For large, listed, cash-rich operators with established track records, tapping the commercial debt market has become easier since the credit crisis. For smaller or less creditworthy borrowers, or those just wanting to operate in risky African countries, ECA and development bank support is vital in helping access long-term, cheaper finance. As the conti­nent offers up more projects in testing juris­dictions such funding sources will in­creas­ingly come to the fore.

Commercial lenders won’t consider Africa risk without multilateral and ECA support, and even then debt is ex­pen­sive by developed market stan­dards – a measure of the risk involved. For example, AIM-listed mining group Mwana Africa’s Freda Rebecca gold mine, located near Bindura, recently drew on a $10 million project loan. The Industrial Development Corporation of South Africa is providing the debt, with political risk insurance from the Export Credit Insurance Corporation of South Africa. Although Mwana has produced an average of 2,569 ounces per month since it opened in August 2010, the debt size is relatively small and the five-year deal priced at 500bp over Libor, repayable semi-annually.

The Democratic Republic of Congo is another no-go area for commercial banks without multi­lateral and development bank support. The government’s recent revocation of mining licences has hit UK-listed copper miner First Quantum Minerals hard, with it losing its license to its best asset in the country, Frontier Mine, last year. The DRC government also shut down First Quantum’s Kolwezi mine in September 2009 after a review flagged contract irregularities and production delays at the site.

“The DRC is simply too challenging for commercial banks,” says one head of mining finance. That is one of the reasons why the bulk of Nairobi-based African Trade Insurance Agency’s political risk cover is on DRC copper projects. The ATI is particularly sought after by commercial lenders for the sway it has with sovereign governments in the dozen or so African countries it works. Because these governments are also investors in the agency, ex­plains Stewart Kinloch, chief under­writing officer at the ATI, they are more likely to leave developers alone. “Govern­ments put their investment in the ATI at risk if they expro­priate one of our projects. We can say that if you don’t fix this problem we will sell your shares and use the money to pay off the debt. It is a big stick.” In a typical scenario ATI cover runs for 1-3 years during the construction period. Once up and running with the risk reduced, operators can refinance. Nor is it all about the margin they can get on their cover – the ATI has to support investment across all its member states evenly, Kinloch says.

ECA cover helps in projects involv­ing relatively untested asset types too. In March 2009 the seven-year $167 million ECA and bank debt package for Paladin Energy’s Kayelekera uranium mine in Malawi needed ECA cover to close. The deal was the biggest commercial international financing in Malawi but risks like it being Malawi’s first ever large-scale mining project financing and only the second uranium project financing to be undertaken global­ly, made ECA presence vital.

Multilaterals are prepared to lend longer, pushing the debt levels in a project beyond commercial bank norms. They are also one of the few lender types prepared to finance exploratory projects with seed equity financing, allowing risky start-up ventures to reach the bankable feasibility stage. Operators typically switch to cheaper forms of debt once the project goes into construction.

Multilaterals also come to the fore as lenders in big deals where the bank market is simply not large enough. They will be valuable partners in costly iron ore projects coming on stream in countries like Liberia and Sierra Leone, where capital expenditure forecasts include building ports and roads, say analysts. Aim-listed African Minerals closed a $417.7 million secured high-yield loan to fund its Tonkolili iron ore project in Sierra Leone, though this loan is designed to bridge it to a Chinese equity investment. It says later phases at the site might use debt.

Legacy of the financial crisis

Multilaterals and ECAs increased their presence as a legacy of the financial crisis, when they expanded their role on the conti­nent. Since 2009 IFC investment has leapt to 8 new African mining pro­jects. This is a recognition of mining’s role in devel­op­ment through both job creation and providing a revenue stream for other sectors, explains Christian Mula­mula, senior investment officer for mining in­fra­structure at the IFC.

As the rise in commodity prices sparks renewed interest in African min­ing deals, bringing mothballed projects back on stream, ECAs and multilaterals will remain sought after local part­ners. Commercial bank appetite for mining projects is growing, with South African lenders leading the way, ex­pand­ing their portfolios up the conti­nent. Botswana’s Debswana Diamond Company recently closed a P1.2 bil­lion ($182 million) local currency financ­ing for the Morupule Colliery coal pro­ject. The lead arrangers of the nine-year debt, of which half has a fixed rate for the first five years, are Standard Bank, through Stanbic Botswana, First National Bank of Botswana, and Bar­clays Bank Botswana. The three were selected following a beauty contest that ranked banks according to pricing and speed of credit approvals.

Debswana is a joint venture between the government of Botswana and De Beers, and operates an existing 1 mil­lion tonnes per year mine at the site. Roughly 90% of the output of the ex­pansion, to 3.2 million tonnes per year, will go towards feed­ing Botswana Power Corporation’s 600MW Moupule B plant under a long-term, fixed-volume inflation-indexed con­tract. Debswana is a sister project to the much larger $825 mil­lion financing for Morupule B, which closed in November 2009 with a cast of Chinese lenders.

Drawbacks and limitations

Yet despite demand for ECA and multilateral involvement, their presence in a deal does have its drawbacks. Larger clubs of lenders make it more cumbersome for a project to reach financial close, slowing down deals. Development finance also comes with strings attached as lending agencies seek to make their own, internal, assessments to ensure com­pliance with environmental and social impact standards. This is particularly the case in African juris­dictions, given the lack of capacity from many governments to regulate investment accor­ding to environmental and social stan­dards. “Their en­vironmen­tal and social restraints mean they are not the first port of call. They have their own specific rules and regu­lations,” says a Johannesburg-based bank­er, adding that Euro­pean multi­laterals stipulate English law, which can be problematic in some Afri­can jurisdictions.

ECAs also have their limitations. A project will always need a pure com­mer­cial tranche since the amount they lend or can cover depends on the pro­ject’s spend on goods from the host country. South Africa’s ECIC wants 80% of a project’s content to be sourc­ed from South Africa before it guarantees a pro­ject, for example. Timing is also a prob­lem. “In some cases it can take ECAs years researching the finan­cials of the buyer and the viability of the project,” says one critic. That said, participants note that some ECAs are relaxing their requirements on the ex­tent to which projects have to support ex­porters back home. They are back­ing broader, nation­al interests, like lock­ing in the source of supply of strat­egic commodities. “ECAs are becom­ing much more commercial in their think­ing. They are not as restrictive as they used to be,” said the critic.

Some ECAs are also reluctant to take on African mining risk – Euler Hermes only has one African mining project in Mozambique on its books. South Africa’s ECIC is “the only ECA that will look at Zimbabwe.” This has opened the door to Chinese ECAs with a more flexible approach, which are less wary of Africa than their European counterparts. Although on this point bankers point out that Asian ECA finance can be more costly than the European counterpart; meaning developers often go with a European-backed project rather than the Asian ECA because of price.

African mining deals are more likely to get done if they combine a mix of commercial and agency debt. Multi­laterals are considered stalwarts of the industry, going into countries to kick-start the sector, playing a critical role in helping to regularise the investment market.