Minera El Tesoro
Latin American Mining Deal of the Year 2002
Minera El Tesoro
The Minera El Tesoro copper refinancing in Chile came to market at a time when deals in the sector had fallen out of favour. The $185 million, 7.5-year refinancing was undertaken on completion of the mine and bought renewed attention to the mining project finance market. Challenging commodity prices and limited liquidity were the main obstacles to contend with.
UK-based, Luksic-controlled Antofagasta (61%) and Australia's Equatorial Mining Company (39%) own the project. They mandated Credit Lyonnais and Royal Bank of Scotland as lead arrangers. KfW kept its original tranche. El Tesoro comes under the operations of Antofagasta Minerals, formerly known as Anaconda, the mining division which provides 90% of Antofagasta's turnover.
An original financing of £205 million was signed in 1999 with RBS and Banco Santander. Seven banks joined Credit Lyonnais and RBS in syndication for the $147.8 million commercial refinancing. They were: HVB ($25 million), WestLB ($25 million), senior manager Fortis ($15 million), LB Kiel ($15 million) and Rothschild ($10 million). Banks were pitched on the basis of El Tesoro being a low cost producer and the promise of an improvement in industry fundamentals.
It is thought ? though not confirmed ? that pricing varies around the 200bp over libor mark, a significant improvement on the rumoured 250bp original margin. Debt was divided into two tranches, a $36.9 million KfW tranche and the commercial loan of $147.8 million. For this purpose KfW's role remained the same, with its loan amount and repayment terms unchanged, although pricing was bettered and the basic covenants reviewed. However, it was involved in the deal's negotiations. Also unchanged is the tenor of 10.5 years ? so 7.5 years remains to mature.
Mark Parry, managing director and head of mining and structured trade finance at RBS, says: ?One of the major hurdles was overcoming negative sentiment about metal markets at the moment. It's only really high quality deals that will get away in the current market. Because of that, the fact that this deal came away oversubscribed is a testament to the quality of the project and to the sponsors involved.?
The refinancing has been done on a true project financing basis. Bankers have labelled their approach ?back to basics' ? the deal has a certain degree of commodity risk and true project finance was a way of instilling confidence at syndication. George Romano, assistant vice president of Latin American project finance at Credit Lyonnais, says: ?The project finance market for mining has been living a world of tight credit structures. Minera El Tesoro is no exception to the return to the original credit orthodoxy associated with single asset project financing.?
He adds: ?We had to be fundamental to get the transaction done, based on industry specifics. After the commodity price dropped, banks left the sector. So we had to syndicate in that context. This has shown that there is still liquidity for refinancing copper mines in Latin America.?
Sergio Galvis, a partner at law firm Sullivan & Cromwell, worked on the transaction for the sponsors. He says: ?One of the attractive features of El Tesoro was it was already a successfully operating, existing mine. We had the opportunity to simplify some of the requirements that were necessary to get the financing done in 1999. It helped that we had achieved completion, there was an established track record and it was done in less difficult market conditions.?
The credit structure includes multiple tests restricting distributions, cash sweep provisions, and front loaded equity contributions. Antofagasta's chief financial officer Hussein Barma says the company was particularly happy with the refinancing covenants and was very impressed with the banks' approach. ?This was a genuine project financing. It is specific to El Tesoro ? non-recourse to the project owners and the banks have the confidence that they will be repaid out of the cashflow from the operation. It was a win-win refinancing that we, and the banks, were keen to do. This has been done against a generally poor economic environment, yet includes advantages such as fewer restrictions and a better margin. It also means that cash can be distributed to shareholders earlier and debt repayments take place over a longer period. This is a more flexible deal for us.? The refinancing took place seven months after completion of the project. ?We were very pleased with how quickly the process went through.?
Minera El Tesoro is a heap leach cathode copper operation with a capacity of 85,000 tonnes. It has an expected life of 21 years. An example of its low cost producer status is that a production level of 58 cents per pound, clearing project costs, lent the project a solid prospect for refinancing. A source close to the sponsors says, ?There was a commodity risk as El Tesoro, which has copper-only output. But it is a low cost producer ? Antofagasta's cash costs were placed at about 40 cents for 2001 and 2002.?
Romano of Credit Lyonnais says: ?The Latin American market pressed forward with this, though it has been out of favour in the sense that all the project finance banks have focused on power for the second part of the 1990s. After a big wave of funding world-scale copper mines in Chile and Peru in the mid 90s, the commodities market fell off and the project finance banks started closing their mining practices. We pressed ahead with a project in mining despite this and found there was a market. It helped that the fundamentals were very sound. For the syndication process, we distributed the transaction in the environment of a liquidity crunch.?
The combination of strength of the sponsors, hedging and the flexible terms of the refinancing for a low cost producer was enough to attract new lenders to replace more than half the original bank syndicate.
Production of the mine is mainly destined for Norddeutsche Affinerie.
Minera El Tesoro refinancing
Status: closed 30 August 2002
Location: Chile
Description: Refinancing of the Minera El Tesoro copper mining project
Size: $185 million split into a commercial tranche and a KfW tranche
Sponsors: Antofagasta (61%) and Equatorial Mining Company (39%)
Lead arrangers: Royal Bank of Scotland and Credit Lyonnais. KfW put up a separate tranche that remained largely unchanged
Lawyers to the lenders: Millbank, Tweed, Hadley & McCloy (international) Charrey & Co (local)
Lawyers to the sponsors: Sullivan & Cromwell
Technical advisor: SRK
Insurance advisor: Marsh
Model auditor: KPMG
Minera El Tesoro
The Minera El Tesoro copper refinancing in Chile came to market at a time when deals in the sector had fallen out of favour. The $185 million, 7.5-year refinancing was undertaken on completion of the mine and bought renewed attention to the mining project finance market. Challenging commodity prices and limited liquidity were the main obstacles to contend with.
