The increasingly onerous terms that international mining banks impose on junior developers are forcing their customers to look elsewhere. Sponsors have used prepayments from offtakers and Chinese debt to try and create some competitive tension between financing sources.

But in some mining markets, local lenders may be more obvious sources of alternative capital. Junior explorer Largo Resources closed a R311 million ($156 million) debt financing with four Brazilian lenders for its majority-owned Maracas vanadium project.

Maracas is probably one of the first greenfield mining financings led entirely by Brazilian banks, and almost certainly one of the first for a junior. Larger entities like the EBX Group and Vale now attract large local bank followings, but Canadian-listed developers have less presence in the market.

The original developers of Maracas were Vale and Odebrecht, but the two large corporates allowed Largo to earn into the project, Odebrecht as it stepped back from mining from the late 1990s, and Vale as it decided to focus on its core business of iron ore production.

Vanadium has links with the iron industry, because its main use is as a hardener of steel. It has a relatively ready substitute, in the form of niobium (of which Brazil is a major exporter), and its market is somewhat opaque (prices for the metal may be obtained in Project Finance’s sister title Metal Bulletin). But prices are volatile, and do not always track steel, and can be susceptible to big changes in consumption patters. Recent changes to Chinese building codes that favour vanadium steel have helped produce a 25% rise in the price of ferro vanadium in the last 12 months.

The Maracas deposit contains an estimated reserve of 13.1 million tonnes with average vanadium concentration of 1.24%, one of the best ratios available. It is located in Bahia state, 250km south-west of state capital Salvador. The project will feature an extraction, crushing and roasting operation requiring about 15MW of power.

In January 2008 Largo mandated Investec as lead arranger of a six-year financing for 75% of the project’s then-estimated costs of $126 million. By the end of that year banks found it much harder to provide cost-effective financing for more unusual minerals. Largo and Investec parted ways.

Largo’s management scoured North American debt and equity markets, and even traveled through Asia looking for development capital. It found few offers acceptable, because most of them would have heavily diluted Largo’s existing shareholders, whether through demands for additional equity-raising or demands for warrants to go with debt commitments. It briefly entertained an offer from a Brazilian private equity group to spin-off Largo’s Brazilian operations into a vehicle that would eventually list on the Bovespa exchange.

One legacy of the Investec mandate probably helped the project to soldier on – a six-year lender-friendly offtake agreement with Glencore. The Glencore agreement eliminates volume risk, if not price risk, and takes effect at the gate of the mine, meaning that Largo does not have to contend with the weaknesses of Brazil’s transport system.

By early 2010 the developer had started talking to ItauBBA, which since its 2009 merger with Unibanco is now the tenth-largest bank in the world by market value. In a noteworthy, but ultimately productive, wrinkle, Itau’s largest shareholder, the Moreira Salles Group, also controls CBMM, the country’s largest niobium producer.

Itau’s mandate covered the raising of both debt and equity, and in April 2011 it closed a $118 million private placement, priced at C$0.50 per unit (one share and 1/3 of a warrant), primarily to non-Brazilian investors, including Eton Park, Ashmore, Arias Resource Capital and Mackenzie Investments.

The eventual debt financing consisted of a direct loan from Brazil’s national development bank, BNDES, which in turn benefited from commercial bank guarantees. The guarantors were Itau (R116 million), Banco Votorantim (R116 million) and Bradesco (R99 million). None of the three had done any business before with the sponsor.

The debt has a two-year grace period, and a six-year amortization period. While the debt is denominated in Reais, but R173 million of the R311 million total is indexed to the dollar, and priced at 226bp over BNDES’ cost of foreign currency funding. Of the Reais debt, R50.1 million carries a flat rate of 7.3%, while the rest is priced at 175bp over the TJLP benchmark (currently 6%).

The financing closed on 22 June 2012, first disbursement took place in July, and commissioning of the mine is scheduled for the fourth quarter of this year. The mine has estimated annual production of 9,200 tonnes, though the sponsor has already produced a preliminary economic feasibility study for an expansion to the mine’s capacity by 46%. “The Maracas project lies at one end of a 40km trend,” notes Largo’s chief executive officer, Mark Brennan, “and we think that it still has a lot of potential.”  

Vanádio de Maracás
Status
Closed 22 June 2012, first disbursement 18 July 2012
Size
R556 million
Description
9,200 tonnes-per-year vanadium project located in Bahia state, Brazil
Sponsors
Largo Resources (95.4%) Companhia, Baiana de Pesquisa Mineral (4.6%)
Equity
R118 million
Offtaker
Glencore
Debt
R311 million
Provider
BNDES
Guarantors
Itau BBA, Banco Votorantim, Bradesco
Financial adviser
Itau BBA
Sponsor legal counsel
Stocche Forbes; WeirFoulds (Canadian)
Lender legal counsel
Machado Meyer
Environmental consultant
Mineral Engenharia e Meio Ambiente
Market and technical consultant
Valente
Independent and owner’s engineer
Promon
Insurance adviser
Marsh