Pits-tops
AngloGold finalised its $135 million seven year project loan for
the Geita Gold Mine project in Tanzania in mid-December last year.
The deal further underscores the growth in interest in lending to
the Tanzanian mining sector and draws a line under Geita's
financing uncertainties when it was 100% under Ashanti Goldfields'
ownership. It also indicates a willingness among political risk
insurers to cover this risk, and could signal further borrowing
from the country's gold sector as a result.
The Geita project was unusual in that banks were being asked to lend to an asset that was already up and running. The mine was developed by Ashanti but ran into trouble when a huge hedging blunder at the company left it exposed to margin calls of $250 million when the gold price rose in October 1999. The vultures very soon began to circle around Geita, one of Ashanti's most valuable assets. In additional to AngloGold, interest was shown by Barrick of Canada, US-based Homestake Mining Company and Newmont Mining Company, Placer Dome of Canada, Meridien Gold and Gold Fields of South Africa. Lonmin, which already owns 30% of Ashanti, offered to buy the company out, valuing it at $835 million, but this price was slashed by 20% when the full extent of Ashanti's hedging exposure became apparent. AngloGold eventually emerged victorious in April last year, having agreed to buy 50% of the Geita mine for $205 million plus the commitment to raise a $135 million project financing for the facility. ?The sale was a competitive auction process and [the Geita stake] was not sold cheaply,? says Gerard Holden, managing director and global head of mining and metals at Barclays Capital, which co-arranged the $135 million Geita loan. ?Ashanti received good consideration for its 50% stake, but both owners still have access to upside through expanding the reserve base and increasing capacity.? Ashanti was advised on the sale by CIBC.
Geita is a mid-cost mine, and one of its most attractive features is its potential. The mine was officially commissioned on August 10, 2000, four months after the agreement between Ashanti and AngloGold had been struck. It is located in the northwest of the country at Mwanza and cost $165 million to build. ?There is a lot of upside to this mine,? says Holden, ?and both Ashanti and AngloGold have strong records of discovering new ounces at low cost.? Geita has recoverable reserves of 12 million ounces and gold deposits in the northwest of the country were assessed last year to be 30 million ounces. There are also plans for the construction of a complete village at the site, an aerodrome, a 62km road between Geita and Hogi, a 25km water pipeline, a clinic and a school. The mine itself has an estimated lifespan of 12 years. Production commenced in June this year. AngloGold and Ashanti are now planning to increase planned output from the mine from four million tonnes per year to seven million tonnes per year at a cost of around $180 an ounce.
What this new $135 million facility does is give AngloGold the breathing space to improve the working of the project. Under the terms of the deal, a pre-completion period has been set for the initial 12 months. ?What we have done is allowed them [AngloGold] to optimise the mine over the next 12 months,? says Holden. ?AngloGold is using the strength of its balance sheet and banking relationships in order to generate the opportunity to optimise the mine plan.? Funds run for seven years with an average life of 3.2 years. During pre-completion the margin is set at 1.2% and the deal carries an AngloGold guarantee. Post-completion (slated for December 31, 2001), the margin is 1.9% and lending is non-recourse.
The key feature of the deal is its political risk insurance (PRI) cover, which runs for the length of the seven year loan ? an unprecedented tenor in this sector. ?We went straight to the commercial market for cover because of the stage the project was at,? explains Mark Lynam, treasurer at AngloGold in Johannesburg. ECA support was effectively out of the question as the project was already up and running. PRI cover is compulsory for all mining projects in Africa (with the exception of Ghana) and it covers both lending and hedging exposure in this case. Because of the size and length of cover required for this project, two insurers were required. The PRI was therefore provided by both AIG and Zurich. The fact that cover was available over such a long time frame is testament to the efforts Tanzania has made to attract foreign investment to its mining sector. The government aims to increase the mining sector's contribution to GDP from its present 2% to 10% by 2025.
