Avgold: on Target
The largest undeveloped gold reserve in South Africa requires a
certain level of ingenuity in its exploitation and financing.
Avgold's work on the Target mine sets new standards by virtue of
its high ? by the country's standards ? level of mechanisation. It
is also one of the largest ticket project financings to date in a
sector more used to balance sheet and equity financing.
The R700 million ($85 million) deal does not depart entirely from precedent since the majority of the project's required capital has already been obtained through the equity markets. This was standard practice during South Africa's apartheid-era isolation from international debt markets, and given the profitability of the country's gold mining industry few of the larger players interested themselves in non-recourse project debt. The facility, jointly lead arranged by Standard Bank and Deutsche Bank, will be watched by other South African corporates for its application to other infrastructure deals.
Whilst public-private partnerships and (potentially) telecoms deals in the region are reckoned to be the hot sectors for project debt in the coming years, mining has been slower to examine the structure's possibilities. The main reason for this has been the horrendous, and continuing, fall in the price of gold. Although most operations that come to market usually come with costs per ounce well within the current price of roughly $265/oz, the cost of hedging is usually prohibitively expensive.
This was the difficulty with selling an earlier deal, which was put together by the now-departed Chase Manhattan and Warburg Dillon Read. That 1999 deal became yet another victim of the European Central Banks' decisions to auction off hefty slices of their gold reserves, with the Bank of England in the vanguard. Hedging costs have moved lower in the intervening period and Target's hedges have been put in place at the Avgold, rather than the project level.
Avgold has been developing Target for around five years now, and the mine is located near ? and designed to replace ? the Lorraine mine, which was recently closed. In line with Avmin corporate philosophy, the mine will be exploited using minimal human labour and will take advantage of existing shafts sunk for the Lorraine operations. During production Target will probably shift around 90,000 tonnes per month of material.
However, the mechanisation will be taking place at 2.5km below the ground and whilst the technology is relatively familiar world-wide, it has not been used extensively at this depth. Placer Dome is currently examining a similar set-up at its South Deep, but Target is currently a unique proposition.
Construction work is well advanced, with the most pressing task yet to be started a metallurgical plant at the surface, at a cost of roughly R200 million.
The reason for the project facility, however, is not the technical risk, nor the completion risk, but simply the wish of the sponsor to avoid going back to its shareholders for more money. Avgold has recently completed a R500 million rights issue that was used to repay a bridge loan from Standard Bank. A large chunk of this R700 million deal will be used to repay an inter-company loan from Avmin, and the facility cannot be seen as integral given the fact that sponsor equity accounts for R1.8 billion of the project's R2.5 billion total cost.
The facility is secured at the Avgold level, which means that it benefits from security over the East Transvaal Consolidated (ETC) mine. ETC is nearing the end of it useful life and does not produce much more than enough to cover operating costs, but it does represent a steady cashflow. The same is true for the hedging on the deal ? also at the Avgold level. The importance of the facility is that it isolates the project from Avmin, which is gearing up for a big year of expansion.
The R700 million has been divided into a R650 million project tranche and a R50 million cost overrun facility. Within the two tranches, the borrowing is divided evenly into dollar and Rand funds. After Standard Bank won the initial mandate, Deutsche came in at the led arranger but lacked a sufficient domestic franchise to advance the financing in Rand.
This has proved to be less of a problem than might be expected given Alan Greenspan's current preoccupation with slashing interest rates. South African borrowers are currently in a very good position to raid the dollar market, as can be seen by the loan pipeline.
Anglogold has a $300 million corporate facility in the market, as has MTN, a mobile operator.
The five year deal is priced at 225 basis points over libor pre-completion, drops to 200bp for the next two years, goes up again to 210bp in years three and four, and stands at 220bp in year five. Co-arrangers are Bank of Tokyo-Mitsubishi (London branch), First Rand Bank and KBC Finance (Ireland). Senior lead managers are Credit Suisse First Boston, SG, Investec and Comerzbank (lending in Rand through its Johannesburg branch). Both currencies sold well despite the currency mismatch (Avgold does not anticipate selling much of the output for dollars), and Deutsche's strategy of looking to maximise market capacity appears to have paid off.
Full production at Target is slated to begin in 2002. In the interim the company is looking at developing the nearby Paradise orebody, which has the potential to dwarf Target with estimated reserves of up to seven million ounces. The area, however, would not have any infrastructure already in place, and would have a far larger capex requirement. The dollar tranche would be a useful way to prime the market for a far larger deal to come in the next couple of years.
A more realistic scenario would be the introduction of a joint venture partner with the muscle and relationship pull to ease such a large undertaking. A natural contender would be Anglogold, which was involved in all of the major financings in Africa last year, with the exception of Bulyanhulu. No formal announcement has yet been made, however.
