On the up Down Under
Australia's resources sector is still in recovery more than a year
after global macroeconomic conditions pushed gold and base metal
prices down to historic lows. But recent price trends have been
encouraging. ?Gold, nickel, copper and to a lesser extent zinc
prices have risen, and to levels where resource companies can start
exploring again,? says one Sydney banking source. However, the long
lead times in the industry suggest that it will be another year
again before many mooted new developments reach a bankable state.
Project Finance canvassed the opinions of local project financiers and found that of all the major green-field projects mooted, three are exciting most attention, both for their size and the fact that financing, in contrast to the more speculative developments, is likely to close in 2000. They are; the A$900 million ($657.89 million) Western Angelas Iron Ore development, Australian Magnesium Corporation's (AMC) proposed A$1 billion project and the A$720 million Ravensthorpe nickel deal.
Plans for nickel production at Ravensthorpe, in the south of Western Australia, are well advanced. Peter Anderton, managing director at Comet Resources, the key sponsor of the development, says that the feasibility study was completed about a year ago, a fact that surprised some of the banks now doing homework on Comet's plans. ?We've spent this last 12 months on optimization studies,? adds Anderton.
In the middle of November 1999, Comet achieved a big leap forward in its search for financing by securing the involvement of QNI, Billiton PLC's 100% Australian subsidiary, as equity partner. ?QNI will come in to the project as joint venture partners on a 50% to 50% basis,? says Anderton. Total equity amount will be aproximately A$90 million.
?QNI's arrival on the scene is a huge positive for the development, not just because of the increased equity volume or the fact that Comet itself is a relative unknown,? says one banker. ?Through QNI the development has now got a company with industry experience in nickel production processes,? the source explains. Ravensthorpe will be able to use QNI's proven low-cost technology, seen in action at QNI's Yabulu Nickel Refinery. At the same time, the bargain struck with QNI immediately removes market risk from the project. Ravensthorpe's total annual nickel equivalent concentrate will be shipped to QNI's facilities at Townsville on a take or pay contract, says Anderton.
The rise in the price of Nickel is a third positive for the project according to Comet. ?We've done all our modelling with an assumption of $2.75 to $3.00 per pound of Nickel, but now the price is up at about $3.50 a pound,? says the managing director. The obvious implication, further profit and revenue upside is likely to be treated with more than a little caution by financiers wary of volatile commodity prices. In fact, adding up total production plans of three fledgling laterite nickel mines in Western Australia alone, another 300,000 tonnes of nickel will be added to annual world production of the metal when they reach peak production. Total world demand is only about 1 million tonnes. The extra supply will inevitably cause nickel prices to soften in the medium term, says one analyst.
Financiers say funding for the project has been complicated by the role that Multiplex, the Australian construction firm, is playing in the development. Multiplex has a general contract mandate to build or procure all the project assets, ?a total turnkey package,? says Anderton. Multiplex's mandate also includes assisting and helping to arrange equity and debt finance on a non-fee basis, to the apparent annoyance of the banking community. ?The company has been slow to get the financing off the ground,? says a local finance source, ?and its continuing involvement is just making the financing unnecessarily complicated.?
Ravensthorpe's sponsors are approaching the banking sector to secure project debt now. Anderton says six of the major resource sector banks have been sent tender documents for the lead arranger mandate. Proposals are expected back this month and financial close is estimated in the second quarter of 2000.
Just as there are several potential nickel developments in Australia, AMC's Rockhampton magnesium venture is one of half a dozen similar magnesium proposals. Several key factors, however, set AMC's proposals apart, according to AMC's shareholders; Normandy Mining, Queensland Metals Corporation (QMC) and Flour Daniel but also to independent analysts. ?The rest are just aspirants,? says one banking player.
