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The emergence of private capital in the mining sector Lee Downham Americas Mining & Metals Forum – September 2013
The emergence of private capital in the mining sector
Lee Downham
Americas Mining & Metals Forum – September 2013
Page 2
Macro and micro factors united against the sector in 2012 ...
Impact
► Squeezed margins
► Share price volatility
► Sub-optimal returns
Macro
► Economic uncertainty
► Volatile markets
► Resource nationalism
Micro
► Weaker metals prices
► Labor unrest
► Cost inflation/overruns
A “risk-off” capital strike
► Slowdown/Cutbacks in capex
► Smaller, “safer” M&A
► Focus on capital optimization
► Capital recycling through divestitures
Companies: slower spending
► Risk aversion
► Retreat of traditional capital providers
► Emergence of private and strategic investors
► Increased funding innovation
Investors: selective investing
Page 3
... perpetuating a two-tier capital environment ...
Record bond proceeds as % of capital
raised
Tightened equity on highly dilutive terms
Bank debt reserved for quality
names/refinancing
▼
▼
▲
Capital raising by asset class: proceeds (2007–1H 2013)
► Constrained capital for junior and mid-tier companies
► Unique opportunities for the investment grade producers
0
50
100
150
200
250
300
350
2007 2008 2009 2010 2011 2012 1H 2012 1H 2013
Pro
ceeds $
b
IPOs Follow-ons Convertible bonds Bonds Loans
Source: EY, ThomsonONE
Page 4
... and risk-averse M&A
► Subdued deal activity in 1H 2013 points to the third consecutive year of
declining volumes
0
200
400
600
800
1,000
1,200
-
50
100
150
200
250
De
al vo
lum
e
De
al va
lue
$b
<$200m Between $200m and $1b >$1b Volume
GX
GX = Glencore Xstrata transaction
Deal value and volume (2003 – 1H 2013)
Source: EY, ThomsonONE
Page 5
- 100 200 300
2008
2009
2010
2011
2012
1H 2013
Other Asian debt Bonds - Top 6 Loans - Top 6
A new capital era
T6/majors = top six global diversified miners. Source: Ernst & Young, ThomsonONE
Challenging funding conditions for all but the investment grade majors
Capital raising: majors’ proportion of total Debt and equity raising ($b)
De
bt
Eq
uit
y
- 100 200 300
2008
2009
2010
2011
2012
1H 2013
Other Top 6 IPOs Top 6 Follow ons Top 6 convertibles
0
50
100
150
200
250
300
350
400
2008 2009 2010 2011 2012 1H 2013
Pro
ceeds $
b
IPOs Follow ons Convertibles
Bonds Loans T6 (all classes)
Page 6
Sentiment-driven high-yield market — all about timing
► Volatile high-yield markets,
heavily influenced by economic
news flow and sentiment
► Widening divergence between
coupons on high-yield and high-
grade bonds in 2012
► On the cusp of an apparent turn
in the interest rate cycle, fear of
rising interest rates may drive a
change in investor preferences
US$ bond issues by month (proceeds, 2012–1H 2013)
Coupon ranges on US dollar and Euro bonds, by tenor (2012)
0
20
40
60
80
100
-
5
10
15Ja
n-1
2
Feb-1
2
Ma
r-12
Apr-
12
Ma
y-1
2
Ju
n-1
2
Ju
l-1
2
Aug
-12
Sep
-12
Oct-
12
No
v-1
2
De
c-1
2
Ja
n-1
3
Feb-1
3
Ma
r-13
Apr-
13
Ma
y-1
3
Ju
n-1
3
MO
VE
ind
ex
Bo
nd
pro
ce
ed
s $
b
Proceeds MOVE*
Source: EY, ThomsonONE, Thomson Datastream
*MOVE: Merrill Option Volatility Estimate index
Page 7
A shift to capital optimization in 2012–13 ...
