Veladero: Argentina is back

Argentina upset several project lenders when it defaulted in 2001. Power and utilities concessions, in particular, were unable to pay back their creditors even if the government had allowed them to send dollars overseas. Natural resources deals fared a little better – there were instances of oil, gas and petrochemicals project that stayed current – but Argentina became off-cover for most export credit agencies after the default. And neither the World Bank nor the Inter-American Development Bank is in a hurry to resume lending.

But the Veladero project shows that some deals can get done in Argentina provided that they receive sufficient enhancement. This $250 million financing, for a $460 million project, marks a number of firsts, the largest foreign investment project, and first project financing, in Argentina since the default. The arrangers claim it is the largest project financed mining deal and largest mining project in Latin America since Antamina in 1999.

The deal also marks a number of firsts for US Ex-Im, which provided some of the debt. This is the first mining deal that Ex-Im has done since 1997, and takes place in a country that Ex-Im still officially has off-cover. The bank is able to make an exception for structured deals, and Veladero certainly has a number of enhancements.

The project is an open pit, heap leach gold mining operation in the northwestern Andean region of Argentina, in San Juan Province. It has proven and probable gold reserves of 11.1 million ounces, with another 1.5 million ounces of measured and indicated resources. Its average production is expected to be between 525,000 and 550,000 ounces of gold per year for the first decade of operation.

The sponsor of the project is Barrick Gold, which has not been to the project finance market since 2000's Bulyanhulu financing, a $200 million loan for a Tanzanian mine. In this instance, perhaps more so than the earlier deal, Barrick wanted to use non-recourse debt to mitigate political risks. But most lenders had the country off limits.

Barrick has been the beneficiary of a slow improvement in the Argentinean economy, which is nowhere near its pre-crisis highs, but at the same time much improved from its nadir earlier in the decade. Moreover, the country's government has become much more stable, and more friendly to outside investment, President Kirchner's low offer to holders of defaulted sovereign debt notwithstanding.

Argentina still has controls on foreign exchange in place, meaning that the lenders would not normally be able to benefit from an offshore account structure. The sponsors thus lobbied the government for a special decree. The decree, which was strongly supported by various levels of the government, exempts all mining companies that file qualified feasibility reports under the Argentine Mining Investment Law from currency restrictions.

This assurance was one of the key reasons for the involvement of US Ex-Im, which needed to ensure some mitigation of country risk. It announced $76.4 million in loans to the project in April 2004. The remaining debt took the form of a $100 million commercial loan, $60 million Export Development Canada (EDC) loan, and $10 million KfW loan.

The arrangers on the commercial bank loan are Fortis capital, KfW-IPEX, ANZ Investment Bank (a commitment that has now moved to Standard Chartered) and Royal Bank of Scotland. The three have, thanks to political risk insurance from EDC, been able to offer a nine-year tenor, of which 2 years is construction, and six months is grace. Reinsurance for EDC comes from Chubb, Zurich and Sovereign.

There are also a number of enhancements from Barrick, including guaranteed purchase of all of the project's output. Barrick, moreover, has agreed to provide the project with gold price support, which has a floor price of $275 per ounce. The sponsor will also be guaranteeing the construction of the project, although the contractors are SNC Lavalin and Techint.

Even with that support in mind, the project is progressing well, gold prices are at healthy levels, and the project will be a very low cost producer. Moreover, the benefits in terms of jobs and tax revenues should persuade the government to view the project favourably. Indeed, the history of other natural resources projects during the crisis suggests that domestic producers receive more, but not entirely, benign treatment.

The Veladero project should ultimately make other sponsors more comfortable about investing in Argentina. But it has limited applicability outside of mining, since the relevant decrees apply only to the mining law. Moreover, the country is still in the middle of rescheduling its debt, and it is thus a long way from attracting commercial, or even multilateral, interest.

Barrick is a rare user of project finance, despite being the best-rated producer in the sector. But while far from being a popular template, the deal stands out as a tightly structured financing in one of the world's more challenging jurisdictions.

Minera Argentina Gold
Status: Closed August 2004
Size: $460 million
Location: San Juan, Argentina
Description: financing for 11.1 million ounce gold project
Sponsor: Barrick Gold
Debt: $250 million
Providers: ANZ (now Standered Chartered), Fortis, KfW-IPEX, RBS, US Ex-Im
Insurers: EDC, Hermes
Financial advisor to the sponsor: Rothschild
Ex-Im Bank financial adviser: HSBC
Lender independent engineer: Chlumsky, Armbrust, Meyer
Sponsor insurance consultant: Marsh
Lender insurance consultant: Willis
Sponsor legal: Davies Ward Phillips & Vineberg (Canada), Sullivan & Cromwell (New York), Fortunati & Lucero;
Basanes & Videla, (Buenos Aires)
Lender legal: Milbank, Tweed, Hadley & McCloy (New York), Estudio Beccar Varela (Buenos Aires)