The Jabal Salab zinc mining project last month reached financial close, marking Yemen's entrance into the global project finance market.

The US$216 million landmark project - the first major minerals extraction operation in Yemen in recent times - involves the development of a zinc mine from the Jabali deposit, located 100km north east of the capital, Sana'a [Projects Database].

The project is sponsored by the Jabal Salab Company - an SPV in which ZincOx holds a 52 per cent stake and Yemen's Ansan Wikfs Investments holds the balance.

The Jabali deposit - which contains 12.6 million tonnes of zinc - will be mined at the rate of 800,000 tonnes per annum of ore over a period of 12 years for the production of 70,000 tonnes per annum of high quality zinc oxide.

A total of US$20 million has already been spent developing the mine - with Brussels-based SNC Lavalin Europe managing the construction - and the first zinc oxide should be produced before the end of 2009.

Jabali will sell its zinc oxide directly to end users in the ceramics and rubber industries at a premium to the value of the zinc contained.

The financing

The US$216 million deal closed with US$96 million in equity and US$120million in senior-secured debt, giving a 56:44 debt-equity ratio.

Ansan Wikfs provided 58 per cent of the equity tranche - US$56 million - and ZincOx supplied the remaining US$40 million.

The debt took the form of limited-recourse, high-yield bonds and associated kicker arrangement, linked to the international zinc price.

The kicker - or ZIPPO (zinc indexed price payment obligation) - is tradable and is the first such instrument for a metal-related transaction.
 
The ZIPPO amounts to US$0.16 for each dollar that the average annual international zinc price rises above US$1,300 per tonne for every tonne produced at the Jabal Salab.

The debt has a six-year tenor, with a three-year grace period on principal, and is priced at 11.5 per cent all in.

The bond was arranged by Exotix - a security firm specialising in emerging market debt - and was underwritten by a consortium of eight lenders, led by a group of London-based hedge funds.

Peter Bartlett, managing director of Exotix, said: "There are numerous challenges involved in structuring deals in frontier countries such as Yemen, which is poorly researched, has no sovereign debt rating and where there is any, little political risk insurance is available at viable rates. This deal was no exception."

He added: "The ZIPPO is the first tradable instrument of its type to be launched for a metal-related transaction, and represents a significant expansion in the range of financing options available to projects in frontier emerging markets."

Legal issues

Eversheds was appointed as legal advisors to the sponsors, while Herbert Smith advised the lenders.

Alexander Currie, who led the Herbert Smith team working on the deal, said: "The arrangement came with all the usual challenges of full blown project finance deal, but was unique as the Yemeni legal council had never dealt with this kind of transaction before.

"We needed to introduce specific legislation in Yemen for the project and work closely with the authorities to push this through."

Currie added: "It is always gratifying to be involved in a first-of-its-kind deal. High commodity prices have recently led to a resurgence in mining projects around the world and this financing for Jabal Salab's Yemen mine is a great example of how these projects are being financed on an increasingly innovative basis as more and more investors seek new types of exposure to emerging markets projects."

Conclusion

The successful financing of the Jabali mine project is likely to open up investment in Yemen - and the government is keen to encourage international exploration and mining companies to develop the country's still relatively untapped resources.

Yemen is already expecting another major investment boost with the US$4 billion Total-led LNG project set to close in mid-April of this year [Projects Database].

It will be interesting to see if Jabal's innovative debt structure does indeed set the precedent for other metals-related transactions, as advisors for the lenders predict .

It is certainly a good example of how innovative finance that moves beyond the traditional non-recourse debt structure can pay off; even when navigating unfamiliar project finance territory.

In today's tight credit market securing financing, particularly for projects in 'riskier' countries, may prove increasingly difficult - but it provides a good incentive for lenders and sponsors to forge more efficient, more attractive deal structures to push projects through.

The project at a glance