Baja Mining’s El Boleo project financing is one of the largest project financings to date for a junior miner – at the date of execution of the $823 million project debt Baja had a market capitalization of only $150 million and Boleo is its only project. The deal also incorporates a diverse range of debt sources and features the largest loan ever from US Ex-Im to a mining project.

One of Baja’s priorities, with around 144 million shares outstanding and after financ­ing exploration at Boleo with equity place­ments, was to minimise shareholder dilution. This it managed by giving up just 30% of its equity in the project company, Minera y Metalurgica del Boleo (MMB), to a Korean consortium – 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 – in 2008.

The Korean investment 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, after a failed first debt raising with UniCredit and Kexim in 2008, the participation of the Korean Development Bank (KDB) as both a senior and subordinated lender, in its first overseas natural resources financing.

Boleo is located in Baja California Sur, close to the town of Sanata Rosalia. Boleo is primarily an underground mine and is projected to produce annual volumes of roughly 60,000 tonnes of copper cathode, 1,500 tonnes of cobalt cathode and 25,000 tonnes of zinc sulphate over a 23-year mine life. Baja has been developing the project since 2003, when it was known as First Goldwater.

Financing kicked off in late 2006 when Baja hired Endeavour Financial as its financial adviser. In September 2007 it 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.

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 fallout from Lehman’s collapse spreading, Baja was forced to rethink and to try and 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 to update the project costs. Simultaneously Baja approached US Ex-Im and Export Development Canada (EDC) and the funding mix started to change.

The final cast of lenders comprises KDB with a $90 million 12-year senior loan and $64 million 15-year subordinated loan; EDC 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, which was able to make such a large commitment on the back of exports from US sup­pliers FL Smidth and Flowmax. The Ex-Im, EDC and subordinated KDB totals include capitalised interest.

Baja and the Korean consortium have executed pro rata completion guarantees to support MMB’s obligations to the senior lenders. The debt package is attractively priced and benefits from very long tenors for a large tranche of the debt.

The project was initially backed only by a 30% offtake agree­ment with the Korean consortium. However, in June 2010 Baja signed a 10-year offtake program with Louis Dreyfus Commodities (LDC) for the remaining 70% of copper/cobalt production.

The LDC agreement includes equity cost overrun support for the project. The convertible equity is made available by letter of credit, which converts into common shares in Baja if cost overruns occur. The conversion strike price is equal to the price at which Baja completed its C$184 million equity financing in November 2010. In the deal, underwritten by a syndi­cate co-led by Raymond James and Canaccord, and including Cormark Securities, CIBC World Markets and Haywood Securities, Baja issued 167,325,000 common shares at a price of C$1.10 per common share. If the cost overrun facili­ty is cancelled or unused, LDC will receive bonus war­rants in exchange for providing the facility. The warrants are priced at 125% of Baja’s equity issue price.

The equity financing fully funded the project and was fol­low­ed by completion of a zero cost collar copper hedge programme in December – one of the final major conditions precedent required under the loan agreements. MMB pur­chas­ed put options with a strike price of $5,291 per tonne and sold call options with an average strike price of $8,760 per tonne for 50% of the estimated copper production for the three-year period from January 2014 to December 2016, totalling 87,360 tonnes of copper. The remainder of Boleo’s copper production over its anticipated 23-year mine life will be sold at spot copper prices. Boleo’s cobalt and zinc sulphate production will also be sold at prevailing market prices. The hedge program was arranged with Barclays Capital, Standard Bank, Standard Chartered, UniCredit and WestLB.

Minera y Metalurgica del Boleo
Status: Financial close 28 September 2010
Project size: $1.1436 billion
Debt: $822.5 million
Location: Baja California, Mexico
Description: Copper-cobalt-zinc-manganese mine
Sponsors: Baja Mining, Korea Resources Corporation, LS Nikko Copper, Hyundai Hysco, SK Networks, Iljin Materials
Lead arrangers: Korea Development Bank, Export Development Canada, US Ex-Im, Barclays Capital, Standard Bank, Standard Chartered Bank, UniCredit, WestLB
Admin and collateral agent: Deutsche Bank Trust Company Americas
Lender legal counsel: Mayer Brown
Sponsor legal counsel: Allen & Overy
Independent engineer: Micon
Financial adviser: Endeavour Financial
Contractors: ICA Fluor, SNC Lavalin, Bateman Advanced Technologies, FLSmidth
Offtaker: Louis Dreyfus Commodities