... with deal activity dominated by three main themes:
► Domestic consolidation
► Build of existing stake
► Deals for supply security via
offtake
► “Toehold” stakes in juniors
Low risk M&A Strategic M&A
Share of mega deal value by M&A theme (2011–1H 2013)
► Divestments of non-core/high-
risk assets
Capital recycling
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
2011
2012
1H 2013
Low risk (domestic consolidation) Low risk (existing stake) Strategic (supply/security)
Market entry/diversification Geographic expansion Disposal/exitSource: EY, ThomsonONE
Page 8
New buyers: countercyclical confidence
► State-owned enterprises: strategic,
long-term raw material supply
► Financial investors: foothold
minority positions for investment
returns
► Commodity traders: greater
integration and operational influence
► “Other sector” acquirers: vertical
integration to manage price volatility
and secure stable supply
0% 20% 40% 60% 80% 100%
2011
2012
1H 2013 exGX
Industry acquirers Financial investors
State-backed acquirers Commodity traders
Other sectors Other
Share of deal value by acquirer type (2011–1H 2013)
Source: EY, ThomsonONE
Page 9
State-owned entities demonstrated the most significant buying power in 2012
► State-owned entities prepared to make the largest investments by value
► While stakes of up to 40% to 50% have been acquired, the “normal” range acquired is 10% to 20%
Minority stake acquisitions in junior companies. Source: EY, ThomsonONE
Deal value: range by investor type ($m) Stake acquired: range by investor type (%)
20 16
12
21
9
0
10
20
30
40
50
60
% s
take
acq
uire
d
227.6
6.3 4.9 22.8 6.5 0
50
100
150
200
250
300
350
400
450
500
Dea
l va
lue
$m
1,500
//
Page 10
Emergence of non-traditional investors
► Retreat of traditional capital providers from higher risk growth projects
► Funding gap that is increasingly being filled by strategic, long-term investors
Page 11
For how long will the window be open?
► Earnings were hit hard in 2012 as capex and net debt increased, reversing net debt trends
► But analysts forecast suggest this is a temporary position, with a short-term reversal
Top 14 mining companies: Earnings, Capex and Net Debt analysis (2005–16)
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
$m
EBITDA Net Debt Capital expenditure
Forecast Historical
Page 12
While net debt is increasing in relative terms to earnings, it is more manageable
► Free cash flows have been squeezed over the last 18 months but are
forecast to improve as new production comes on line, cost saving programs
achieved and additional cash released through divestment programs
► While net debt is increasing in relative terms to earnings, it is far more
manageable.
Source: Capital IQ, EY analysis
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
-1,000
0
1,000
2,000
3,000
4,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Net
Deb
t/EB
ITD
A
Fre
e C
ash
Flo
w $
m
Operating cash flow less Capex Net Debt/ EBITDA
Page 13
Much of the cash generated is earmarked for share buyback programs and increased dividend yields
► Cost saving initiatives: Rio Tinto has announced plans to reduce
operating costs by $5b over the next two years. Vale has reported $900m
operating cost savings in 1Q13.
► Divestments announced across the industry: Glencore’s proposed sale
of Las Bambas; Rio Tinto’s sale of Northparkes mine, Eagle and Palabora
Mining; BHP’s divestment of Pinto Valley and associated SMARRCO.
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
0
500
1,000
1,500
2,000
2,500
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Div
iden
d/F
CF
%
Div
iden
d $m
Dividend Dividend/ FCF
Source: Capital IQ, EY analysis
Page 14
Analyst consensus suggests that the window may remain open for some time
► Consensus reporting suggests that ROCE will not return to 2010 levels
until 2016.
► Although action taken by management could put M&A back on the table:
exceeding ROCE targets, lower gearing; improved Free Cash Flow (post
dividend), meeting share buy back targets
0
5
10
15
20
25
30
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
RO
CE
%
Net
Deb
t/ E
BIT
DA
Net Debt/ EBITDA ROCE
Source: Capital IQ, EY analysis
Page 15
0
5
10
15
20
25
30
35
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
RO
CE
%
4Yr RROCE ROCE
However, returns are more stable when earnings are analyzed over a 4-year period
► Investment decisions in the mining industry are made for the long
term: the capital employed in a particular year, is unlikely to generate
returns until some point in the future.
► While ROCE typically considers the earnings generated from capital
employed in one particular year, looking at a rolling ROCE over time, the
picture is far less volatile.
ROCE: T1 EBIT/ ave T1-1 and T1 Capital Employed
4Yr ROCE: Average T1-T4 EBIT/ T1 Capital Employed
Source: Capital IQ, EY analysis
Page 16
Conclusion
► Clearly, there isn’t a definitive answer to how long this window of opportunity
will be open, but our analysis suggests it isn’t in the danger of closing
imminently – the factors that will influence timing are:
► The speed in which equity markets reopen for the juniors as this will stimulate
share price performance in the sector and help support valuations.
