Projects such as Veladero, Milpillas, El Tesoro and Alunorte have demonstrated the importance of project finance for the mining sector in Latin America, although the refinancing of two Chilean projects – Collahuasi and Pelambres in Chile last year also highlight the different options available to sponsors. And diverse political risk perceptions in countries such as Chile and Argentina have led to very different approaches in funding key projects.

Veladero was a unique structure, put together by Barrick for its $540 million gold mine in Argentina. To secure the $250 million financing package, the deal required a special presidential decree and price support from the sponsor to overcome the country's political risk situation. But Chile's investment grade rating has made it possible for operating mines to shift away from project finance towards more traditional balance-sheet corporate financings, according to Sergio Galvis, partner at Sullivan & Cromwell.

Chile comes a copper

Galvis, who acted on Collahuasi, Pelambres and on the original project financing for Tesoro, says the experience in Chile is thus far unique in the mining sector in Latin America. "In Chile," he says "essentially these three mines were set up as classic full security interests with offshore account-type project financings in the middle and late 1990s. They followed a long line of successful copper project finance deals in Chile." Since the late 1990s the projects, he says, have reduced their debt burden with healthy cash flows but they are still being held by project finance-type restrictions.

These borrowers, he adds, "recognised that there was a market opportunity to amend the loan papers to strip out the project finance elements of the financings." In the case of Collahuasi, the borrower, Compañía Minera Doña Inés de Collahuasi SCM, moved its $641 million senior debt from secured project debt to unsecured debt, while in Pelambres, the borrower Minera Los Pelambres, did the same with $460 million outstanding senior debt.

The Pelambres refinancing in Chile was documented by way of one loan agreement and involved one syndicate of lenders, for which the lead arrangers were BBVA, BNP Paribas, and Citibank. The Collahuasi refinancing involved three groups of lenders and the financing was structured with three separate loan agreements. The lead arrangers of the largest tranche were BBVA, BNP Paribas, Bank of Tokyo-Mitsubishi, and Citibank. The syndicated loan accounted for $333 million, a second loan agreement for $135 million was agreed with Export Development Canada, and a third loan for $173 million was from KfW-IPEX. Milbank Tweed represented the bank lenders.

KfW was also involved in the $147 million refinancing for the expansion and operations of El Tesoro's 85,000 tonnes a year open-pit, heap leach copper mine in northern Chile. "They are essentially now corporate loans so there are no security interests and banks are basically lending on the strength of negative pledge and other corporate-style covenants," says Galvis. The deals, he says, illustrate the maturing of Chile and the mining industry in the country which has the best sovereign risk rating in South America. "I think it would have been very difficult to do it in any other Latin American country," says Galvis.

Stronger and fitter

Possibly the only other country with a similar rating is Mexico, where Industrias Peñoles closed a $155 million loan with BNP Paribas and ANZ Investment Bank to develop its Milpillas mine. Located in the northern state of Sonora, Milpillas has estimated copper cathode production of 56,000 tonnes per year over a 12-year asset life.

The loan will account for the majority of the mine's $180 million capital costs. The two lead lenders are providing a 10-year loan, and were mandated in early October. Following the deal, Standard & Poor's removed the company's $380 million of structured silver payable notes from CreditWatch. The ratings agency noted that the company would be better able to take advantage of the currently strong commodity price environment to term out short-term debt; had obtained favourable long-term financing for the Milpillas copper project; and had avoided a leverage increase outside of related project debt.

KfW was also involved in a $310 million hybrid corporate/project financing for Brazil's Alunorte, used to fund the expansion of its Para refinery last year. In Brazil, large mining companies, such as Companhia Vale do Rio Doce, have tended to finance projects through balance sheet financing. CVRD holds a 57% stake in the company, with Norsk Hydro holding 34% and several smaller Brazilian and Japanese investors the remainder.

All three shareholders have approved plans to increase the capacity of the refinery from 2.4 million tonnes per year to 4.2 million. Of this total, Norsk Hydro will buy 1.5 million, while CVRD has suggested that it might buy stakes in overseas smelters if its own smelting operations cannot take all of its share of Alunorte's capacity.

The multisourced financing includes a German subordinated debt facility, resembling a pre-export financing. It was the company's first dollar borrowing. The mandated lead arrangers are DnB NOR Bank, ING, ING BHF-BANK, KfW, Nordic Investment Bank and WestLB.

The deal does not feature any Real-denominated debt and instead, uses an instrument known as the Bundesgarantie für Direktinvestitionen im Ausland (DIA), which is a guarantee from the Federal Government of Germany for direct investments in foreign countries. The DIA is designed for application to equity investments, such as those by the German subsidiary of a Norwegian investor, as Norsk Hydro is. Thus, the DIA financing is largely structured as a subordinated, equity-like investment. Its arrangers are WestLB, KfW and ING.