Colin Jackson, executive general manager, at Normandy, which has a 47.5% direct stake in AMC, says that other magnesium development proposals are located in areas which lack plentiful supplies of low-cost power, essential to economically producing the mineral. AMC, on the other hand, will operate in the shadow of the modern Stanwell power station. ?The competitor proposals will have to factor the cost of building a power station in to the overall project cost and that's going to add a lot to their overheads,? says Jackson. A source unconnected with the AMC deal explains that other magnesium ventures cannot simply build power transmission lines to their sites. ?Steam is an essential part of the magnesite treatment, not something that can be transferred long distances,? the source says.
Several of the alternative magnesium proposals are also planned around Russian magnesium treatment methods, technology that is not proven in the context of Australia's more stringent environmental laws. ?Nobody is sure at this time whether Russian methods can meet local environmental impact standards,? says a resource sector analyst. In contrast, AMC will use its own, purportedly far cleaner, production processes.
From a financing perspective, what gives the AMC deal its bankable status is the number of buyers already lined up for the output. AMC signed a deal with Ford Motor Company for 45% of designed output earlier in the year. Discussion with other takers for more than half of the remaining output are guaranteed to be sealed within six months, says Jackson. ?I know of no other magnesium project which has already got purchase contracts firmed up,? he says.
In addition, AMC is likely to be the first magnesium development up and running. AMC's demonstration plant in Gladstone produced its first batch of magnesium metal test angiitis in September. The pilot project is unusual for being much larger comparative to the proportions of the final plant than most other pilots. (It is one-fifteenth of the final plant's capacity) says Brad Glynne, head of resources at Citibank. Rumours of technical hitches at the test facility have been reported, ?but it's better to have them during test stages than the actual plant?, another finance source adds.
Banking sources say financing was scheduled for 1999 but for the technical hitches. Not so, says Jackson: ?Our own internal timetable for financial close has always been June 2000.? Jackson also says that the pilot plant has given the AMC project more accurate capital and operating cost information and a better chance of meeting production ramp up schedules than similar magnesium ventures.
The AMC deal has passed one more project milestone with the release of an environmental impact statement (EIS) in December. The public now has eight weeks to lodge their responses to the EIS. Subject to EIS-related modifications ordered by the government, key project data will be released to banks this month. As the government may require alternatives that could affect the total project cost, Jackson can't give exact data on project cost, but does confirm the ballpark figure of A$1billion. Project equity is expected to be between 30% and 40% of the total cost.
AMC is to be advised by an independent consultant, David Barker, formerly of Deutsche Morgan Grenfell, who now has the title of project finance manager.
On the other side of Australia, the West Angelas scheme is being developed through Robe River Iron Associates a joint-venture between indigenous mining company, North (with a 53% stake), Mitsui & Co (with a 33% stake), Nippon Steel and Sumitomo Metal. Joint-venture partners are all responsible for their own financing arrangements. The programme will certainly be on a large scale, (about A$900 million in total cost) but project finance opportunities are looking less likely as the year 2000 kicks off.
Development sponsors have not yet made a formal commitment to the project, according to sources in the consortium, however they are likely to do so in January. A formal government sign off of the environmental management plan is expected as Project Finance goes to press. ?If we commit to the project before the funding is finalized, we will go ahead and provide funds from our own corporate resources and then refinance at a later date,? says John Sanders, treasurer at North. Those initial financing arrangements will be followed by a 24-month construction period.
The project will require more than just the construction of mining facilities. Also planned is an expansion of port and stockpile capabilities at Port Lambert and (after Robe River failed to obtain rights to use Rio Tinto's Pilbara rail line) a sizeable private railway accounting for almost A$400 million of the total project cost. Of the other A$500 million required, 50% will be used on the port upgrade and 50% on the mine itself, says Sanders
A banking sector source say that the project's Japanese backers want the consortium itself to operate the railway, despite the opposition of North. ?That is likely to rule out project finance options because the funding sources are likely to want to have the railway financed on a build-own-operate (BOO) basis,? says Chris Tonkin in charge of ANZ's resource project finance team.