► The rate at which divestments and cost savings initiatives are completed across
the large caps to bring capital employed in line.
► The commodity price environment
► Ultimately, if shareholders continue to exert pressure on management to
achieve higher ROCE, M&A activity will remain subdued across the large
cap producers in absence of a significant metals price jump
► Will shareholders realign to more modest levels of ROCE, perhaps with the
incentive of higher yields? Maybe, but it may take a few years yet …
Page 17
In focus: Alternative sources of finance
Page 18
Project funding options typically utilized in current environment
Development stage Exploration Development Construction Mid-tier producer Major producer
Credit quality Unrated Unrated Unrated/High yield High yield Investment grade
Investor perspective Highest risk,
zero/negative yield
High risk,
uncertain yield
High risk,
high yield
Medium risk,
high yield
Lowest risk,
low yield
Public equity
Farm-ins
Standby equity
Strategic equity
Convertible bonds
US PPM
Streaming
Royalties
Offtake
Development finance
Project finance
Equipment finance
Pre-export finance
Fixed income
Commercial loans
Refinancing
Page 19
Development finance
Development Finance Institutions (DFIs) (or multi-lateral
development banks) provide credit in the form of higher
risk loans, equity stakes and risk guarantee instruments
to companies investing in developing countries.
In principle, DFIs can accept higher project and country
risk than commercial banks, but borrowers must
demonstrate their commitment to benefitting the host
nation, and compliance with high environmental, social
and transparency standards.
Typical funding structures
►Provide a variety of investment instruments – e.g., senior
debt, subordinated debt, equity and convertibles
►Usually invest at BFS (post-DFS) stage
►Usually invest in base, precious or industrial minerals, but
recent investments also seen in diamonds
►Follow stringent environmental and social standards – and
under public scrutiny over their mining investments
►Frequently come with ancillary value-add services, such as
environment and social (E&S) risk management advice,
community engagement strategies
►Can be a more costly source of funding than other
alternatives
►Represents vote of confidence/recommendation, which
lends support to future financing opportunities
Key recent investments by DFIs in the mining sector:
DFI Company Project Value Type
IFC ►Oyu Tolgoi
►Unigold
►Finsch Diamond Mine
►Hummingbird Resources
►Sama Resources
►Guyana Goldfields
►Copper, Mongolia
►Gold, Dom. Rep.
►Diamonds, S. Africa
►Gold, Liberia
►Nickel, Cote d’Ivoire
►Gold, Guyana
►$400m
►$12m
►$25m
►$9m
►$1m
►$10m
►Loan
►Equity
►Loan
►Equity
►Equity
►Equity
China
Dev’t
Bank
►MMG/China Minmetals
►Gindalbie Metals
►Generaly Moly
►Zijin Mining
►SLZ, Australia
►Iron ore, Australia
►Molybdenum, US
►Investm’t/acq’n
►<$1b
►$250m
►$665m
►$4.9b
►Loan
►Loan
►Loan
►Loan
EBRD ►Dundee Precious Metals
►Coal Energy
►Oyu Tolgoi
►Lydian International
►Hambledon Mining
►Gold, Bulgaria
►Coal, Ukraine
►Copper, Mongolia
►Gold, Armenia
►Gold, Kazakhstan
►$67m
►$70m
►$400m
►$45m
►$30m
►Loan
►Loan
►Loan
►Equity
►Loan +
equity
IDCSA ►Scaw Metals
►Sedibelo Platinum
►DiamondCorp
►Village Main Reef
►Metals, South Africa
►PGMs, South Africa
►Diamonds, S Africa
►PGMs, South Africa
►$340m
►$328m
►$28m
►$15m
►Equity
►Equity
►Loan
►Loan
Mid producer Maj. producer
Construction Advanced
Early
Page 20
Estimated value over 2011–Q1 2013: $5.8b*
Asset Stream provider Upfront payment Product
Salabo & Sudbury
(Vale)
Silver Wheaton $1.9b Gold (25% and
70%)
Cobre Panama
(Inmet Mining)
Franco-Nevada $1b + warrants Gold + silver
(86%)
Mt Milligan
(Thomson Creek)
Royal Gold $782m Gold (52.25%)
777
(Hudbay Minerals)
Silver Wheaton $750m Gold (100%) +
Silver (100%)
Constancia
(Hudbay Minerals)
Silver Wheaton $750m Silver (100%)
Prosperity
(Taseko Mines)
Franco-Nevada $350m + warrants Gold (22%)
Streaming agreements
The provision of an upfront payment to a mining company in return
for the right to a percentage of production (usually for life-of-mine)
from an underlying asset (typically precious metals as a by-
product). Streams usually (but may not) carry ongoing payments
due on receipt of physical metal.
