Lumwana: Every little helps

Even in an era of high commodity prices, junior miners can struggle to bring their projects to completion without a larger partner. Equinox Minerals' multisourced financing for its $846 million Lumwana project in Zambia highlights the ingenuity that the junior miner must exploit to pursue a large resource alone. It is also one of the largest mining deals to close in 2006, only behind two extremely large iron ore projects in Australia.

The project, when completed, will be the largest open-pit copper mine in Africa. Equinox management has been examining the Zambian copper reserves since 1996, and has been pursuing the Lumwana resource since 1998. Equinox started life as a developer and explorer, and after completing a feasibility study in 2002, looked to sell its interest in the project to a larger operator.

The Lumwana resource lies in the western sector of Copperbelt province in Zambia. Phelps Dodge, the original developer of the resource, sold 51% of the project's license to Equinox in 1999, and the remainder in 2004. The 2002 feasibility study indicated that the project could produce 112,000 tonnes of copper per year over a mine life of 20 years.

At this stage, Equinox had funded its development activities through private placements of equity and a $7 million loan from the European Investment Bank. But although several large international players had stakes in Equinox, it struggled to bring in a partner, in part because the infrastructure of the western Copperbelt is much less developed than elsewhere, and in part because partners had lingering concerns about the grade of the Lumwana copper resource.

When Equinox decided to pursue the resource alone, it needed to maximize all possible sources of debt and equity. In July 2004 it raised C$15.2 million ($13 million at today's exchange rate) in a Canadian initial public offering, and is now listed on both the Toronto Stock Exchange and (since 1994) the Australian Stock Exchange.

In August 2005, Equinox announced that it had mandated Standard Bank, Standard Chartered and WestLB to provide the commercial element of a $255 million senior facility, which also included an ECIC-backed tranche, and a direct tranche from African Development Bank (AfDB), EFIC and EIB. At this time, the mine's cost was estimated at $330 million.

Equinox was not able to put together a deal at this mine cost, but has been lucky that 2005's copper prices have been surpassed. However, signing the requisite construction, smelting, and hedging agreements has been a complex process. The nearby Kansanshi resource, which closed in 2003 with backing from Standard Bank, WestLB and the EIB, increased lender confidence, and led to an improvement in the area's infrastructure.

The project has, in particular, benefited from increased Chinese interest in the Zambian copper reserves. Following financial close, on 15 February, the project signed a five-year offtake agreement with Chambishi Copper Smelter of which China Nonferrous Metal Mining owns 60% and Yunnan Copper Industry the remainder. The project signed an agreement in February 2006 for ZESCO, Zambia's state-owned generator, to extend transmission lines 65km to the project from Solwezi.

In 2006, the developer selected an Ausenco-Bateman joint venture to construct the mine, and on 16 October signed an engineering, procurement and construction contract with the two. The price, at $407 million, was substantially higher than original estimates, but given the current contracting market conditions, and Equinox' thin capitalization, signing off on the contract was a coup.

Now that Equinox had demonstrated its ability to develop a solid contractual structure, it launced a series of equity raisings, which brought in $250 million. It placed $30 million with ZCCM, the Zambian state copper miner in June, raised $95 million in Canadian dollars in an issue led by Sprott Securities, CIBC, GMP, Paradigm Capital, Raymond James and Dundee Securities in August, and a further $125 million from the same group in September.

On 1 September it signed the $583 million senior bank debt with a much expanded group of banks. Standard Bank, Standard Chartered and WestLB are now providing $81 million as a commercial tranche, while ECIC and Eler-Hermes are covering a $110 million tranche, provided by Standard Bank, Standard Chartered (both ECIC), WestLB and KfW-IPEX (both Hermes).

A full $173 million in direct loans comes from DEG, the EIB, EFIC, FMO, KfW-IPEX, and the OPEC Fund for International Development. The sponsor also raised a mining fleet tranche, in essence leasing this equipment, from Fortis Bank, with the participation of Export Development Canada, Caterpillar Financial and Sandvik Mining and Construction. It also raised a $54 million subordinated facility from the EIB, as several other junior miners have done for African assets.

The debt is priced at between 350bp and 440bp over Libor (depending on the tranche), during construction, falling to between 300bp and 390bp when operational. The debt has a cash sweep that begins as soon as the project's grace period is over in 2009, which will give the nine-year loan a seven-year average life if the base case holds. The above offtake agreement mitigates some lender concerns about the project having a market, and 30% of the project's output will have a price hedge, although the sponsor has stressed that it wants to gain the benefit of higher copper prices of the metal continues its upward trajectory.

Drawdown is scheduled for the second quarter of 2007 and is subject to Equinox meeting a number of conditions precedent. These include: the provision of equity, the commitment to provide village housing for Equinox employees, the implementation of the hedging strategy and the commitment to deliver offtake arrangements with smelters that in total relate to no less than 80% of production over the first five years.

The commercial banks are providing a limited amount of commodity hedging. Equinox's strategy is to ensure that Lumwana benefits from long term protection from adverse movements in the copper price. The sponsor negotiated to minimise of the volume of production committed to hedging, with an intention to hedge up to 30% of the initial three years of production. EFIC is providing political risk interim on the hedge facility, the first time it has done so.

Since financial close, the sponsor has compelted further equity raisings, from the EIB, the EPC contractors, and a $158 million equivalent bought deal. While the first two were pre-planned, and necessary parts of the assembling the financing, the third is an illustration that Equinox' long creep into the middle tier of mining players is almost over.

Lumwana Copper Mine
Status: Closed 1 December 2006, drawdown is expected during Q2 2007
Size: $960 million
Location: Lumwana, Zambia
Description: Financing of an open pit copper mine
Sponsor: Equinox Minerals
Debt: $583.8 million
Senior commercial lenders and hedging agents: Standard Bank, Standard Chartered, WestLB
Subordinated lender and feasibility financier: EIB
ECAs: ECIC, Hermes
Mining fleet financiers: Fortis, EDC, Caterpillar, Sandvic
Legal counsel to the sponsor: Norton Rose
Legal counsel to the lenders: Milbank Tweed
EPC Contractor: Bateman-Ausenco