The cost of bringing major mining projects online has risen sharply in recent years, and commercial lenders struggle, in a still-constricted credit market, to provide all the capital that mine developers require. “Getting transactions done in the bank market at the moment is nearly impossible,” explains one mining developer, “at least with a manageable number of institutions.”

While some sponsors have opted for an all-equity solution for their developments, as Moly Mines has on its Spinifex Ridge molybdenum project, borrowers have been leaning ever more heavily on multilateral lenders and and export credit agencies (ECAs).

Barbara O’Boyle, vice-president, project and structured finance at US Ex-Im Bank, notes that, “Commercial banks have had to pull back on lending as funding is less readily available, and as a result the ECAs have seen much more activity. We’re much busier when it’s a bad market, but it will change. ECA activity is often counter-cyclical.”

For US Ex-Im, the credit crisis has resulted in a significant change in its mining experience, as it had not been as active in the mining sector as agencies such as EDC and KfW. “We used to see maybe one mining project every five years, but now we’re seeing many more,” says O’Boyle. “Last year we loaned around $800 million to two mining deals.” The ECA loans are still pending approval, though Barrick and Goldcorp signed on their $1.35 million Puerto Viejo gold mine development in the Dominican Republic in March 2010 with funding expected imminently.

The debt, which has taken almost two years to arrange, includes a 12-year $260 million bank loan from Scotia Capital, Standard Chartered, CIBC, ING and KfW-IPEX, which priced at 215bp over Libor. Export Development Canada (EDC) is offering political risk insurance, plus a 15-year, $400 million debt commitment, and a margin of 325bp over Libor; US Ex-Im will also provide a 15-year loan (including construction), with an all-in rate of 4.02%.

Hugo Dryland, global head of mining and metals at Rothschild in Washington DC, advised the borrowers on Puerto Viejo and also on the Esperanza project last year. He notes that, for the Puerto Viejo project “the sponsors and lenders successfully overcame a number of challenges, in securing a group financing in what may be described as a tumultuous market.”

Baja Mining’s Boleo project in Mexico is one such deal that stalled in its early days and is now being revived with agency debt replacing the bank tranches from the previous financing plan. The project is in the process of financing with a number of multilateral tranches, including loans from the EDC and US Ex-Im. The sponsor also anticipates some commercial bank debt to round out the financing.

EDC has been the most consistently active of the ECAs, given the outsized importance of Canadian-listed developers, Canadian banks, and Canadian exporters and service providers to the mining industry. According to Doug Macaulay, director of mining, metals and resources in EDC’s project finance group “The pipeline has increased and deals that had stalled as a result of the economic climate are beginning to pick up pace. We believe that there will be larger underwriting requirements in the coming years for mining projects and we have a positive view of the medium- to longer-term fundamentals for most of the mineral commodities we see in the mining project finance market.”

Lenders of necessity

“Looking at it cynically, this type of financing comes in waves,” says an advisory banker close to a number of recently-signed deals. “Commercial banks get to the point where they are over-exposed and increasingly competitive and then something happens which means they have to retrench.” Or as EDC’s Macaulay puts it: “The last peak commodities and credit cycles coincided. Mining sponsors, before the crisis, had access to a broad variety of sources of new capital, particularly new ones like hedge funds, offtakers, commodities traders, pension funds. In general they’d maximise their use of commercial source of financing – and this still primarily meant commercial banks – before rounding out their requirements with ECAs. Now the reverse is true, because sponsors first go to agencies to get an idea of the available debt capacity. Some of the newer sources of capital, especially offtakers, are coming back, but there will continue to be an important role for ECAs.”

EDC, however, is something of an anomaly, since it works primarily as a commercial debt arranger, working alongside – and competing against – commercial banks, and as a provider of political risk insurance. Other ECAs tend to provide financing or comprehensive cover at a fixed CIRR rate, while EDC, though it complies with the same set of OECD guidelines, tends to offer floating rate debt. Circumstances have made all ECAs busier, but have not prompted them to re-evaluate their models. As Macaulay puts it “it may be less important to pick between models than to ensure the various lenders can collaborate effectively together.”