KEY PROVIDERS
►Silver Wheaton (TSX) – #1 by market value; primarily focused on
silver but expanding into gold – including the 2013 Vale deal; 100% of
revenues are from precious metals streams
►Franco-Nevada (TSX) – #2 by market value; streams accounted for
45% of 2012 revenues; primarily focused on gold in North America
►Royal Gold (Nasdaq/TSX) – royalties and streams; see Royalties
►Sandstorm Gold (TSX) – one of the fastest growing through its
exploitation of niche market providing smaller streams; 93% of 2013–15
revenues from streams; 93% of revenues from gold, 7% from PGMs and
silver
►Sandstorm Metals & Energy (TSX-V) – non-precious metals streams
including copper, palladium and natural gas; same management team
as Sandstorm Gold; four metals streams as of April 2013
Typical features – but each deal is different
►Upfront, one-off cash payment
►Ongoing per ounce payments under pre-determined price
scenarios
►Not typically tied to the property title, so stream holders stand with
other creditors in cases of financial distress
►Can include contract terms designed to mitigate risk for the
stream provider – e.g., construction and/or production guarantees;
price floors and minimum thresholds
►Can include buy-back options for mining companies
Largest recent deals: Benefits for mining companies
►Upfront payment – no equity dilution or interest costs
►Immediate monetization of non-core production
►Ongoing payments designed to cover cash costs of
production – often price linked with a cushion
►Stream provider has no operational control – but shares the
funding/development risk for developers as both parties are
dependant on production success
►Potential for greater tax efficiencies vs. royalties
►Scalable – well-suited to diversified majors’ business model
►Potential growth market – via joint bidding on streams, financial
backing from PE or SWFs, greater role in M&A funding,
diversification into non-precious commodities
►Traditionally, “last money in” but stream providers are
increasingly investing earlier stage as competition increases
Mid producer Maj. producer
Construction Advanced
Early
*Value of upfront payment
Page 21
Royalty agreements
The provision of an upfront payment to the mining
company in return for future payment, typically based
on either a) a percentage of the value of the product
produced or b) the profits or revenues generated from
the mine. Royalties are most frequently granted over
precious metals, but there are no limitations.
KEY PROVIDERS
►Royal Gold (Nasdaq/TSX) – one of the oldest royalty companies,
also becoming active in streams (e.g., Thomson Creek); 83% of 2013–
15 revenues precious metals, 17% base metals; 76% from royalties,
24% from streams; 36 producing and 22 development stage assets
►Franco-Nevada (TSX) – 2012 revenues: royalties – revenue-based
45%, profit-based 10%, 45% streams; 75% gold, 14% PGMs, 10%
O&G, 1% base
►Premier Royalty – newest royalty company to emerge; 60% owned
by Sandstorm Gold; NSRs on operating and exploration assets (gold)
►Anglo Pacific (LSE) – established royalty provider with 21-strong
portfolio of producing, development and early stage royalties;
diversified exposure to coal (53%), iron ore (21%), gold (11%),
chromite (4%), uranium, copper, nickel, PGMs and others
►Callinan Royalties (TSX-V) – 1 producing (Hudbay), 2 development
and 14 exploration assets
►Americas Bullion Royalty (TSX) – precious metal royalties and
streams; 32 agreements, including Barrick Gold; able to receive
payments-in-kind (bullion instead of cash)
►Royalco Resources (ASX) – ASX’s only royalty company; nine
royalties in Aus and NZ (petroleum, silver and gold); and royalties on
exploration projects in the Philippines (gold/copper) and Uganda (gold)
►Gold Royalties Corp (TSX-V) – relatively new entrant; NSR
structures on early stage and producing mines in Canada; royalties on
nine mines (as at June 2013)
Royalties typically take the following forms:
1) Gross revenue – right to a fixed percentage of gross revenue
on metals sales
2) Net smelter return – right to a fixed percentage of net
revenues (gross revenues less treatment, refining and freight
charges – i.e., cash flow that is free from any operating and
capital costs or environmental liabilities)
3) Net profit interest – right to a fixed percentage of the profits
from an underlying asset. Terms vary but royalties are
commonly payable after the recovery of certain pre-production
costs and typically deduct mine site operating and
administrative costs plus tax.
