Baja Mining has signed the $858 million debt financing for the construction of its Boleo copper-cobalt-zinc-manganese mine in Baja California, Mexico. The financing assembles a diverse number of sources of debt, one of them a first-time lender, for one of the largest financings for a Mexican mining project to date. It also features the largest loan ever from US Ex-Im to a mining project, Ex-Im’s fifth this year, after a long break from mining.

Baja owns 70% of Boleo, and Boleo is Baja’s only project. Baja managed to bring the large multi-sourced financing for Boleo to completion and gave up only 30% of its equity to outside providers. The minority owners – a consortium of Korean metals buyers – brought huge advantages to the financing, including the participation of the Korean Development Bank as both a senior and subordinated lender, in its first overseas natural resources financing.

The Korean consortium consists of Korea Resources Corporation (Kores), a government owned buyer of energy and minerals, together with large industrial and manufacturing users LS Nikko Copper, Hyundai Hysco, SK Networks, and Iljin Copper. Their involvement followed an initial agreement between Kores and Baja in April 2008, under which it took a 30% stake in the project.

Baja has been developing the Boleo project since 2003, when it was known as First Goldwater. In late 2006, a little over two years after changing its name to Baja, it hired Endeavour Financial as its financial adviser, and in September 2007 closed a $10 million, 10% bridge loan with Endeavour to finance long lead-time items. Later that month it mandated HVB/UniCredit to provide a $475 million 12-year senior project loan and an eight-year $40 million cost overrun facility.

Baja’s priority, with a little under 144 million shares outstanding, and after financing exploration at Boleo with equity placements, was to minimise any further dilution to shareholders. The Korean investment meant giving up a 30% stake in the project, but brought with it $103 million in cash, a subordinated shareholder loan of $50 million, a promise to help find another $60 million in subordinated project debt, and the entry of Korea Ex-Im as a senior debt provider.

By July 2008, the senior debt consisted of a $300 million 17-year Kexim loan, a 12-year $325 million project loan from Unicredit, and a $40 million cost overrun facility from Unicredit. But by October, and with Lehman’s collapse not far behind, Baja said it would delay development at Boleo while it worked on a revised financing plan. Such large debt commitments would not work for either the commercial or the ECA lender.

Baja also worked to cut back on the project’s $991 million capital cost to something nearer $889 million (which included a $92.3 million contingency). In May 2009 it selected ICA/Fluor’s Mexican joint venture as engineering, procurement and construction management contractor, and restarted mine development. Negotiations with Kexim went less well, and by April 2010, the project’s financing mix had changed. The sponsor needed to find $1.1436 billion in total, consisting of the capital cost, another $100 million cost overrun allowance and $154.1 million in financing and other costs.

This cast of project lenders, which held through to financial close, consisted of the Korea Development Bank, with a $90 million 12-year senior loan and $64 million 15-year subordinated loan, Export Development Canada, with a 14-year loan of $150 million, a $50 million 10-year commercial senior bank tranche and $50 million commercial subordinated tranche from Barclays Capital, Standard Bank, Standard Chartered Bank, Unicredit and WestLB, and a $419 million 14-year loan from US Ex-Im. Ex-Im was able to make such a large commitment on the back of exports from US suppliers FL Smidth and Flowmax. The financing is slightly larger than Ex-Im’s second-biggest mining deal this year, $375 million for Barrick’s Pueblo Viejo gold mine in the Dominican Republic. The Ex-Im, EDC and subordinated KDB totals include capitalised interest.

For all the firsts for the KDB and Ex-Im, the most interesting features of the financing happened around the margins. The Korean consortium had agreed to buy 30% of each of the minerals produced at Boleo. In June, Baja signed a 10-year offtake agreement with commodities trader Louis Dreyfus for 70% of the mine’s copper and cobalt production. This agreement included a $40 million equity investment by the offtaker in Baja, and a $35 million cost overrun letter of credit backed by Louis Dreyfus.

The letter allows Baja to build in a smaller contingency than it might otherwise have to include, and then fund with equity. If drawn, and Louis Dreyfus makes whole the lender, it has the right to convert any draw into Baja shares, and if undrawn or cancelled, it would still receive warrants. The structure recognises that as a single project company Baja’s ability to make good on cost overruns, whatever its completion guarantee, is limited. Its use will be limited to projects that strike up relationships with highly-rated offtakers.

Boleo is located in Baja California Sur, close to the town of Sanata Rosalia. Over the life of the mine it will produce an annual average of 84 million pounds of copper concentrate, 3.6 million pounds of Cobalt, and 28,400 tonnes of zinc. Assuming prices of $2.91 per pound for copper, $26.85 per pound of cobalt, and $0.53 per pound of zinc, Baja says the mine will produce an internal rate of return of 25.6%.

Funding on the debt is still dependent on the sponsors putting in place a hedging programme, and contributing their equity. Of the total $321.1 million equity component, the Korean consortium is contributing $103.7 million in equity, and its $50 million shareholder loan and the Louis Dreyfus letter of credit count against its residual $224.8 million requirement. It needs to find $154.5 million to round out its equity requirement and meet some corporate expenses.

Minera y Metalurgica del Boleo
Status: Signed 28 September, funding dependent on meeting hedging and equity commitments
Size: $1.1436 billion
Location: Baja California, Mexico
Description: Copper-cobalt-zinc-manganese mine
Sponsors: Baja Mining (70%), Korean consortium (30%)
Debt: $822.5 million
Providers: Korea Development Bank, Export Development Canada, US Ex-Im, Barclays Capital, Standard Bank, Standard Chartered Bank, Unicredit and WestLB
Lender legal counsel: Mayer Brown
Sponsor legal counsel: Allen & Overy
Independent engineer: Micon
Sponsor financial adviser: Endeavour Mining
EPC-M contractor: ICA/Fluor