Canadian-listed phosphate producer MbAC Fertilizer Corp has completed the first draw on the R400 million ($220 million) debt financing package for its Itafós single superphosphate project in Brazil.

In October 2008, MbAC bought the mining rights, operations, and tax benefits of Itafós Mineração, located near Campos Belos, in Goiás state, close to its border with Tocantins state. The acquisition provided MbAC with a small rock phosphate operation, which produces 100,000 tonnes per year for sale to local farmers. But MbAC’s ambition was to develop an operation that had a larger scale of 500,000 tonnes per year and sold a more valuable product.

The developer listed on the Toronto Stock Exchange in December 2009, through the merger of Sandwell Mining and MBAC Opportunities and Financing, and alongside a C$57 million ($56 million) equity placement. In March 2010 MbAC produced a resource estimate for Itafós of 24 million tonnes.

According to Anthony Cina, MbAC’s chief financial officer, the developer initially assumed that it would be have to secure equity financing. Debt financing was highly unlikely considering the fact that it was the sponsor’s first project, only asset and the difficulty it would encounter trying to secure an substantial off-take agreement. ”We approached some Canadian banks and were told that it would be tough, notwithstanding the economic feasibility of the project,” says Cina.

The output of the mine would be sold to the agricultural sector, primarily to grain traders, and most resources lenders would not have the ability to hedge the mine’s output even if they were to demand the sponsor did so. Agricultural lenders do not always have experience of the resource and construction risk attached to mining projects.

The sponsor mandated Itau BBA as arranger in November 2010, “but I’ve always been wary of only working with one lender,” says Cina, who proceeded to cold-call the International Finance Corporation, after taking note of the IFC’s work on the Jifco phosphate project in Jordan.

Itafós is located in central Brazil, in an area where agriculture is undergoing rapid expansion, far from competing sources of fertiliser. Rival producers are located towards the south of the state of Minas Gerias, or towards Brazil’s coasts. At the same time, the region’s agriculture demands fertiliser with a high sulphur content, much higher than European farmers, though roughly in line with the demands of some Asian markets.

But the most difficult step for the developer was convincing the two lenders that it had plans in place to minimise environmental and social effects of the project. Lenders typically demand a high level of compliance from resources extraction projects, and there are lingering worries attached to agriculture’s role in deforestation in Brazil. The financing, as Cina notes, closed in an impressively short timeframe for both the IFC and particularly BNDES, which was funding Itau’s debt commitment, though not retaining credit risk. But the environmental due diligence process was the most onerous task connected to the financing process.

“The market price has gone from $250 per tonne when we first started modeling the deal to above $400,” says Cina. The sponsor is not likely to have given up this upside by signing an offtake contract, since this would have been take-or-pay, but not fixed-price, and lenders in any case did not insist upon one. Lenders did not insist on a cash sweep either, a feature common in the petrochemicals industry, and one that Cina was fully expecting to be part of the deal.

Lenders were also happy with MbAC’s use of separate subcontracts for the project rather than an overall engineering, procurement and construction contract. The plant is set for completion in October 2012.

The debt has a term of eight years, of which two years is interest-only, and breaks down into R205 million of BNDES debt with Itau as intermediary, and a $40 million A loan from the IFC. The BNDES debt in turn splits into five different subfacilities, of which three, of R141 million in total, have a 5.3% interest rate, one, of R50 million is priced at 4.9% because it is being used to make equipment purchases, and a final facility, of R1.6 million, is priced at 2%, because it is being used to fund social projects.

The split between dollar and Reais debt provides something of a natural hedge because while the bulk of the project’s inputs and outputs are denominated in Reais, the prices of phosphate fertiliser tracks that of grain, which itself responds to movements in the dollar. Itau initially credit approved a $110 million dollar deal in January, but this was eventually converted to Real deal, increasing the deal size thanks to the Real’s appreciation over the year. The IFC approved its equity investment in September, and its debt commitment in November. Signing on the Itau debt took place in October, and funding took place in November, with IFC funding still pending. 

Itafós Mineração
Status Dollar debt signed 21 November, Real debt 28 October, now funding
Size R400 million
Location Goias state, Brazil
Description 500,000 tonnes per year ingle superphosphate mine and production facility
Sponsor MbAC Fertilizer Corp
Debt R205 million and $40 million
Maturity 8 years
Arrangers Itau BBA (BNDES on-lending) and International Finance Corporation
Market consultant MB Agro
Tax PwC
Environmental due diligence JGP Consultoria; Mineral Engenharia e Meio Ambiente
Lender legal counsel Clifford, Chance (IFC) Veirano (Itau)
Sponsor legal counsel Simpson, Thacher, & Bartlett (New York); Machado, Meyer, Sendacz e Opice (Brazil)