Cerro Matoso: the iron-clad nickel deal
Syndication closes on December 8 on the $240 million Cerro Matoso
mining project financing - a sign that confidence is returning to
the market in Latin America. The mine, located in the Cordoba
province in north-west Colombia, requires the financing to expand
its annual production capacity by around 90%.
The brownfield expansion project builds on the 18-year production history at the Billiton-managed mine. Its integrated ferronickel mining and smelting operation accounts for about 11% of world capacity. Barclays Capital acted as lead arrangers, book agents and joint book-runners.
Getting funding presented a challenge given the depressed state of the world nickel market and the sovereign risk perceptions surrounding Columbia. This had to be confronted earlier this year when the sovereign rating level of the country slipped below investment grade. The structure of the deal was designed to mitigate these factors, although it contained features tried and tested in the Latin mining market.
Sovereign risk came down to two separate aspects: local currency fears and material risk of disruption. The first was mitigated through an offshore account structure - production revenues and debt servicing took place outside of the Colombian financial system, with a Billiton group company acting as offtaker.
Billiton is providing a pre-completion guarantee through its finance arm and their relatively benign local presence should minimise the prospect of the physical interruption of both energy and output lines. The guarantee has brought the pre-completion pricing on the loan down to the 100bp level. In addition to a comprehensive security package, the deal also contains provisions for the taking out of political risk insurance, although given the disclosure issues at work, the identity of any provider is unlikely to emerge. This cover will be put in place post completion, after Billiton Finance BV's role is complete.
Joining Barclays Capital as lead arrangers were ABN Amro, Citibank and Deutsche Bank, as well as ANZ and the EDC, the latter acting chiefly in a financing capacity. Barclays were impressed with the response they received - $422.5 million from 15 banks - and claim the assets could have supported more than the $240 million on offer. Their managing director and global head of mining and metals, Gerard Holden describes the syndication partners as "a first class group of experienced and Billiton relationship banks".
Holden does not believe that the sovereign risk structure offers up any greatly unusual features - the measures put in place have been developed in recent years to cope with the fall-out from the Latin American crisis. With a history of providing funding in this context, banks can afford to be more relaxed: "I don't think it makes too much difference what the country rating is unless it's in serious trouble". Billiton are also familiar with this structure - they have a similar package in place for their MOZAL aluminium operation in Mozambique.
The success of the deal lay more in coping with the context of metals prices. "The structure was quite flexible to deal with the volatility of the nickel markets", says Holden. He points to the fact that 12 months ago, when the package was being put together, nickel stood at $1.83/lb. It is now over $3.50.
This uncertainty makes nickel mining deals some of the harder projects to finance. Billiton's offtake agreement went some way to mitigating this, as did their record as a sponsor, in particular their size and reliability. The chief mitigant, however, was the record of the Cerro Matoso deposit itself. Described as one of the richest lateritic nickel deposits in the world, its estimated reserve life is around thirty years. The project, as a brownfield expansion, is reliant on proven, existing mining technology. The upgrade in ancillary supply facilities to provide for the expansion, such as increased energy use at the smelter, are not expected to contribute greatly to capital expenditure.
Bechtel carried out the feasibility study for Billiton and estimated costs for the life of the mine stand at the lower end of the cost curve, well within the most pessimistic forecasts for nickel prices.
Indeed, although banks have so far been slow in responding to more bullish price predictions for metals in general, partly waiting for a resolution of the sovereign issues, a consensus at least on mining prospects might be emerging. Holden for one is optimistic: "I think we'll see other metals prices turn the corner, and this will feed through into mining activity".
The sovereign rating of Colombia has also now stabilised, partly through the increased ability of the current administration to convince analysts of the sincerity of their restructuring plans. The strength of the Peso in the wake of the government's decision to let it float freely has surprised many analysts. Latin American currencies, however, are scarcely less volatile than nickel prices, which are at the moment benefiting from labour disputes at a prominent Canadian producer.