Sanders confirms the consortium did look at various schemes including BOO options with the help of ABN Amro as financial adviser. ?But at the end of the day we couldn't come up with a structure that satisfied all partners,? he says. Sanders does not, however, rule out a range of funding options including project finance.
Several bankers point out that North is only a very occasional visitor to the project finance markets. ?I don't think they are going to opt for project finance in their own backyard unless it is for the railway line itself,? says one of the financiers. Sanders echos the point: ?We view iron ore as a core commodity so we are less likely to go to third parties to fund the actual extraction assets.?
North also has the sort of balance sheet strength that would comfortably accommodate corporate financing for its share of the West Angelas project. Precisely because North hasn't borrowed extensively for its developments, the company has a gearing ratio of just 20%. In addition, North recently sold two businesses, Warman Pumps and its Kanawa Belle Gold Mine, netting A$263 million in the process. The sales allowed North to realise a profit of A$238 in the last financial year. Sanders says proceeds from the Warman sale are being used to further reduce debt ratios. A solid financial status is topped up by a completely undrawn A$735 million committed bank facility.
Sanders says the good news for project finance banks is that North is keen to improve the use of its capital resources and shareholder returns. It was for this reason that North was keen to consider the West Angelas railway being built, operated and possibly financed by a third party. ?We will be using off-balance sheet and operating lease solutions for as much of the capital spend in the West Angelas project as possible,? says Sanders, adding that the Japanese backers are fully behind BOT arrangements for less strategically important assets than the railway. ?For instance,? says Sanders, ?the power supply.?
North also has an ambitious expansion program that may draw its internal cash reserves away from the West Angelas deal. ?We want the company to be 50% bigger than it is now [currently net assets are worth a total of A$1.7 billion].? Recently North's managing director, Malcolm Broomhead, reported that the company plans to make about A$2 billion in acquisitions, targeting resource companies throughout the world.
If the prospects for a project finance deal looked mixed for North's portion of the West Angelas development, they look less likely for the Japanese. The Japanese Eximbank will be responsible for most of the funding for the Japanese consortium members, says Sanders.
Project Finance canvassed the opinions of local project financiers and found that of all the major green-field projects mooted, three are exciting most attention, both for their size and the fact that financing, in contrast to the more speculative developments, is likely to close in 2000. They are; the A$900 million ($657.89 million) Western Angelas Iron Ore development, Australian Magnesium Corporation's (AMC) proposed A$1 billion project and the A$720 million Ravensthorpe nickel deal.
Plans for nickel production at Ravensthorpe, in the south of Western Australia, are well advanced. Peter Anderton, managing director at Comet Resources, the key sponsor of the development, says that the feasibility study was completed about a year ago, a fact that surprised some of the banks now doing homework on Comet's plans. ?We've spent this last 12 months on optimization studies,? adds Anderton.
In the middle of November 1999, Comet achieved a big leap forward in its search for financing by securing the involvement of QNI, Billiton PLC's 100% Australian subsidiary, as equity partner. ?QNI will come in to the project as joint venture partners on a 50% to 50% basis,? says Anderton. Total equity amount will be aproximately A$90 million.
?QNI's arrival on the scene is a huge positive for the development, not just because of the increased equity volume or the fact that Comet itself is a relative unknown,? says one banker. ?Through QNI the development has now got a company with industry experience in nickel production processes,? the source explains. Ravensthorpe will be able to use QNI's proven low-cost technology, seen in action at QNI's Yabulu Nickel Refinery. At the same time, the bargain struck with QNI immediately removes market risk from the project. Ravensthorpe's total annual nickel equivalent concentrate will be shipped to QNI's facilities at Townsville on a take or pay contract, says Anderton.