► Typically registered to the underlying property title, giving
priority over creditors in financial distress
► Long-term, passive investments – no commitment to fund
capital or operating costs
► A large degree of flexibility can usually be built into contracts
► Normally limited to between 2% and 5% of a project’s net
revenue after certain charges
► Costs are usually limited to legal fees in drawing up contract
terms; no hedging requirement.
► Royalties can change hands among (be acquired by other)
royalty providers.
Mid producer Maj. producer
Construction Advanced
Early
Page 22
Standby equity
Key providers to mining industry:
►YA Global (Yorkville Advisors)
►Darwin Strategic (Henderson Global Investors)
►Dutchess Opportunity Cayman Fund (Dutchess Capital Management)
Example:
Company X agrees a $5m SEDA facility with Provider Y. CX may draw down these
funds over a period of up to three years, in exchange for the issue of shares to PY
at a discounted price (5% to market price during a 10-day drawdown period), with
the maximum advance by PY linked to share trading volumes. A fee of $150,000,
payable to PY on first drawdown, secures the facility.
Benefits for the company:
►Is in control of the timing – funding can be drawn when needed
►Provides level of comfort over availability of near-term funding
►Eliminates the need for roadshows to bankers and investors
►Allows companies to set a price floor to each tranche
Drawbacks:
►Can be lengthy and expensive to set up, depending on regulatory
environment (structures differ according to market)
►Setup costs
►Drawdown can negatively impact share price – dilution of existing
shareholdings usually includes a purchaser discount
Recent deals:
Standby equity (a.k.a. equity line, equity-linked) facilities provide
companies with an option to issue shares to a facility provider over
a multi-year time period, giving companies assurance of a future
buyer of shares and the flexibility to choose the timing of the
issuance. There is no upfront capital injection but there may be an
arrangement/security fee.
The equity provider commits to purchase a pre-established dollar
amount of a company’s shares in a series of drawdown at the
option of the issuer. The purchaser is committed for a fixed period
to buy the securities. The issuer has the ability, but not the
obligation, to sell the shares. There are normally no penalties for
inactivity or termination of the agreement.
There are also SEDA-backed loan facilities whereby the borrowing
company has the option to convert outstanding loan amounts into
ordinary shares for the SEDA loan provider. Some providers also
offer equity-linked promissory notes – short-term upfront capital
injection (usually 90-180 days), repaid with cash from operations or
funds drawn from the associated equity agreement.
Provider Company Value Type
Dutchess Baobab Resources
Sunkar Resources
£17m
£10m
Equity line facility
Equity line facility
YA
Global
Red Rock Resources
ECR Minerals
Kibo Mining
Conroy Gold
Strategic Minerals
Shanta Gold
£3m
£2.75m
£3m + $1.5m
$5m
Financing package
Financing package
Stock purchase agreement
SEDA
SEDA+ Loan
Loan
Darwin Horizonte Minerals
Altona Energy
Noventa
Orogen Gold
Sunrise Resources
DiamondCorp
Ortac Resources
£8m
£2m
£5m
£5m
£3m
£10m
£20m
Equity finance facility
Equity finance facility
Equity finance facility
Equity finance facility
Equity finance facility
Equity finance facility
Equity finance facility
Mid producer Maj. producer
Construction Advanced
Early
Page 23
Project finance
The financing of projects on a non- or limited-recourse basis, where
the loan is secured by the project. In the event of default, the lender
can seize the collateral (project) only, but has no recourse to the
balance sheet of the shareholders (other assets of the company).
However, in mining, lenders may seek additional recourse to the
shareholders via form of guarantee or security agreement during
the construction and commissioning phase, to reflect the increased
risks associated with mine development, particularly in frontier
regions. Once completion tests are concluded, loans become fully
non-recourse to sponsors and shareholders
The debt is repaid with cash flow generated from the project.
