completion without overly diluting their interests.

Ambatovy Minerals Société Anonyme
Status: Closed 23 August 2007, awaiting receipt of conditions precedent
Size: $3.3 billion
Location: Madagascar
Description: 60,000 tonnes per year nickel project
Sponsors: Sherritt International (45%), Sumitomo Corporation, and Korea Resources (each 27.5%), and SNC-Lavalin (has an option to purchase 5% of the project's equity)
Debt: $2.1 billion
Providers: JBIC, Kexim, Export Development Canada, the African Development Bank and European Investment Bank.
Financial advisers: BNP Paribas (from 2004), NM Rothschild (from 2006)
Lender legal counsel: Milbank Tweed
Sponsor legal: Sullivan & Cromwell