Geita is the third largest mining project financing in Tanzania. What all three have in common is the presence of a strong sponsor ? a prerequisite for any deal in this region. The first, Golden Pride, involved the 1998 syndication of a small $48 million loan to the mine's owners, a 50/50 joint venture between Ashanti and Australia-based Resolute. Resolute has subsequently bought out Ashanti's interest in the mine. Golden Pride was the first mining project in Tanzania since the 1960s and has ore reserves of around three million ounces. The second recent project loan to the Tanzanian mining sector was the $200 million facility for Barrick Gold's Bulyanhulu mine in the Kahama district which was signed in early 2000 (Barrick bought Bulyanhulu from Sutton Resources in March 1999 for $281 million). This facility was arranged by Barclays Capital, CIBC, Citibank, Deutsche Bank, Dresdner Kleinwort Benson and Societe Generale. It carried 90% PRI. This was the largest loan ever made to a sub-Saharan mining project outside South Africa and therefore ? unlike Geita ? entailed considerable price support from the sponsor.
Barclays Capital has been involved in arranging all three project loans. Holden describes the Golden pride deal as ?dipping a toe in the water? in order to test the legal framework of the country. Lynam at AngloGold explains that the major concerns with such projects are whether or not the mining licence is ?real?, and how easily it can be withdrawn. The country's prospects for foreign investment were given a major boost by the Mining Act of 1998. This repealed legislation hostile to foreign investment which had been in place since 1979 and included four important features. Firstly, the procedures for obtaining prospecting and mining licences were simplified. Secondly, there was a substantial reduction in red tape and investment guarantees (including the unlimited repatriation of profits) were provided. Thirdly, the state's mandatory 10% stake in mining ventures was abolished, to be replaced with a 3% royalty fee to the treasury and finally foreign firms were made exempt from import duties on capital goods and equipment and sales tax.
?Tanzania is actively courting the mining sector and has rewritten its legislation to take account of international financiers' and mining investors' concerns,? says Holden. ?There is now no question over security of title or the normal protections lenders seek in structured deals such as offshore accounts and robust security.? The lawyers involved in the Golden pride deal spent a lot of time with the Tanzanian government and as a result Holden reckons that Tanzania is now on a par ? or may even have surpassed ? Ghana as a favourable jurisdiction for investment. ?They are the pick of the crop,? he says.
The $135 million loan takes out a $100 million bridging facility that had been in place for Geita. This deal was co-arranged by the same group that co-arranged the long-term facility: Barclays Capital, Dresdner Bank and NM Rothschild. Both Bulyanhulu and Geita were oversubscribed, and both sponsor and arranger report that the syndication went very smoothly. There were essentially three groups of banks to approach: AngloGold relationship banks, Ashanti relationship banks and banks that had already shown an appetite for Tanzania. The arranging group took $11 million apiece and syndicated down to nine co-arrangers, each taking $10.5 million. These were Absa Corporate bank, Bayerische Hypo-und Vereinsbank, Credit Lyonnais, DKB, Fortis Bank, HSBC, KBC Finance, Royal Bank of Scotland and Societe Generale. Chase came in as senior lead manager with $7.5 million. Of this group, HSBC, Royal Bank of Scotland, Societe Generale and Chase had already lent into the bridge facility. ?I don't think that the quantum of banks willing to lend to these types of projects has changed,? says Lynam at AngloGold. ?Some banks have fallen away but they have been replaced by new banks willing to lend.? Holden is still bullish on further lending to the sector. ?There is still another $100 million to $200 million capacity out there,? he reckons. ?If, for example, Barrick wanted to increase the size of the Bulyanhulu facility there is enough appetite there for it to get done. There is always going to be capacity for well-structured transactions with strong sponsors.?
50% of Geita's output will be hedged during the pre-completion stage. The final level of hedging has yet to be determined, but will be based on revenue generation. The low spot price of gold means that it is likely that the level of hedge cover will have to increase both at Geita and at AngloGold's Morila mine in Mali. Hedging is something of a hot topic, given Ashanti's woes over the last two years, but Lynam is adamant that its hedging policy will not change. ?[Ashanti] has not affected our approach,? he says. ?We still have the same hedging policy in place: 50% of five years' production.? AngloGold increased it hedge cover by 30-35 tonnes at the end of October last year and had a market to market value of all hedge transactions of $80.4 million based on a gold price of $274.05 an ounce. This includes some rand hedges for the company's South African operations but the weighting is towards dollar-denominated positions.