The advisory banker continues, “These agencies are lending large chunks of money out of necessity. But export and import credit agencies are ulterior-motive lenders, either working in the national interest to boost economies or to secure supplies for their domestic markets. It is not just about what margin they can get on their loan. Some agencies, in countries such as Finland, Germany, Korea and Japan, require the sale of the natural resources to consumers in their home market from projects in which they invest as a condition of the debt, at least for the term of their loan commitment.”

Mining deals tend to throw off more cash and have shorter payback than essential infrastructure deals, but also bring more external scrutiny. For agencies such as US Ex-Im, debt pricing follows rigid and legislatively-mandated guidelines, whereby the only area of variability is whether, and how, the risk is rated. “The maximum maturity we offer is 14 years post-construction, but sponsors haven’t needed that length of debt as their expected cash flows have tended to be sufficient sooner,” says Ex-Im’s O’Boyle.

Outside of the OECD consensus rules, pricing structures and policies vary significantly. JBIC has offered consistently attractive margins, though its interest rates track the commercial market, and for recent projects JBIC debt has not diverged from Japanese commercial capital market rates by more than 50bp to 100bp.

Newer entrants to the mining market and, particularly, competition from Chinese metals buyers and their lenders, have forced JBIC to maintain its competitive edge. “China’s huge demand for natural resources has had a big impact on Japan,” says Kohei Toyoda, deputy division chief in JBIC’s energy and natural resources finance department, “the competition for these resources has become tougher. We need to find new projects and sources in the regions far from Japan, like Latin America and Africa, which are rich in these resources.”

Despite some degree of competition between certain regions, debt pricing has increased, for the most part, across both the commercial and multilateral credit markets, but borrowers are prepared to pay more for their debt when their equity also comes at a premium. “The biggest challenge for JBIC in financing the mining market is the fluctuation in the price of natural resources,” says Toyoda. “Cash-flow projections have been affected and they have had to deviate from the original schedules. Lenders have faced some challenges in restructuring project debt as a result of the price downturn.”

Digging for equity

The increased price of commodities has dampened some of the after-effects of the crunch, because sponsors, on the back of the boom in prices, had sufficient retained earnings to increase equity contributions when price forecasts turned south. “Sponsors have had to inject more equity into their projects, but because of the hike in prices for these resources pre-2008, many of them had available equity reserved.”

Increased equity contributions to mining projects took place because of increased lender inflexibility. “All the mining projects in my portfolio had more equity added post-crisis,” notes one ECA lender. However, many sponsors cannot afford to let equity carry projects for a sustained period of time, and newer entrants to the mining market have sought alternative financing solutions, including Chinese equity and streaming deals, more readily.

“Previously there were more first-tier companies developing mining projects and seeing funding from us, but there are now a lot more smaller developers seeking ECA funding as raising equity and debt is more challenging for them.” Multilateral and ECA debt appeals to sponsors for reasons beyond pricing and funding certainty, “In trickier markets, we prefer this kind of sovereign-backed debt,” says one mining adviser. “It carries political risk mitigation and the governments in the project countries are more likely to leave us alone.”

Some sponsors view debt from development lenders and multilaterals as slightly more problematic than that from ECAs for mining projects, as their perceived interests are not so closely aligned. “Development agencies are another source of capital, but their loans come with more baggage,” says one borrower. “They come under greater NGO scrutiny than the ECAs. For sponsors, that means that the social and environmental requirements for debt provision are much more rigorous.”
The International Finance Corporation is in the process of approving a $300 million loan to Ivanhoe Mines’ $4.6 billion Oyo Tolgoi mine development in Mongolia. When completed, the mine is set to become the biggest private-sector investment in the country. Ivanhoe has lined up $2 billion in commitments not just from the IFC, but also from the EBRD, BNP Paribas, Standard Chartered and Export Development Canada, towards the project. It is also, however, locked in a dispute with Rio Tinto over the mine’s ownership structure, which has led to Rio Tinto filing an arbitration claim.

Environmental concerns

For lenders, environmental and social risk has the greatest potential for long-term reputational damage. Though export credit agencies are required to follow similar guidelines, and many settle on the Equator Principles, one mining sponsor believes that: “ECA motivation and purpose is different from that of a development bank. There is a particular media hostility towards mining projects, and also oil and gas, more so than with other infrastructure and power developments with similar environmental impact,” he believes.