Target Mine financing
Status: closed
Cost: R2.5 billion ($306 million)
Location: near Welkom, South Africa
Description: highly mechanised deep gold mining operation
Sponsor: Avgold, part of Anglovaal Mining (Avmin)
Debt: R700 million, split into R650 million project tranche and R50 million cost overrun facility
Arrangers: Standard Bank, Deutsche Bank
Lawyers to the borrower: Denton Wilde Sapte
Lawyers to the lenders: Deneys Reitz, Maitland & Company
The R700 million ($85 million) deal does not depart entirely from precedent since the majority of the project's required capital has already been obtained through the equity markets. This was standard practice during South Africa's apartheid-era isolation from international debt markets, and given the profitability of the country's gold mining industry few of the larger players interested themselves in non-recourse project debt. The facility, jointly lead arranged by Standard Bank and Deutsche Bank, will be watched by other South African corporates for its application to other infrastructure deals.
Whilst public-private partnerships and (potentially) telecoms deals in the region are reckoned to be the hot sectors for project debt in the coming years, mining has been slower to examine the structure's possibilities. The main reason for this has been the horrendous, and continuing, fall in the price of gold. Although most operations that come to market usually come with costs per ounce well within the current price of roughly $265/oz, the cost of hedging is usually prohibitively expensive.
This was the difficulty with selling an earlier deal, which was put together by the now-departed Chase Manhattan and Warburg Dillon Read. That 1999 deal became yet another victim of the European Central Banks' decisions to auction off hefty slices of their gold reserves, with the Bank of England in the vanguard. Hedging costs have moved lower in the intervening period and Target's hedges have been put in place at the Avgold, rather than the project level.
Avgold has been developing Target for around five years now, and the mine is located near ? and designed to replace ? the Lorraine mine, which was recently closed. In line with Avmin corporate philosophy, the mine will be exploited using minimal human labour and will take advantage of existing shafts sunk for the Lorraine operations. During production Target will probably shift around 90,000 tonnes per month of material.
However, the mechanisation will be taking place at 2.5km below the ground and whilst the technology is relatively familiar world-wide, it has not been used extensively at this depth. Placer Dome is currently examining a similar set-up at its South Deep, but Target is currently a unique proposition.
Construction work is well advanced, with the most pressing task yet to be started a metallurgical plant at the surface, at a cost of roughly R200 million.
The reason for the project facility, however, is not the technical risk, nor the completion risk, but simply the wish of the sponsor to avoid going back to its shareholders for more money. Avgold has recently completed a R500 million rights issue that was used to repay a bridge loan from Standard Bank. A large chunk of this R700 million deal will be used to repay an inter-company loan from Avmin, and the facility cannot be seen as integral given the fact that sponsor equity accounts for R1.8 billion of the project's R2.5 billion total cost.
The facility is secured at the Avgold level, which means that it benefits from security over the East Transvaal Consolidated (ETC) mine. ETC is nearing the end of it useful life and does not produce much more than enough to cover operating costs, but it does represent a steady cashflow. The same is true for the hedging on the deal ? also at the Avgold level. The importance of the facility is that it isolates the project from Avmin, which is gearing up for a big year of expansion.
The R700 million has been divided into a R650 million project tranche and a R50 million cost overrun facility. Within the two tranches, the borrowing is divided evenly into dollar and Rand funds. After Standard Bank won the initial mandate, Deutsche came in at the led arranger but lacked a sufficient domestic franchise to advance the financing in Rand.
This has proved to be less of a problem than might be expected given Alan Greenspan's current preoccupation with slashing interest rates. South African borrowers are currently in a very good position to raid the dollar market, as can be seen by the loan pipeline.
Anglogold has a $300 million corporate facility in the market, as has MTN, a mobile operator.
The five year deal is priced at 225 basis points over libor pre-completion, drops to 200bp for the next two years, goes up again to 210bp in years three and four, and stands at 220bp in year five. Co-arrangers are Bank of Tokyo-Mitsubishi (London branch), First Rand Bank and KBC Finance (Ireland). Senior lead managers are Credit Suisse First Boston, SG, Investec and Comerzbank (lending in Rand through its Johannesburg branch). Both currencies sold well despite the currency mismatch (Avgold does not anticipate selling much of the output for dollars), and Deutsche's strategy of looking to maximise market capacity appears to have paid off.
Full production at Target is slated to begin in 2002. In the interim the company is looking at developing the nearby Paradise orebody, which has the potential to dwarf Target with estimated reserves of up to seven million ounces. The area, however, would not have any infrastructure already in place, and would have a far larger capex requirement. The dollar tranche would be a useful way to prime the market for a far larger deal to come in the next couple of years.
A more realistic scenario would be the introduction of a joint venture partner with the muscle and relationship pull to ease such a large undertaking. A natural contender would be Anglogold, which was involved in all of the major financings in Africa last year, with the exception of Bulyanhulu. No formal announcement has yet been made, however.
Target Mine financing
Status: closed
Cost: R2.5 billion ($306 million)
Location: near Welkom, South Africa
Description: highly mechanised deep gold mining operation
Sponsor: Avgold, part of Anglovaal Mining (Avmin)
Debt: R700 million, split into R650 million project tranche and R50 million cost overrun facility
Arrangers: Standard Bank, Deutsche Bank
Lawyers to the borrower: Denton Wilde Sapte
Lawyers to the lenders: Deneys Reitz, Maitland & Company
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