There are further facilities from Nordic Investment Bank, with $30 million, and a GIEK facility of $80 million, supplied by DnB NOR Bank. The debt is priced at 200bp over Libor pre-completion and 300bp thereafter, has a tenor of 10 years and a four-year grace period. Milbank Tweed acted for the lenders, while Baker & McKenzie represented the borrower.

Veladero – a matter of decree

A clear contrast to the deals in Chile and Brazil is Veladero, winner of Project Finance's Latin American mining deal of the year for 2004. A gold mining operation in the northwest of Argentina, Veladero has proven and probable gold reserves of 16.1 million ounces, with another 1.5 million ounces of measured and indicated resources. Annual production is expected to average 525,000-550,000 ounces of gold per year for the first decade of the mine's operation.

When it financed in September it became the first project financing in Argentina since the economic crisis, the first ECA transaction in Argentina since the crisis, and the first political risk insurance programme for Argentina since the crisis. "Veladero is an interesting juxtaposition. Not only does it need classic project finance structures with classic project finance security interests but there is also the need for political risk insurance," says one participant familiar with working in both Argentina and Chile.

Paul Clifford, head of Standard Chartered's Americas project finance division, says Veladero was "quite a unique case due to the various laws and regulations. A lot of time and effort went in to make sure that the correct mining investment laws and regulations and the optimal fiscal stability regime was in place." StanChart inherited the deal, as well as Clifford, when it acquired ANZ's project finance business.

A national decree issued by the government exempts all mining companies that file qualified feasibility reports under the Argentine Mining Investment Law from foreign exchange and other restrictions implemented during the economic crisis. Barrick was able to convince Ex-Im, which still has Argentina off-cover, to make an exception for the deal.

The $250 million consists of a $100 million commercial loan, $80 million US Ex-Im Bank loan, $60 million Export Development Canada (EDC) loan, and $10 million KfW Loan. The debt has a tenor of nine years (seven years plus construction), and terms are shared across all tranches. The commercial bank debt features political risk insurance from EDC. The lead arrangers on the commercial debt were ANZ, Fortis, KfW and RBS, each providing $25 million.

The most interesting aspect of the project was the mining investment Presidential decree, according to Clifford, which paves the way for other projects following Veladero. One of these is likely to be Barrick's Pascua-Lama mine. The Pascua Lama project has 17.6 million reserve ounces and is forecast to have an annual average production of 750,000-775,000 ounces of gold. While the company has decided to go ahead with the development it is contingent on obtaining the necessary permits, approvals and a fiscal structure similar to that of Veladero.

The company has said that it intends to find third-party finance of up to $750 million of the expected $1.4 billion construction costs. It has allocated 6.5 million ounces of its existing gold sales contracts to Pascua-Lama during the quarter in support of anticipated financing for the project. The Pascua-Lama gold sales hedge represents just over 35% of currently identified gold reserves at the project and does not affect any of the silver contained within the gold reserves. The company hopes that the allocation of these contracts will be sufficient.

As well as using project financing in the case of Veladero, the company has tapped the bond markets, raising $750 million for development through the sale of 10-year and 30-year debt securities. Located very close to the same ore beds of Veladero, Pascua-Lama is complicated by the fact that it is a cross-border project with most of the deposits located in Chile.

Barrick also started production at Lagunas Norte in the Alto Chicama District in Peru last year. In the same way it managed to establish a favourable regulatory and fiscal framework in Argentina to give comfort to lenders Barrick managed to secure a similar legal agreement with the Peruvian government in January. The agreement provides certainty as to the foreign exchange and fiscal administrative regime for 15 years, including real estate tax, custom duties, VAT and excise taxes.

The Lagunas Norte project has 7.2 millon ounces of reserves with average expected production of 535,000-560,000 ounces. It cost $182 million to develop, $40 million of which relates to the purchase of the mine fleet.
However, most mining projects in Peru are likely to be financed through the local capital markets or private corporate financing arrangements, according to Clifford. "The Peruvian capital markets are very deep and liquid. There are a number of projects in Peru that will be financed in the local capital markets," he says.

Phelps Dodge's Cerro Verde expansion project is also attracting banking interest. Located near Arequipa, the mine was 82.5%-owned by the world's second largest producer of copper, but it has inked a deal that will see a Peruvian company, Compania de Minas Buenaventura, increase its stake to 20% and Sumitomo Corp and Sumitomo Metal Mining taking between 21% and 25%. The sale will give Phelps Dodge between $400 million and $500 million, giving it greater flexibility in the funding of the scheme. The company says it will fund the project using Cerro Verde's existing cash flows and project debt.

"There are a number of expansion projects underway, but it is an awful lot easier to do balance sheet financing because projects have an established cash flow stream," says Clifford. The Cerro Verde project is likely to cost $850 million. Through the expansion the company expects to open up 1 billion tons of sulfide ore reserves averaging 0.51% copper, which will be processed through a new concentrator. The mining of the sulfide ore body is expected to begin in later 2006, with expanded copper production to be achieved in the first half of 2007. Current copper production at Cerro Verde is roughly 100,000 tonnes per year.