Syndication has launched on Australian Magnesium's $902 million debt financing for its Stanwell project. The deal, for what will be the largest magnesium producer in the world, has had a suitably long and chequered lead-time, but arrangers expect a strong response from participants. It should provide hope to other mining and metals financings in the region, including the long-awaited A$5 billion Austeel project in New South Wales.

AMC is a publicly quoted Australian metals producer in which Newmont Mining holds a substantial stake. This stake was formerly in the hands of Normandy Mining, the subject of a hard-fought takeover battle between Newmont and AngloGold. This struggle was one of the reasons for the deal's launch a year after underwriting commitments were given. It began life as Queensland Metals, and pitched Normandy, automotive producer Ford and Fluor Daniel as to the feasibility of the Stanwell site.

Still more significantly, the project has enjoyed prolonged and enthusiastic support from the Queensland government. This has been important to the project as a source of funding and, equally importantly, as a source of power. The plant is located near Rockhampton, Central Queensland, close to the Stanwell power project, owned by the state government. Since the project was first put before the government in 1991, A$50 million has been injected through the Commonwealth Scientific and Industrial Research Organisation (CSIRO) and A$50 million for the Stanwell power plant.

The interest in the plant is the product of increased interest in magnesium, particularly in car production. The interest on the part of Ford is that magnesium has similar properties to aluminium and steel, but is lighter, and will help cars meet emissions and fuel economy standards if used in a large enough proportion of components. AMC is constructing the magnesium metal plant to process its reserves of magnesite, an oxide that is the raw material for the plant, and has been exploited for 15 years.

AMC has mobilised much of the research expertise of the Australian scientific establishment to create a demonstration facility at Gladstone. This A$48 million plant exists partly to assuage any doubts about what is a relatively new industrial process, at least on the scale of that attempted at Stanwell. The capacity of the plant, at 97,000 tonnes of alloy and metal per year, will make it the largest, and potentially lowest-cost, producer in the world.

The mandated lead arrangers are ABN Amro (technical bank and facility agent), ANZ Investment Bank (security trustee), JP Morgan and WestLB. The four have been working on the financing for roughly two years, and market rumour has suggested, at times, a June 2000 and a July 2001 launch. The main obstacles, however, appear to have been putting in place a sufficiently solid engineering, procurement and construction (EPC) contract and finding sufficient non-debt funding.

In the later case, AMC's public listing will have helped it in accessing equity. It had initially looked for $680 million in equity from Normandy before deciding on a public equity offering of A$525 million in October 2001, led by ABN Amro Rothschild and ABN Amro Morgans. A further A$370 million in loans and guarantees came from the government, while Newmont must inject a further A$100 million into AMC by January 2003.

This cushion is important, because the A$902 million debt cannot be drawn down until A$715 million has been spent on the project's development. A$200 million has been spent so far, including the Gladstone demonstration plant. There is also a 100% cashflow sweep during ramp-up until completion tests have been satisfied ? these include production at 95% of capacity at or below 105% of operating cost over a 3 month period, a minimum of 72,750 tonnes of production contracted and loan life coverage ratio of 1.75:1. The project is geared at 47%.

The other sizeable task for sponsors and lenders was the negotiation of an engineering, procurement and construction contract. While the plant uses what is now considered proven technology, such a large undertaking carries a relatively high level of construction risk. Fluor Daniel had worked on an initial feasibility study, and had at one point been fingered as a possible source of equity, Leighton Contractors eventually took the contract. Leighton is ultimately 50.1% owned by Hochtief, and Leighton Holdings guarantees performance of the contract. Contractors also provides contingent equity.

The final key player in the financing is Ford. Ford has a BBB+/Baa1 (S&P/ Moody's) rating, but its size and long lead time requirements make it a useful offtaker. Very little of a liquid global magnesium market exists, so the need for bilateral contracts is pressing. Merchant magnesium plants, in other words, do not exist. AMC has a marketing team in place to make up the shortfall between Ford's 50% commitment and the requirements of the banks' completion tests.

The debt breaks down into several tranches: a construction loan of A$730 million, a debt service reserve of A$50 million (priced at 325bp), a cost overrun facility of A$60 million (priced at 300bp), a commissioning facility of A$50 million (priced at 325bp), a letter of credit, a A$12 million (provided by the leads and not syndicated) and a working capital facility of A$30 million (not syndicated). Pricing on the construction and term loan is 275bp pre-completion, 225bp years 6-10 and 275bp thereafter.

BOS International (Australia) (part of Halifax Bank of Scotland Group), Mizuho Corporate Bank, China Construction Bank (Hong Kong), and HSBC Precious Metals (Australia) have joined as co-arrangers. Senior lead manager titles are available for a A$50 million commitment, whilst A$35 million will garner a lead manager title. Roadshows will take place in Sydney, Hong Kong, Singapore and London, and according to sources at the arrangers, the deal will be pitched to bookers of pure project finance assets.