He continues, “Lenders are getting stricter about who they’ll provide debt to, and sponsors are conscious of their corporate social responsibility profiles. Lending agencies are therefore all the more cautious and want to make their own, internal, assessments to ensure compliance with environmental procedures and compliance with the terms of the loan.”
The Puerto Viejo project skirts these concerns by being located at an existing brownfield site. Rothschild’s Dryland notes that, “The project is unusual as it will subsume and clean up the existing operations and replace them with facilities that meet all the modern environmental standards.”

EDC’s Macaulay believes that sponsors and lenders are embracing the environmental regulatory requirements, as they enhance the projects in the long term. “There is a tremendous convergence of how lenders now approach CSR and environmental concerns,” he says. “It increases the complexity of the deal but if everyone is complying to the same principles it strengthens the ability of sponsors to close financing, and a project’s accountability to shareholders, civil society and shareholders.”

Macaulay also notes that there are a number of CSR issues that are new to the structuring and project financing of mining assets; “Biodiversity, and sociological issues such as resettlement and human rights – there isn’t a lot of case history, so the sponsors and lenders have to work together to get it right.”

Chinese cheques

China is growing rapidly in importance in the mining market, and has already created significant waves. The China Development Bank, a state-owned entity, as well as the main Chinese export lender, Chexim, have been active since the crunch in several jurisdictions. “They’re pretty inexperienced as lenders in the mining sector,” says a source familiar with the China Development Bank, “and, for the other participants in a given deal, it is taking some time and effort to educate them.”

European Nickel sought Chinese financing for its Caldag mine in Turkey last year, after its mandated commercial banks, Societe Generale, Standard Bank and Standard Chartered, proved reluctant to lend with the sponsor putting up only 20% of the project’s cost as equity. Chinese-domiciled companies held the engineering, procurement and construction contract and an eventual 100% offtake agreement with state-owned entities Jiangxi Rare Earth and Rare Metals Tungsten, after one of the original offtakers, BHP Billiton, withdrew its contract.

Despite the Chinese interest, the negotiations were lengthy and ultimately unsuccessful. The sponsor is now raising further equity, in a partnership with Hunter Dickinson’s affiliate, Constantia Resources, and bank debt to be arranged by Société Générale and Unicredit, plus a post-financial close private placement to round out the financing requirement.
One adviser familiar with Chinese mining activity says, “It’s difficult to get project financing off the ground in any market, but in a credit crunch, when the commercial lenders are far fewer it’s even tougher. There is a perception that the Chinese will lend with less rigorous due diligence and offer more attractive pricing on its debt, but that is true only if you can get it.”

He continues, “What we’ve seen with the China Development Bank and, to some extent, Chinese lenders on mining deals, is that the timelines are much more protracted. You might get cheaper debt, but you’ll have to wait a hell of a time for it, and there is less certainty that it will be funded.”

Despite serious teething problems, China’s import requirements for natural resources are an incentive for its state-owned lenders to persevere in breaking into the market. Japan sees China as a competitor for commodities and, as well as offering attractive debt for projects, is also looking for other ways to enhance its access to resources.

“Russia is a big player in the natural resources market,” notes JBIC’s Toyoda, “but it faces some difficulties due to the downturn in commodities prices. Because Russia is an exporter and Japan is an importer of natural resources, the two countries have maintained a reciprocal relationship which could be further enhanced.”

The cycle continues

As conditions improve, ECAs and multilateral lenders all agree that their involvement should become less of a necessity. However, some note that there has been a more pronounced shift during the recent downturn, and that their roles have changed.

“We advise borrowers that a mix of commercial and agency debt works well, and though sponsors sometimes do not favour larger clubs, as there is a perception they can be more cumbersome. We think it is preferable to split the due diligence and make sure all the bases are covered, which means there is a greater confidence in the finished deal,” says EDC ‘s Macaulay. “Artificially limiting the number of lenders at the table is not good for any party.”

But ECA debt will always be available – on attractive terms – to ensure host-country access to important commodities. When national interest is at stake, whether in the form of promoting domestic companies and manufacturers or ensuring requisite commodities are imported, or to mitigate environmental concerns by providing regulatory guidance, ECAs will still be responsive.