Kupol: The main course

Bema Gold's financing for the Kupol gold and silver mine is the largest mining deal ever in Russia, and is probably the largest ever in the world for a gold and silver project. It highlights the greatly improved atmosphere for mining developers in Russia, and builds on the earlier success of Bema's Julietta project.

The financing of its main resource moves Bema from being a junior to an intermediate player in the gold market. Bema has been developing the Kupol prospect since October 2002, when it signed an agreement with the government of Chukotka, an autonomous Okrug in north-east Russia, to buy up to a 75% interest in the mine. The agreement, which signed in December of that year, laid down a series of payments for which Bema would receive successive stakes.

Bema already owned the Julietta project, subject of $50 million in financing from Standard Bank, HypoVereinsbank, the International Finance Corporation and MIGA in 2000. Kupol is 950km north-east of Julietta, and 200km east of the city of Bilibino. Whereas Julietta's resource was estimated at financial close as 113,000 ounces, Bema's share of Kupol amounts to 1.7 million ounces (inferred) of gold and 22.2 million (inferred) ounces of silver.

In July 2004, HVB agreed to provide Bema with a $60 million, two-year bridge loan, which Bema guaranteed, to fund early stage development. The size, indeed the existence, of the bridge loan was a rarity – junior miners do not normally raise loans on such terms. It represented, according to Bema's CEO, Clive Johnson, "a huge vote of confidence in the Kupol resource, and Bema's development history."

During this period, Bema carried out test drilling at the site to ensure that it had an economic, as well as bankable, resource. In April 2005 it increased the bridge loan to $100 million, and again in June to $160 million, with both the maturity and the guarantee unchanged. It had drawn $108 million of that debt a month later, and had spent $120 million on the asset by the end of 2005.

In September 2005, it announced the promised long-term project finance deal, a $280 million commercial term loan from SG and HVB. The two were to provide a facility with a tenor of seven years and priced at 200bp precompletion, 250bp for the first two years after that, and 300bp for the remainder of the loan's life. This pricing included the cost of political risk insurance, provided by MIGA.

The close of the financing waited on completion of a $120 million supplementary tranche, as well as Bema raising additional equity. It completed the latter task by closing, in September, a C$142 million ($125 million) bought deal equity offering. The second tranche, of 7.5 years, came from Caterpillar Financial ($36 million), Export Development Canada ($50 million), the IFC ($14 million) and Mitsubishi Corporation ($50 million). This longer tranche was increased to $150 million, with the bank piece decreased by $30 million to $250 million, and its tenor reduced to 6.5 years.

The reason for the increase was that in September Mitsubishi was waiting for the necessary approvals, and commitments from the IFC would have been sufficient for the longer tranche to reach $120 million. With its approval, the first time Mitsubishi had taken on such a role, the IFC was scaled back and the total size of the tranche increased.

The project also raised a $25 million eight-year subordinated loan from the IFC. The IFC's C loan, which mirrors the facility it provided to Julietta, can be converted into equity, subject to certain conditions. The loan comes with 8.5 million share purchase warrants, allowing the IFC to buy Bema stock at $2.94 per share. Bema's stock has not been below $3 this year.

HVB, which had the title of documentation and facility agent, also provided the project with a $17.5 million cost overrun facility, which, if drawn, would also have granted HVB convertible notes. SG was insurance and technical agent.

Bema is providing additional cash equity of $53 million, funded from a recent equity issue, while Chukotka's government is providing $18 million.

Throughout the process, Bema's priority had been to minimise the issuance of additional equity, thus avoiding diluting existing shareholders, and maximising the available debt capacity. In this effort, the sponsor had to maximise the available political risk insurance, still necessary to maximise lender interest, and put in place a hedging system that relied on puts and calls to limit downside to the borrower.

Risk perceptions of Russia have improved considerably since Julietta was financed, but maximising available debt still required the arrangers to offer political risk insurance. Banks will be paid 75bp more if they lend uncovered – the political risk insurance costs the project 100bp.

The lead arrangers closed and underwrote the facility on 5 December, and they are currently in the process of syndicating the debt. Initial response has been good, although most borrowings this size in the gold sector tend to be at the corporate level.

The project also includes measures to encourage hiring of regional, and particularly indigenous, labour, maintain strong safety standards, and manage the mine's environmental impact. The project also held public consultation sessions, probably the first and certainly the most extensive such process in the region. NGO response to the project has so far been muted, even though it is of an extractive nature.

Chukotka Mining and Geologic Corporation
Status: Closed 5 December, in syndication
Size: $470 million
Location: Chukotka, Russia
Description: Gold and silver deposit
Sponsors: Bema Gold (75%) Chukotka government (25%)
Debt: $400 million senior debt, $25 million subdebt, $17.5 million corporate cost overrun facility
Lead arrangers: HVB and Societe Generale
Providers: IFC, EDC, Caterpillar Financial, Mitsubishi
Financial adviser: Endeavour Financial
Lender legal advisers: Mayer Brown Rowe & Maw (international) Baker & McKenzie (Russia) and Blakes, Cassels & Graydon (Canada)
Sponsor legal advisers:
Stikeman Elliott (international), Macleod Dixon (Russian)
Independent engineer: Pincock Allen & Holt
Insurance: Marsh Bankrisk
Technical advisers: Wardrop, Amec, SRK, Geochemica, Diamondback, Orocon, Thyssen Mining