Cerro Corona: Golden touch

High commodities prices may not have led to a boom in big-ticket oil and gas projects, but the same cannot be said in mining. The last 12 months have witnessed a surge in financings for previously uneconomic resources, or for less well-capitalised sponsors, or for projects in slightly trickier host countries. But high prices have also allowed more established sponsors to access financing on ever-more competitive terms.

The best example of this in Latin America, where Gold Fields completed its first financing in the region is the $340 million Cerro Corona mine. Gold Fields' corporate slogan is "unhedged, liquid and leveraged to gold," and since its founding in 1999 it has shied away from limiting on its exposure to the gold price.

Since banks have typically wanted to avoid exposure to commodities prices, and have usually demanded this of their borrowers, Gold Fields has funded its activities from internal resources. More than half of its production, and almost half of its operating profit, comes from mines in its South African home territory, with Ghanaian and Australian operations constituting most of the remainder.

Cerro Corona is not the first property that the sponsor has acquired in Latin America – in January 2006 it took control of Bolivar Gold, which operated the Choco 10 mine in Venezuela. Choco 10 was an operating asset, even if located in the global capital of resource nationalism, and was bought for $357 million.

Gold Fields' involvement in Peru goes back a little further. The original holder of the lease on the project was the Gubbins family, through Minera La Cima. The family had attempted at several junctures since the 1980s to interest larger players in the resource, including Barrick, and for a period over 1995-6 Renison Gold Fields, a rough precursor of Gold Fields.

The Gubbins family completed an updated feasibility study in 2001, and sold an option to buy the site to Gold Fields in 2003. Gold Fields exercised this option in February 2006, which gave it an 80.3% economic stake and 92% voting stake. The remaining 7% economic, and 8% voting, stake is in the hands of a dissident Gubbins family member, and a further 12.3% economic stake is held by the successors to employee organisations of Minera La Cima.

In 2003, producers worked from an assumption of a gold price of between $350 and $375 per ounces, whereas in January 2007 the price has not dipped much below $600 per ounce. Gold Fields acquired the undeveloped resource at roughly $11 per ounce, and had to confront the twin challenges of developing a property in unfamiliar territory and persuading banks that it could keep its operating costs low enough to bring project banks on board. A 2003 feasibility study from GRD Minproc estimated the mine's reserves at 147,000 ounces of gold and 65 million pounds of copper per year (280,000 ounces of gold- equivalent), and estimated total operating costs of $212 per ounce of gold equivalent or $0.48 per pound of copper equivalent. These figures, however, were based on a gold price of $360 per ounce and a copper price of $0.80 per pound.

The project financing, which runs counter to Gold Fields' previous track record, is best understood as a low-cost hedge against political risk. Project lenders have become increasingly uninterested in demanding political risk insurance for all but the most dubious host countries, and Peru, whose credit rating now hovers in the upper reaches of double-B, hardly fits this category.

Moreover, Gold Fields is providing more than half of the financing for the project – $190 million of the mine's total $340 million cost. It is also managing the construction process without resorting to an expensive engineering, procurement and construction contract. The sponsor spent 18 months completing engineering due diligence, and a further six finalising an environmental impact statement.

The EIS' receipt, and the issue of construction permits, were conditions precedent to the exercising of the option, after which the sponsors and lenders began work on the financing package. Peru's mining sector has been a magnet for project lenders, although there have been no greenfield gold financings since Yanacocha, which first borrowed in 1993, and last came to market in 1999.

The two most recent deals – Phelps Dodge's Cerro Verde and Barrick's Lagunas Norte financing – both relied upon a domestic bond component and both had access to existing cashflows. Bonds can offer pricing and tenor benefits, but more obviously provide a further hedge against political risk. Resource nationalism is much harder to pursue when target assets' secured lenders are domestic institutions. The sponsor will issue up to $100 million in bonds for the project when market conditions allow.

However, while the financing documents include the provision that some of the bank debt might be taken out with a bond issue, at present Royal Bank of Scotland, Scotiabank and Citigroup are underwriting a $150 million 10-year term loan, and doing so without a production price hedge or political risk insurance package. Cerro Verde, for instance, also had a 10-year maturity, but benefited from heavy support from JBIC and KfW.

Still, the banks were confident in the project's cost structure, and local investors have been equally enthusiastic. The price of the legacy shares in Minera La Cima, which trade on the Peruvian stock exchange, has increased from roughly NS0.25 in 2003 to NS3.50 ($1.1) at the start of the year.

Goldfields La Cima
Status: Closed 14 November 2006
Size: $340 million
Location: Peru
Description: Financing for 2.9 million ounce gold and 480,000 tonnes of copper project
Sponsor: Gold Fields Ltd
Debt: $150 million
Arrangers: Citigroup, Scotiabank, RBS
Maturity: 10 years
Lender's engineer: CAM
Sponsor legal counsel: White & Case
Lender legal counsel: Milbank Tweed
Sponsor financial adviser: Alonso y Asociados