Operational risk insurance for the Geita transaction has been provided by Marsh of South Africa. This was a precondition of the loan as thefts from mines in the region are on the increase. The South African Chamber of Mines has calculated that around 35 tonnes of gold worth R1.8 billion is lost from mines in the country each year through crime. As recently as January 11 this year, armed robbers attacked one of AngloGold's mines south of Johannesburg, taking gold concentrate, cash and guns.
Completion of the Geita purchase will be a major boost to AngloGold, which is bracing itself for large-scale consolidation in the industry. The company reported a 12% drop in headline earnings to $58.5 million for the third quarter ? down from $66.2 million in the second quarter. This is partly as a result of spot prices and partly due to the huge cash requirements that Geita and Morila are placing on the company. Steve Lenahan, executive officer corporate affairs at AngloGold in Johannesburg says, however, that the industry has learnt from increased competition from other commodities (such as platinum) and now plans an aggressive marketing campaign to boost gold sales. ?The gold industry has learned a thing or two about marketing from the Platinum Gild, which has conducted a very significant campaign,? he says. Although the platinum industry is more consolidated and has fewer members, Lenahan believes that collaboration on marketing is the way forward for gold. ?AngloGold has a $20 million market development budget for next year on its own,? he reveals. This will be spent in part through the World Gold Council and partly on AngloGold's own projects. AngloGold's focus will be on promoting gold for jewellery but the company will also devote some of this budget to market deregulation activities.
Lenahan says that AngloGold has taken a conservative view on gold prices going forward and estimates a price in the region of $280 per ounce for 2001. The company will reveal its reserves in March this year, a figure that will be based on a price of $300 an ounce. But the focus of attention in the short term will be the much-anticipated consolidation among the world's leading gold producers. The market is buzzing with rumours that AngloGold has drawn up merger proposals with Gold Fields, and may even have approached Barrick to launch a joint bid for the company. Such a deal would mean the combining of South Africa's two largest gold producers. Steve Lenahan at AngloGold refuses to outline the company's acquisition plans, saying merely that ?The comments regarding Gold Fields are purely speculative and we have no comment.? He does, however, add that AngloGold ?Remains committed to the consolidation of the industry ? for which there is huge scope.? With gold prices languishing at their current level, the company is now under pressure to boost performance, whether organically or by acquisition, until its huge investment in Geita begins to bear fruit.
The Geita project was unusual in that banks were being asked to lend to an asset that was already up and running. The mine was developed by Ashanti but ran into trouble when a huge hedging blunder at the company left it exposed to margin calls of $250 million when the gold price rose in October 1999. The vultures very soon began to circle around Geita, one of Ashanti's most valuable assets. In additional to AngloGold, interest was shown by Barrick of Canada, US-based Homestake Mining Company and Newmont Mining Company, Placer Dome of Canada, Meridien Gold and Gold Fields of South Africa. Lonmin, which already owns 30% of Ashanti, offered to buy the company out, valuing it at $835 million, but this price was slashed by 20% when the full extent of Ashanti's hedging exposure became apparent. AngloGold eventually emerged victorious in April last year, having agreed to buy 50% of the Geita mine for $205 million plus the commitment to raise a $135 million project financing for the facility. ?The sale was a competitive auction process and [the Geita stake] was not sold cheaply,? says Gerard Holden, managing director and global head of mining and metals at Barclays Capital, which co-arranged the $135 million Geita loan. ?Ashanti received good consideration for its 50% stake, but both owners still have access to upside through expanding the reserve base and increasing capacity.? Ashanti was advised on the sale by CIBC.
Geita is a mid-cost mine, and one of its most attractive features is its potential. The mine was officially commissioned on August 10, 2000, four months after the agreement between Ashanti and AngloGold had been struck. It is located in the northwest of the country at Mwanza and cost $165 million to build. ?There is a lot of upside to this mine,? says Holden, ?and both Ashanti and AngloGold have strong records of discovering new ounces at low cost.? Geita has recoverable reserves of 12 million ounces and gold deposits in the northwest of the country were assessed last year to be 30 million ounces. There are also plans for the construction of a complete village at the site, an aerodrome, a 62km road between Geita and Hogi, a 25km water pipeline, a clinic and a school. The mine itself has an estimated lifespan of 12 years. Production commenced in June this year. AngloGold and Ashanti are now planning to increase planned output from the mine from four million tonnes per year to seven million tonnes per year at a cost of around $180 an ounce.
