Vedanta Resources has been considering an initial public offering for its Konkola Copper Mines subsidiary for over two years.

Given the controlling sponsor’s sprawling operations and strong following among lenders, Konkola has usually been able to benefit from access to the parent company balance sheet. But the $700 million debt financing that Konkola Copper Mines closed in November 2012 marks that start of its existence as a standalone entity.

Vedanta, which is UK-listed but Indian-based, bought a 51% controlling stake in Konkola in November 2004, and now owns 79.4% of the Zambian copper producer, with ZCCM-IH owning the rest, except for a single golden share in the hands of the Zambian government. Public shareholders in turn own 12.4% of ZCCM-IH, and the Zambian Government owns the other 87.6%.

The board of Konkola Copper Mines approved the Konkola deep mining project in 2005. The project was designed to extend the life of the mine and increase extraction from 2 million tonnes per year to 6 million tpy. After the expansion the mine would produce 400,000 tonnes per year of finished copper, double the base capacity of 200,000. In 2005 the project had an estimated cost of $400 million and scheduled completion date of 2009.

The expansion, part of a $2.5 billion programme of expenditure, involves drilling a new 1,500m shaft at the site, expanding some existing shafts and installing a new 3 million tonnes per year concentrator. As a result, Konkola will become one of the ten largest copper producing operations in the world

Konkola currently has two active shafts – 1 and 3 – and several disused shafts. The new shaft, as well as the improvements to ventilation and pumping equipment (water is a particular problem at Konkola) will improve operations at the existing shafts and wider mining operations.

The sponsors have hired South African mining firm Aveng to drill the new shaft and carry out the new works. The contract with Aveng is not a pure turnkey engineering, procurement and construction contract, and sponsor and lenders are exposed to overrun risk.

Vedanta’s original hope was that internal cash generation would supply the bulk of the funding for the deep mining project, supplemented where necessary with debt. However by 2010 Vedanta increased the cost of the project, which had already risen to $674 million, to $973 million because of what it said were “weak ground conditions, increase in scope post detail engineering and consequent extra time required, and commodity price increase.”

Vedanta stuck with Konkola, using shareholder loans to fund initial work on the expansion. In September 2011 it closed a $500 bridge loan with Standard Bank to refinance these shareholder loans, though the bridge benefited from considerable support from Vedanta. Recent years have been characterised by wildly volatile commodities prices, though copper has fared better than aluminium and iron ore, for instance.

But in the wake of Vedanta’s transformative $9 billion acquisition of Cairn Energy’s Indian assets Vedanta was under pressure rein in its indebtedness, and simplify its holding company and capital structure. The Konkola operations, recently-acquired, and with a decades-long history and governance structure, were obvious candidates for a looser financial association with Vedanta.

The long-term $700 million facility that replaces the Standard Bank-led bridge, has elements of project finance, corporate finance and trade finance. Corporate, in the sense that lenders have access to existing cashflows, project, in the sense that the financial metric that lender use to monitor the debt are similar to project financings, and trade, in the sense that the financing features collection accounts held by banks.

The South African export credit agency, Export Credit Insurance Corporation of South Africa, is providing 100% political risk and 85% commercial risk cover on a five-year $400 million piece, while another $300 million, which has a three-year tenor and is designed to amortise fast, is uncovered.

Both of the lead arrangers have retail banking operations in the country, which leaves them comparatively comfortable with host country risk. But the ECIC cover helps them manage their exposure to the borrower, and would allow the lenders to sell down their commitments if they wish, which the documentation allows them to do.

The documentation also features change of control language, which will encourage Vedanta to maintain a strong shareholding in the borrower. The financing benefits from lender perception that Vedanta, having spent freely to turn the Zambian operations around, will not walk away.

The banks also hope that their presence as lenders will also help spur the development of improved environmental compliance processes at Konkola, which has a history (pre-dating current ownership) of attracting criticism from environmental groups and of occasionally rocky labour relations. Recent annual pay negotiations have gone comparatively smoothly. 

Konkola Copper Mines
Status
Closed 30 November 2012
Size
$2 billion
Description
Deep mining expansion to Zambian copper mine
Sponsor
Vedanta Resources
Debt
$700 million
ECA
ECIC
Lead arrangers
Standard Bank, Standard Chartered Bank
EPC contractor
Aveng
Legal adviser to sponsors
Latham & Watkins,
ECB Legal Practitioners
Legal adviser to lenders
Webber Wentzel
Technical adviser
SRK