The rise in the price of Nickel is a third positive for the project according to Comet. ?We've done all our modelling with an assumption of $2.75 to $3.00 per pound of Nickel, but now the price is up at about $3.50 a pound,? says the managing director. The obvious implication, further profit and revenue upside is likely to be treated with more than a little caution by financiers wary of volatile commodity prices. In fact, adding up total production plans of three fledgling laterite nickel mines in Western Australia alone, another 300,000 tonnes of nickel will be added to annual world production of the metal when they reach peak production. Total world demand is only about 1 million tonnes. The extra supply will inevitably cause nickel prices to soften in the medium term, says one analyst.
Financiers say funding for the project has been complicated by the role that Multiplex, the Australian construction firm, is playing in the development. Multiplex has a general contract mandate to build or procure all the project assets, ?a total turnkey package,? says Anderton. Multiplex's mandate also includes assisting and helping to arrange equity and debt finance on a non-fee basis, to the apparent annoyance of the banking community. ?The company has been slow to get the financing off the ground,? says a local finance source, ?and its continuing involvement is just making the financing unnecessarily complicated.?
Ravensthorpe's sponsors are approaching the banking sector to secure project debt now. Anderton says six of the major resource sector banks have been sent tender documents for the lead arranger mandate. Proposals are expected back this month and financial close is estimated in the second quarter of 2000.
Just as there are several potential nickel developments in Australia, AMC's Rockhampton magnesium venture is one of half a dozen similar magnesium proposals. Several key factors, however, set AMC's proposals apart, according to AMC's shareholders; Normandy Mining, Queensland Metals Corporation (QMC) and Flour Daniel but also to independent analysts. ?The rest are just aspirants,? says one banking player.
Colin Jackson, executive general manager, at Normandy, which has a 47.5% direct stake in AMC, says that other magnesium development proposals are located in areas which lack plentiful supplies of low-cost power, essential to economically producing the mineral. AMC, on the other hand, will operate in the shadow of the modern Stanwell power station. ?The competitor proposals will have to factor the cost of building a power station in to the overall project cost and that's going to add a lot to their overheads,? says Jackson. A source unconnected with the AMC deal explains that other magnesium ventures cannot simply build power transmission lines to their sites. ?Steam is an essential part of the magnesite treatment, not something that can be transferred long distances,? the source says.
Several of the alternative magnesium proposals are also planned around Russian magnesium treatment methods, technology that is not proven in the context of Australia's more stringent environmental laws. ?Nobody is sure at this time whether Russian methods can meet local environmental impact standards,? says a resource sector analyst. In contrast, AMC will use its own, purportedly far cleaner, production processes.
From a financing perspective, what gives the AMC deal its bankable status is the number of buyers already lined up for the output. AMC signed a deal with Ford Motor Company for 45% of designed output earlier in the year. Discussion with other takers for more than half of the remaining output are guaranteed to be sealed within six months, says Jackson. ?I know of no other magnesium project which has already got purchase contracts firmed up,? he says.
In addition, AMC is likely to be the first magnesium development up and running. AMC's demonstration plant in Gladstone produced its first batch of magnesium metal test angiitis in September. The pilot project is unusual for being much larger comparative to the proportions of the final plant than most other pilots. (It is one-fifteenth of the final plant's capacity) says Brad Glynne, head of resources at Citibank. Rumours of technical hitches at the test facility have been reported, ?but it's better to have them during test stages than the actual plant?, another finance source adds.
Banking sources say financing was scheduled for 1999 but for the technical hitches. Not so, says Jackson: ?Our own internal timetable for financial close has always been June 2000.? Jackson also says that the pilot plant has given the AMC project more accurate capital and operating cost information and a better chance of meeting production ramp up schedules than similar magnesium ventures.
The AMC deal has passed one more project milestone with the release of an environmental impact statement (EIS) in December. The public now has eight weeks to lodge their responses to the EIS. Subject to EIS-related modifications ordered by the government, key project data will be released to banks this month. As the government may require alternatives that could affect the total project cost, Jackson can't give exact data on project cost, but does confirm the ballpark figure of A$1billion. Project equity is expected to be between 30% and 40% of the total cost.