What this new $135 million facility does is give AngloGold the breathing space to improve the working of the project. Under the terms of the deal, a pre-completion period has been set for the initial 12 months. ?What we have done is allowed them [AngloGold] to optimise the mine over the next 12 months,? says Holden. ?AngloGold is using the strength of its balance sheet and banking relationships in order to generate the opportunity to optimise the mine plan.? Funds run for seven years with an average life of 3.2 years. During pre-completion the margin is set at 1.2% and the deal carries an AngloGold guarantee. Post-completion (slated for December 31, 2001), the margin is 1.9% and lending is non-recourse.
The key feature of the deal is its political risk insurance (PRI) cover, which runs for the length of the seven year loan ? an unprecedented tenor in this sector. ?We went straight to the commercial market for cover because of the stage the project was at,? explains Mark Lynam, treasurer at AngloGold in Johannesburg. ECA support was effectively out of the question as the project was already up and running. PRI cover is compulsory for all mining projects in Africa (with the exception of Ghana) and it covers both lending and hedging exposure in this case. Because of the size and length of cover required for this project, two insurers were required. The PRI was therefore provided by both AIG and Zurich. The fact that cover was available over such a long time frame is testament to the efforts Tanzania has made to attract foreign investment to its mining sector. The government aims to increase the mining sector's contribution to GDP from its present 2% to 10% by 2025.
Geita is the third largest mining project financing in Tanzania. What all three have in common is the presence of a strong sponsor ? a prerequisite for any deal in this region. The first, Golden Pride, involved the 1998 syndication of a small $48 million loan to the mine's owners, a 50/50 joint venture between Ashanti and Australia-based Resolute. Resolute has subsequently bought out Ashanti's interest in the mine. Golden Pride was the first mining project in Tanzania since the 1960s and has ore reserves of around three million ounces. The second recent project loan to the Tanzanian mining sector was the $200 million facility for Barrick Gold's Bulyanhulu mine in the Kahama district which was signed in early 2000 (Barrick bought Bulyanhulu from Sutton Resources in March 1999 for $281 million). This facility was arranged by Barclays Capital, CIBC, Citibank, Deutsche Bank, Dresdner Kleinwort Benson and Societe Generale. It carried 90% PRI. This was the largest loan ever made to a sub-Saharan mining project outside South Africa and therefore ? unlike Geita ? entailed considerable price support from the sponsor.
Barclays Capital has been involved in arranging all three project loans. Holden describes the Golden pride deal as ?dipping a toe in the water? in order to test the legal framework of the country. Lynam at AngloGold explains that the major concerns with such projects are whether or not the mining licence is ?real?, and how easily it can be withdrawn. The country's prospects for foreign investment were given a major boost by the Mining Act of 1998. This repealed legislation hostile to foreign investment which had been in place since 1979 and included four important features. Firstly, the procedures for obtaining prospecting and mining licences were simplified. Secondly, there was a substantial reduction in red tape and investment guarantees (including the unlimited repatriation of profits) were provided. Thirdly, the state's mandatory 10% stake in mining ventures was abolished, to be replaced with a 3% royalty fee to the treasury and finally foreign firms were made exempt from import duties on capital goods and equipment and sales tax.
?Tanzania is actively courting the mining sector and has rewritten its legislation to take account of international financiers' and mining investors' concerns,? says Holden. ?There is now no question over security of title or the normal protections lenders seek in structured deals such as offshore accounts and robust security.? The lawyers involved in the Golden pride deal spent a lot of time with the Tanzanian government and as a result Holden reckons that Tanzania is now on a par ? or may even have surpassed ? Ghana as a favourable jurisdiction for investment. ?They are the pick of the crop,? he says.
