Securing the financing to develop phase one of the Kansanshi copper mine in Solwezi is a major boost to the Zambian government's plans to return its mining sector to its former glory. And, as the first mining deal in the country to be done on a project finance basis, it could also spur on other deals in the region.

For First Quantum Minerals, the main sponsor, choosing non-recourse financing to fund development of phase one of the project was the logical route.

The Canadian-listed mining group came to Zambia in the 1990s looking, so it says, for 'the right project' and identified the Bwana Mkubwa mine.

According to Clive Newall, president of First Quantum, the country had a strong history of mining that, on nationalization in the late 1960s, had fallen into decline, with many mines either reaching the end of their life or left under-resourced.

First Quantum saw Zambia as a relatively low-risk African country and was attracted by the fact that it had English speakers, followed English law, had a sophisticated mining code and a workforce with good mining skills. Most importantly the country is part of a rich copper belt that stretches across to the Congo.

As well as Bwana Mkubwa, First Quantum also bid on Kansanshi, one of the first mines to be to be sold in the privatization of the state-owned Zambian Consolidated Copper Mines (ZCCM) in the mid-1990s. However, the group was outbid by Cyprus Amax. But when Phelps Dodge took over Cyprus Amax and decided to scale back in Africa, First Quantum "saw the window of opportunity", says Newall, and took an 80% stake in the mine. The remaining 20% is held by ZCCM.

By any accounts it was a good deal.

First Quantum paid $2.5 million and 1.4 million in common shares in June 2001. Then 30 days after the start of commercial production at Kansanshi, First Quantum will pay Phelps Dodge an additional $25 million less an amount equal to the market value at that time of the 1.4 million First Quantum common shares, at present prices now worth about $20 million.

Though First Quantum re-engineered the deal, creating a more manageable and cheaper project, it still needed funds to develop the mine. "We were still a relatively small company when we started out and our share price was only $3 or $4," says Newall.

Issuing shares was thought to be too dilutive for shareholders but the deal leant itself to a project financing.

Standard Bank, a key player in the region and with a strong mining background, joined up with WestLB and arranged a $120 million financing split between a $60 million commercial tranche, covered by a private political risk insurer and a $60 million tranche backed by ECIC, the South African export credit agency. Both carry a seven-year term. Pricing details are not disclosed.

Intriguingly the deal also attracted the attention of the European Investment Bank, which chose to provide $38 million of subordinated debt over 12 years. The move is as an extension of the European Union's donor efforts to Zambia and aims to encourage other projects in the region.

There is also $30 million of equity in the project. A third unnamed party is also providing an undisclosed amount.

David Rhodes, senior manager at Standard Bank, says getting the banks on board on the Kansanshi limited non-recourse deal "rubber-stamped the project as investors knew that we had been through the deal with a fine-tooth comb".

In phase one, the mine aims to produce 1.6 million tonnes of copper, about 44% as copper cathode and 56% as copper in concentrate. A limited amount of gold production is forecast to provide an average of 25,000 ounces of gold per year.

All output from the site will be sold at the factory gate to two unnamed parties, which then agree to take it away.

Such a factory gate offtake agreement avoids any gap in payment and means it is the offtaker rather than the sponsor that is exposed to the risks of transporting a valuable commodity across Africa.

From a legal point of a view, the deal posed a few challenges. Hunton & Williams, lawyers to the lenders, had to make sure that the deal was compliant with the South African export credit agency's rules and environmental issues played a key part of the legal framework.

Mark Frewin, partner at Hunton & Williams in London says: "Against the background of publication of the Equator Principles and the internal requirements of European development agencies, lenders are increasingly sensitive to environmental issues. The environmental covenant package was among the most extensive we've seen."

The deal that has emerged certainly looks robust - especially now the environment in which First Quantum is operating in has taken a turn for the better.

The weakness of the US dollar has had a dramatic effect on metal prices. During 2003 copper prices rose by over 40% and analysts see further gains this year. The deal itself was based on a flat 72 cents copper price, while the current price stands closer to $1.10.

But says Standard Bank's Rhodes "the interesting effect has also been on First Quantum's share price, which was about $3 at the start of financing and is now about $13. Part of that is the copper price but it also has something to do with the way it raised financing for the Kansanshi project, with only a relatively small amount of equity injected. That certainly improves the situation for shareholders."

It also bodes well for the financing for the second much larger phase of the project.

Kansanshi

Status: closed December 2004

Cost: Pre-production capital costs have been estimated at $163.4 million, consisting of $122.5 million in process plant and infrastructure, $23.6 million in mining equipment, $6.5 million in mine services, $5.7 million in pre-production mining and $5.1 million in owner's costs. Total sustaining and expansion capital over the mine life of phase one is about $118.3 million.

Location: Zambia

Description: Involves the first phase of development of the Kansanshi copper mine in Solwezi, northwest Zambia

Sponsors: First Quantum Minerals (80%), The Government of the Republic of Zambia (20%)

Lenders: Standard Bank and WestLB

Bank debt: $120 million, split into two $60 million tranches

EIB: $38 million

Lawyer to the lenders: Hunton & Williams