Voskhod Chrome: Chrome plated deal

One of the first chrome mines to be project financed and featuring a multilateral loan from the recently formed Russia/Kazakhstan joint venture the Eurasian Development Bank, the Oriel Resources-sponsored Voskhod Chrome project was also one of the fastest mining deals closed to date.

Discovered in 1963, the Voskhod chrome deposit lies within the Khromtau District of the Aktobe Region of north western Kazakhstan and lies 7 km north-east of Khromtau. It is surrounded by a group of existing and exploited mines and has good transport links – a recently reconstructed tarmac road links the town of Khromtau with Aktobe 110 km to the west and rail upgrades are ongoing.

Oriel acquired 100% of the Voskhod chrome project in February 2005 for the equivalent of $15 million in cash and the allotment of 9,181,352 Oriel shares, at the time valuing Voskhod at $25 million.

The project's economics are robust. The deposit is high grade with favourable mining characteristics allowing bulk-mining methods to be employed. Voskhod will also adopt low cost bulk mining methods combined with a simple processing route with proven technology.

When operational Voskhod will be in the top three global suppliers of high-grade chrome ore (crucial in stainless steel production) with average annual sales of 900,000 tonnes.

Furthermore, the outlook for the global stainless steel market is strong growth in demand for nickel and chrome products. World crude stainless steel output expanded by 5.5% per year between 1995 and 2004, the year in which crude stainless steel output rose to a record of 25.3 milion tonnes. Production then declined slightly to 24.8 milion tonnes in 2005, when major de-stocking in the industry was necessary to bring the market back into balance. For 2006, output was expected to rise to 26.7 million tonnes, a level which would lift the stainless steel market back to its previous growth path.

The mine has a certain life of 14 years with the potential to extend to 20 years. Oriel has also been awarded an extension to the Voskhod contract licence area to include the Karaagash deposit, which has additional Russian C2 and P1 classified resources of some 7.8 milion tonnes.

Originally Oriel was looking for $40 million in finance against projected costs of $48 million. But the unexpected scale of the resources has gradually upped the deal.

The final $120 million financing comprises a $40 million seven-year loan and $20 million cost overrun facility from WestLB and HVB/Unicredit, and a$60 million loan from the EDB. Pricing is 275bp pre-completion and 250bp when the mine is operational.

The deal comes with no political risk insurance – partly because Oriel is cash positive, with $30 million working capital in the bank as a guarantee, and partly because of the size of the debt support from the EB loan – in effect 50% of the total deal.

The quality of the ore is such that Voskhod has a number of offtake agreements at an advanced stage. Some of the offtake – around one third – will go to Oriel's own Tikhvin smelter project in St Petersburg, which it bought – partially built – last year from IPH Polychrom. The remaining two-thirds output will be sold on the open market, much of it expected to go to Chinese smelters.

The Tikhvin smelter will give Oriel cashflow from the first quarter of 2007. The plant will initially source ore from Turkey until Voskhod comes on line. The Tikhvin cashflow will bolster Voskhod/ Oriel's financial backbone until the mine becomes operational in 2008.

The projects economics are conservative and based on an ore price of $145 per tonne in the financial model conducted by SRK Consultants, with forecast market pricing ranging between %154 and $224 until 2015. Total revenue for the life of the mine is estimated at $1.2 billion with annual average cashflow of $85 million.

Voskhod Chrome
Status: Financial close 18 December 2006
Total project cost: $150 million
Total debt: $120 million
Description: Project financing of chrome mine in Kazakhstan
Sponsor: Oriel Resources
Financial advisory: Endeavour Financial
Lead arrangers: Eurasian Development Bank, HVB/UniCredit, WestLB
Legal counsel to lenders: Mayer Brown
Legal counsel to borrower: Norton Rose
Feasibility study: SRK; DRA-I; Mintek