The $135 million loan takes out a $100 million bridging facility that had been in place for Geita. This deal was co-arranged by the same group that co-arranged the long-term facility: Barclays Capital, Dresdner Bank and NM Rothschild. Both Bulyanhulu and Geita were oversubscribed, and both sponsor and arranger report that the syndication went very smoothly. There were essentially three groups of banks to approach: AngloGold relationship banks, Ashanti relationship banks and banks that had already shown an appetite for Tanzania. The arranging group took $11 million apiece and syndicated down to nine co-arrangers, each taking $10.5 million. These were Absa Corporate bank, Bayerische Hypo-und Vereinsbank, Credit Lyonnais, DKB, Fortis Bank, HSBC, KBC Finance, Royal Bank of Scotland and Societe Generale. Chase came in as senior lead manager with $7.5 million. Of this group, HSBC, Royal Bank of Scotland, Societe Generale and Chase had already lent into the bridge facility. ?I don't think that the quantum of banks willing to lend to these types of projects has changed,? says Lynam at AngloGold. ?Some banks have fallen away but they have been replaced by new banks willing to lend.? Holden is still bullish on further lending to the sector. ?There is still another $100 million to $200 million capacity out there,? he reckons. ?If, for example, Barrick wanted to increase the size of the Bulyanhulu facility there is enough appetite there for it to get done. There is always going to be capacity for well-structured transactions with strong sponsors.?
50% of Geita's output will be hedged during the pre-completion stage. The final level of hedging has yet to be determined, but will be based on revenue generation. The low spot price of gold means that it is likely that the level of hedge cover will have to increase both at Geita and at AngloGold's Morila mine in Mali. Hedging is something of a hot topic, given Ashanti's woes over the last two years, but Lynam is adamant that its hedging policy will not change. ?[Ashanti] has not affected our approach,? he says. ?We still have the same hedging policy in place: 50% of five years' production.? AngloGold increased it hedge cover by 30-35 tonnes at the end of October last year and had a market to market value of all hedge transactions of $80.4 million based on a gold price of $274.05 an ounce. This includes some rand hedges for the company's South African operations but the weighting is towards dollar-denominated positions.
Operational risk insurance for the Geita transaction has been provided by Marsh of South Africa. This was a precondition of the loan as thefts from mines in the region are on the increase. The South African Chamber of Mines has calculated that around 35 tonnes of gold worth R1.8 billion is lost from mines in the country each year through crime. As recently as January 11 this year, armed robbers attacked one of AngloGold's mines south of Johannesburg, taking gold concentrate, cash and guns.
Completion of the Geita purchase will be a major boost to AngloGold, which is bracing itself for large-scale consolidation in the industry. The company reported a 12% drop in headline earnings to $58.5 million for the third quarter ? down from $66.2 million in the second quarter. This is partly as a result of spot prices and partly due to the huge cash requirements that Geita and Morila are placing on the company. Steve Lenahan, executive officer corporate affairs at AngloGold in Johannesburg says, however, that the industry has learnt from increased competition from other commodities (such as platinum) and now plans an aggressive marketing campaign to boost gold sales. ?The gold industry has learned a thing or two about marketing from the Platinum Gild, which has conducted a very significant campaign,? he says. Although the platinum industry is more consolidated and has fewer members, Lenahan believes that collaboration on marketing is the way forward for gold. ?AngloGold has a $20 million market development budget for next year on its own,? he reveals. This will be spent in part through the World Gold Council and partly on AngloGold's own projects. AngloGold's focus will be on promoting gold for jewellery but the company will also devote some of this budget to market deregulation activities.
Lenahan says that AngloGold has taken a conservative view on gold prices going forward and estimates a price in the region of $280 per ounce for 2001. The company will reveal its reserves in March this year, a figure that will be based on a price of $300 an ounce. But the focus of attention in the short term will be the much-anticipated consolidation among the world's leading gold producers. The market is buzzing with rumours that AngloGold has drawn up merger proposals with Gold Fields, and may even have approached Barrick to launch a joint bid for the company. Such a deal would mean the combining of South Africa's two largest gold producers. Steve Lenahan at AngloGold refuses to outline the company's acquisition plans, saying merely that ?The comments regarding Gold Fields are purely speculative and we have no comment.? He does, however, add that AngloGold ?Remains committed to the consolidation of the industry ? for which there is huge scope.? With gold prices languishing at their current level, the company is now under pressure to boost performance, whether organically or by acquisition, until its huge investment in Geita begins to bear fruit.
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