AMC is to be advised by an independent consultant, David Barker, formerly of Deutsche Morgan Grenfell, who now has the title of project finance manager.
On the other side of Australia, the West Angelas scheme is being developed through Robe River Iron Associates a joint-venture between indigenous mining company, North (with a 53% stake), Mitsui & Co (with a 33% stake), Nippon Steel and Sumitomo Metal. Joint-venture partners are all responsible for their own financing arrangements. The programme will certainly be on a large scale, (about A$900 million in total cost) but project finance opportunities are looking less likely as the year 2000 kicks off.
Development sponsors have not yet made a formal commitment to the project, according to sources in the consortium, however they are likely to do so in January. A formal government sign off of the environmental management plan is expected as Project Finance goes to press. ?If we commit to the project before the funding is finalized, we will go ahead and provide funds from our own corporate resources and then refinance at a later date,? says John Sanders, treasurer at North. Those initial financing arrangements will be followed by a 24-month construction period.
The project will require more than just the construction of mining facilities. Also planned is an expansion of port and stockpile capabilities at Port Lambert and (after Robe River failed to obtain rights to use Rio Tinto's Pilbara rail line) a sizeable private railway accounting for almost A$400 million of the total project cost. Of the other A$500 million required, 50% will be used on the port upgrade and 50% on the mine itself, says Sanders
A banking sector source say that the project's Japanese backers want the consortium itself to operate the railway, despite the opposition of North. ?That is likely to rule out project finance options because the funding sources are likely to want to have the railway financed on a build-own-operate (BOO) basis,? says Chris Tonkin in charge of ANZ's resource project finance team.
Sanders confirms the consortium did look at various schemes including BOO options with the help of ABN Amro as financial adviser. ?But at the end of the day we couldn't come up with a structure that satisfied all partners,? he says. Sanders does not, however, rule out a range of funding options including project finance.
Several bankers point out that North is only a very occasional visitor to the project finance markets. ?I don't think they are going to opt for project finance in their own backyard unless it is for the railway line itself,? says one of the financiers. Sanders echos the point: ?We view iron ore as a core commodity so we are less likely to go to third parties to fund the actual extraction assets.?
North also has the sort of balance sheet strength that would comfortably accommodate corporate financing for its share of the West Angelas project. Precisely because North hasn't borrowed extensively for its developments, the company has a gearing ratio of just 20%. In addition, North recently sold two businesses, Warman Pumps and its Kanawa Belle Gold Mine, netting A$263 million in the process. The sales allowed North to realise a profit of A$238 in the last financial year. Sanders says proceeds from the Warman sale are being used to further reduce debt ratios. A solid financial status is topped up by a completely undrawn A$735 million committed bank facility.
Sanders says the good news for project finance banks is that North is keen to improve the use of its capital resources and shareholder returns. It was for this reason that North was keen to consider the West Angelas railway being built, operated and possibly financed by a third party. ?We will be using off-balance sheet and operating lease solutions for as much of the capital spend in the West Angelas project as possible,? says Sanders, adding that the Japanese backers are fully behind BOT arrangements for less strategically important assets than the railway. ?For instance,? says Sanders, ?the power supply.?
North also has an ambitious expansion program that may draw its internal cash reserves away from the West Angelas deal. ?We want the company to be 50% bigger than it is now [currently net assets are worth a total of A$1.7 billion].? Recently North's managing director, Malcolm Broomhead, reported that the company plans to make about A$2 billion in acquisitions, targeting resource companies throughout the world.
If the prospects for a project finance deal looked mixed for North's portion of the West Angelas development, they look less likely for the Japanese. The Japanese Eximbank will be responsible for most of the funding for the Japanese consortium members, says Sanders.
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