Project finance is suited to long-term loan periods, high capital
expenditure and uncertain revenue streams.
Typical features:
►High risk, expensive and difficult to arrange
►Project documentation – e.g., completion terms – can be highly
complex and therefore expensive
►Extensive due diligence required on project risks
►Technical, financial, environmental risks and economic viability of
the project are of key concern to financiers
►Additional recourse may involve any of the following in the form of
equity subscriptions, loans or payments:
►Payment toward cost overruns
►Payment of debt service
►Obligation to step in as borrower in the event of the
project failing to achieve completion within the loan terms
►Favored by advanced juniors/developers with significant
infrastructure requirements (non-dilutive)
Case study: Sierra Gorda copper project, Chile
►Project sponsors: Quadra Mining, Sumitomo Metal Mining,
Sumitomo Corp.
►Project cost: $3.15b
►Senior debt – export credit agency direct loan $700m + $84m
►Senior debt – syndicated loan $300m
►Sponsor equity - $724m + $650m
►Offtake: Take and pay - Sumitomo 50% of annual copper output.
►Quadra originally formed a 50/50 equity JV with China’s largest state
utility company to expand its operations in Chile but the deal fell
through due to additional project costs.
►JV formed instead between Quadra (55%) and Sumitomo Metal
Mining and Sumitomo Corp (45%). Sumitomo arranged $1b project
financing, with JBIC funding $700m, SMBC, BTMU and Mizuo lending
$85m and Sumitomo Trust & Banking $45m, all with a 9-year tenure.
Mid producer Maj. producer
Construction Advanced
Early
0.9 4.4 2.2 3.1 3.0 5.1 3.4 2.2 3.0 4.4 1.2
4.9
3.7
3.1
2.4 2.0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Caserones Minera Esperanza
Sierra Gorda
Pueblo Vieja
Ambatovy
Project finance closed 2003-2013 ($b)
Page 24
Offtake agreements/ pre-export finance
Offtake agreements typically comprise payment for a determined
volume or percentage of production over a determined time span,
often with exclusivity attached. Typically provided by customers,
traders and specialist finance providers.
Terms vary significantly from deal to deal. Some offtake
agreements are required components of funding facilities (debt or
equity), securing advance payments or used toward repayment or
arrangement of the financing. Offtake-linked loans typically require
some form of security over the assets or company.
Pre-export financing is secured against determined production
volumes, though additional security may be required to account for
production/supply risks.
Offtake prices are usually market-linked, and sometimes
discounted. Offtakes provide a guaranteed source of revenue for
the project, which can help secure other sources of finance.
Type Offtaker Company Advance Type
State-
backed
buyers
►Tongling
►Sinosteel
►Yunnan TCT
►Nautilus Minerals
►Kaboko Mining
►Sirius Minerals
-
-
-
►Take or pay
►Exclusive take
►Fixed tonnage
Private
capital
►Red Kite
►Allied Gold
►Nevada Copper
►EMED Mining
►Augusta Res.
►$80m
►$200m
►$80m
►$83m
►Loan repayment
►Loan
►Equity + loan
►Loan
Banks ►Stand. Chart. ►Archipelago Res. - ►Exclusive take
Customers ►Tiffany’s
►Wolfram Bergbau
►Tata Steel
►DuPont
►Sinosteel
►Yara Int’l
►Toshiba
►DiamondCorp
►Wolf Minerals
►Northern Iron
►Base Resources
►Kaboko Mining
►IC Potash
►GoviEx Uranium
►$6m
►$75m
-
-
-
►$40m
►$40m
►Term loan
►Loan
►Long-term offtake
►Purchase
►Take or pay
►Equity
►Convertible
Commodity
traders
►Noble
►Glencore
►Trafigura
►JP Morgan
►Samsung
►Kaboko Mining
►Bellzone
►OceanaGold
►Straits Resources
►Amara Mining
►$10m
►$15m
-
►$98m
►$20m
►Loan
►Early payment
►Purchase
►Upfront payment
►Loan
Typically comprise any of the following:
►Pre-production advances in return for future offtake in form of:
►Equity stakes
►Loans (interest- and non-interest-bearing)
►Convertible bonds
►Exclusive right to purchase production at a determined price
(which is usually index/market linked)
►Built-in options to extend – based on mutual consent
►Take or pay agreements (purchase product or pay a penalty)
►Additional marketing/distribution terms
►Some minimum stipulations are common:
►Minimum volume of offtake over agreed period of time
►Minimum price in volume-based offtake contracts
►Hedging to protect against volatility
Recent deals:
Mid producer Maj. producer
Construction Advanced
Early
Page 25
Some other options
US PRIVATE PLACEMENT
MARKET
► US private bond market available to both US and non-US issuers
► Attractive to junior/mid-tiers as no need for formal credit rating