Billiton has recently begun examining a new laterite nickel deposit in Australia, although it is too early to start talking about a deal mandate.
The brownfield expansion project builds on the 18-year production history at the Billiton-managed mine. Its integrated ferronickel mining and smelting operation accounts for about 11% of world capacity. Barclays Capital acted as lead arrangers, book agents and joint book-runners.
Getting funding presented a challenge given the depressed state of the world nickel market and the sovereign risk perceptions surrounding Columbia. This had to be confronted earlier this year when the sovereign rating level of the country slipped below investment grade. The structure of the deal was designed to mitigate these factors, although it contained features tried and tested in the Latin mining market.
Sovereign risk came down to two separate aspects: local currency fears and material risk of disruption. The first was mitigated through an offshore account structure - production revenues and debt servicing took place outside of the Colombian financial system, with a Billiton group company acting as offtaker.
Billiton is providing a pre-completion guarantee through its finance arm and their relatively benign local presence should minimise the prospect of the physical interruption of both energy and output lines. The guarantee has brought the pre-completion pricing on the loan down to the 100bp level. In addition to a comprehensive security package, the deal also contains provisions for the taking out of political risk insurance, although given the disclosure issues at work, the identity of any provider is unlikely to emerge. This cover will be put in place post completion, after Billiton Finance BV's role is complete.
Joining Barclays Capital as lead arrangers were ABN Amro, Citibank and Deutsche Bank, as well as ANZ and the EDC, the latter acting chiefly in a financing capacity. Barclays were impressed with the response they received - $422.5 million from 15 banks - and claim the assets could have supported more than the $240 million on offer. Their managing director and global head of mining and metals, Gerard Holden describes the syndication partners as "a first class group of experienced and Billiton relationship banks".
Holden does not believe that the sovereign risk structure offers up any greatly unusual features - the measures put in place have been developed in recent years to cope with the fall-out from the Latin American crisis. With a history of providing funding in this context, banks can afford to be more relaxed: "I don't think it makes too much difference what the country rating is unless it's in serious trouble". Billiton are also familiar with this structure - they have a similar package in place for their MOZAL aluminium operation in Mozambique.
The success of the deal lay more in coping with the context of metals prices. "The structure was quite flexible to deal with the volatility of the nickel markets", says Holden. He points to the fact that 12 months ago, when the package was being put together, nickel stood at $1.83/lb. It is now over $3.50.
This uncertainty makes nickel mining deals some of the harder projects to finance. Billiton's offtake agreement went some way to mitigating this, as did their record as a sponsor, in particular their size and reliability. The chief mitigant, however, was the record of the Cerro Matoso deposit itself. Described as one of the richest lateritic nickel deposits in the world, its estimated reserve life is around thirty years. The project, as a brownfield expansion, is reliant on proven, existing mining technology. The upgrade in ancillary supply facilities to provide for the expansion, such as increased energy use at the smelter, are not expected to contribute greatly to capital expenditure.
Bechtel carried out the feasibility study for Billiton and estimated costs for the life of the mine stand at the lower end of the cost curve, well within the most pessimistic forecasts for nickel prices.
Indeed, although banks have so far been slow in responding to more bullish price predictions for metals in general, partly waiting for a resolution of the sovereign issues, a consensus at least on mining prospects might be emerging. Holden for one is optimistic: "I think we'll see other metals prices turn the corner, and this will feed through into mining activity".
The sovereign rating of Colombia has also now stabilised, partly through the increased ability of the current administration to convince analysts of the sincerity of their restructuring plans. The strength of the Peso in the wake of the government's decision to let it float freely has surprised many analysts. Latin American currencies, however, are scarcely less volatile than nickel prices, which are at the moment benefiting from labour disputes at a prominent Canadian producer.
Billiton has recently begun examining a new laterite nickel deposit in Australia, although it is too early to start talking about a deal mandate.
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