UK-based, Luksic-controlled Antofagasta (61%) and Australia's Equatorial Mining Company (39%) own the project. They mandated Credit Lyonnais and Royal Bank of Scotland as lead arrangers. KfW kept its original tranche. El Tesoro comes under the operations of Antofagasta Minerals, formerly known as Anaconda, the mining division which provides 90% of Antofagasta's turnover.
An original financing of £205 million was signed in 1999 with RBS and Banco Santander. Seven banks joined Credit Lyonnais and RBS in syndication for the $147.8 million commercial refinancing. They were: HVB ($25 million), WestLB ($25 million), senior manager Fortis ($15 million), LB Kiel ($15 million) and Rothschild ($10 million). Banks were pitched on the basis of El Tesoro being a low cost producer and the promise of an improvement in industry fundamentals.
It is thought ? though not confirmed ? that pricing varies around the 200bp over libor mark, a significant improvement on the rumoured 250bp original margin. Debt was divided into two tranches, a $36.9 million KfW tranche and the commercial loan of $147.8 million. For this purpose KfW's role remained the same, with its loan amount and repayment terms unchanged, although pricing was bettered and the basic covenants reviewed. However, it was involved in the deal's negotiations. Also unchanged is the tenor of 10.5 years ? so 7.5 years remains to mature.
Mark Parry, managing director and head of mining and structured trade finance at RBS, says: ?One of the major hurdles was overcoming negative sentiment about metal markets at the moment. It's only really high quality deals that will get away in the current market. Because of that, the fact that this deal came away oversubscribed is a testament to the quality of the project and to the sponsors involved.?
The refinancing has been done on a true project financing basis. Bankers have labelled their approach ?back to basics' ? the deal has a certain degree of commodity risk and true project finance was a way of instilling confidence at syndication. George Romano, assistant vice president of Latin American project finance at Credit Lyonnais, says: ?The project finance market for mining has been living a world of tight credit structures. Minera El Tesoro is no exception to the return to the original credit orthodoxy associated with single asset project financing.?
He adds: ?We had to be fundamental to get the transaction done, based on industry specifics. After the commodity price dropped, banks left the sector. So we had to syndicate in that context. This has shown that there is still liquidity for refinancing copper mines in Latin America.?
Sergio Galvis, a partner at law firm Sullivan & Cromwell, worked on the transaction for the sponsors. He says: ?One of the attractive features of El Tesoro was it was already a successfully operating, existing mine. We had the opportunity to simplify some of the requirements that were necessary to get the financing done in 1999. It helped that we had achieved completion, there was an established track record and it was done in less difficult market conditions.?
The credit structure includes multiple tests restricting distributions, cash sweep provisions, and front loaded equity contributions. Antofagasta's chief financial officer Hussein Barma says the company was particularly happy with the refinancing covenants and was very impressed with the banks' approach. ?This was a genuine project financing. It is specific to El Tesoro ? non-recourse to the project owners and the banks have the confidence that they will be repaid out of the cashflow from the operation. It was a win-win refinancing that we, and the banks, were keen to do. This has been done against a generally poor economic environment, yet includes advantages such as fewer restrictions and a better margin. It also means that cash can be distributed to shareholders earlier and debt repayments take place over a longer period. This is a more flexible deal for us.? The refinancing took place seven months after completion of the project. ?We were very pleased with how quickly the process went through.?
Minera El Tesoro is a heap leach cathode copper operation with a capacity of 85,000 tonnes. It has an expected life of 21 years. An example of its low cost producer status is that a production level of 58 cents per pound, clearing project costs, lent the project a solid prospect for refinancing. A source close to the sponsors says, ?There was a commodity risk as El Tesoro, which has copper-only output. But it is a low cost producer ? Antofagasta's cash costs were placed at about 40 cents for 2001 and 2002.?
Romano of Credit Lyonnais says: ?The Latin American market pressed forward with this, though it has been out of favour in the sense that all the project finance banks have focused on power for the second part of the 1990s. After a big wave of funding world-scale copper mines in Chile and Peru in the mid 90s, the commodities market fell off and the project finance banks started closing their mining practices. We pressed ahead with a project in mining despite this and found there was a market. It helped that the fundamentals were very sound. For the syndication process, we distributed the transaction in the environment of a liquidity crunch.?
The combination of strength of the sponsors, hedging and the flexible terms of the refinancing for a low cost producer was enough to attract new lenders to replace more than half the original bank syndicate.
Production of the mine is mainly destined for Norddeutsche Affinerie.
Minera El Tesoro refinancing
Status: closed 30 August 2002
Location: Chile
Description: Refinancing of the Minera El Tesoro copper mining project
Size: $185 million split into a commercial tranche and a KfW tranche
Sponsors: Antofagasta (61%) and Equatorial Mining Company (39%)
Lead arrangers: Royal Bank of Scotland and Credit Lyonnais. KfW put up a separate tranche that remained largely unchanged
Lawyers to the lenders: Millbank, Tweed, Hadley & McCloy (international) Charrey & Co (local)
Lawyers to the sponsors: Sullivan & Cromwell
Technical advisor: SRK
Insurance advisor: Marsh
Model auditor: KPMG
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