or public-market reporting
► Small but growing market, surpassing $50b in 2012 (all sectors),
with issues sized anywhere between $100m and $1b
► Investors (mainly pension funds and insurance companies) are
typically buy-and-hold, seeking long-term investments to match
long-term liabilities. They do thorough due diligence and as such
the PPM is less risk-influenced than public debt markets
► An illiquidity (hold) premium is usually demanded, but pricing has
proven to be competitive particularly compared with bank debt
► Refinancing risk for issuers is mitigated as long-term/life of
project tenure (10–15 years) can sometimes be secured
► Recent mining examples include Intrepid Potash, Yamana Gold,
Agnico-Eagle, Newcastle Coal
EXPORT CREDIT AGENCIES
► ECAs exist to promote the export of national goods and services
through the provision of trade finance, guarantees or insurances
► ECAs are increasingly coming under the spotlight on human
rights/ethical/environmental grounds, so social and environmental
standards are becoming increasingly important
► Recent mining example: Canada’s ECA in Chile – $65m loan to
Chile’s Minera Los Pelambres to promote the purchase of
Canadian goods and services — e.g., equipment, technology and
services — and to help more Canadian companies develop or
expand business in the Chilean mining sector
FARM-INS
► Investor (often another junior) is given a right to earn an interest in
a project by funding project expenditure up to a certain minimum
amount or by carrying the cost of certain project activities.
► A stake in the project is earned once the funding obligation is
satisfied.
EQUIPMENT/EPCM FINANCE
► Equipment suppliers or EPCM contactors – e.g., GE Capital,
Caterpillar Financial Services, Macquarie, Standard Bank
► Finance provided directly or via export credit agencies
► Companies can to fund organic growth without significant capital
outlays
► Some specialized equipment can’t be financed (must be
purchased) – limited resale ability, may cost too much to relocate
(financiers tend to work on worst-case scenario: having to get their
money back by selling the equipment at market)
► Emergence of niche equipment financiers and funding structures
► Typical structures include: finance and operating leases, sale and
lease-back, hire purchase, secured term loans, RCFs, guarantees
and letters of credit, asset-based inventory financing
Advanced Construction
Early Advanced
Construction
Construction
Page 26
Wrap up
► Financing conditions will remain volatile at best over 2H 2013
► Bond markets reactive to interest rate uncertainty – risk of less favorable terms for
issuers than have been seen over the past 18 months
► Equity markets yet to provide risk capital to the junior sector, despite improved
economic sentiment in the US – juniors must continue to look to other sources
► M&A likely to remain subdued
► Majors focused on capital recycling and portfolio rationalization to improve returns on
capital
► Continued tension between buyer and seller expectations
► Sustained commodity price improvement likely needed to trigger competitive buying of
divested assets
► Creates continued opportunities for strategic investors with mid- to long-term
investment horizons – but for how long?
Thank you
EY | Assurance | Tax | Transactions | Advisory
About EY
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About EY’s Global Mining & Metals Center
With a strong but volatile outlook for the sector, the global mining and
metals sector is focused on future growth through expanded
production, without losing sight of operational efficiency and cost
optimization. The sector is also faced with the increased challenges of
changing expectations in the maintenance of its social license to
operate, skills shortages, effectively executing capital projects and
meeting government revenue expectations. EY’s Global Mining &
Metals Center brings together a worldwide team of professionals to
help you succeed — a team with deep technical experience in
providing assurance, tax, transactions and advisory services to the
mining and metals sector. The Center is where people and ideas come
together to help mining and metals companies meet the issues of today
and anticipate those of tomorrow. Ultimately it enables us to help you
meet your goals and compete more effectively.
© 2013 EYGM Limited.
All Rights Reserved.
EYG no. ER0107
ED None
This material has been prepared for general informational purposes only and is not intended to
be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for
specific advice.
