The $1 billion multi-sourced Lumwana copper mine deal is notable not only for its size but also because of the high degree of structuring. The deal has 15 different facilities, with the intercreditor agreements pulling together commercial banks, equipment financiers, ECAs and development agencies.

Situated to the west of the Copperbelt in Zambia, Equinox owns 100% of Lumwana, after securing an unused Phelps Dodge exploration license. First Quantum's $160 million Zambian Kansanshi mine, which was backed by $120 million bank debt that closed in December 2003, was similarly based on an unused Phelps Dodge license.

The Lumwana mine, which is expected to come online by mid-2008, has proven and probable reserves totaling 321 million tonnes of ore grading at 0.73% copper.

The $584 million debt splits into a $81 million commercial tranche underwritten by Standard Chartered, Standard Bank and WestLB, a $110 million ECA tranche, a $175 million development agency portion, a $166 million mining fleet finance agreement and a subordinated debt tranche provided by the EIB of $54 million.

The $110 million ECA tranche comprises an ECIC political and commercial covered tranche underwritten by Standard Bank of South Africa and Standard Chartered, and a Hermes covered tranche underwritten by KfW and WestLB.

There are seven distinct development agency facilities that together total $175 million comprising: African Development Bank, DEG, EIB, EFIC, FMO, KfW and OPEC.

The $166 million mining fleet finance facility is secured principally on the mining trucks and is provided by Fortis, EDC, Caterpillar and Sandvic. In essence the fleet facility works as an operating lease, so the fleet finance lenders are higher up in the cash waterfall than the senior lenders.

The various tranches pay a Libor plus margin range of between 350bp to 440bp during construction while a sponsor guarantee is in place, then falls to 300bp to 390bp in operation. The debt has a tenor of between 7 and 9 years, with repayment starting in March 2009.

Equinox has committed $305 million in equity and separate from the financing $70 million will be spent on creating a Lumwana town that will comprise around 1,000 new homes to house the workers. This brings the total project outlay to $960 million.

The project documentation is based on industry standard common terms agreement and DSCRs. Given Equinox's status as a junior company with limited project history the lenders required a tough financing package; insisting on a fixed-price EPC contract, a minimum level of hedging, offtake agreements and cash sweeps to promote early repayment.

The cash sweeps kick in at the first repayment in 2009 to front-end the amortization and knock down the tenor from 9 to minimum of 7 years.

Drawdown is scheduled for Q2 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.

A fixed price EPC contract has been agreed with the joint venture of Bateman and Ausenco: something of a rarity given capex inflation. It is the same JV that worked successfully on Oxiana's gold mine in Laos.
The EIB is building a portfolio of African mining debt and it had a sizeable hand pulling together the Lumwana deal, following on from its participation in the Kansanshi and Moma Titanium mines.

The EIB first had a dialogue with Equinox in 2001, when it agreed to provide half the $14 million cost of the feasibility studies for the mine, on terms that if there was no project the EIB would write-off the cost but if a mine were to be built the $7 million would convert to a loan with an interest rate linked to the copper price. The feasibility debt is accounted for under project costs.

After successful studies and several years of looking for a JV partner to develop the mine without success – Equinox at the time was a specialist exploratory company – Equinox approached the EIB again in 2004 unveiling its plans to put together its own management team to develop the mine on their own and asking the EIB to participate.

Because Equinox had limited capitalization at the time, the EIB agreed to come in with sub-debt. The $54 million EIB subordinated tranche pays a fixed rate and includes an equity kicker (the upfront debt is actually $50 million, the additional $4 million capitalizes the interest accrued during construction according to Equinox's figures). The kicker is shares in the sponsor equal to 10% value of the sub-debt. This is the same formula used in the EIB sub-debt on Kenmare Resource's Moma Titanium project in Mozambique.

The EIB is also providing an uncovered $20 million senior debt as per the Cotonou agreement, and $20 million with political risk covered by KfW but with no extra mark up for the commercial risk of the project. This latter facility is commonly used by the EIB in Asia.

Lumwana Copper Mine
Status: Closed 1 December 2006, drawdown is expected during Q2 2007
Size: $960 million
Location: Lumwana, Zambia Alberta
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: Millbank
EPC Contractor: A JV of Bateman and Ausenco