Peter Van Kerckhoven - 4 PDF

Journalists Education Seminar:
Mining Finance 101

Peter van Kerckhoven
Co-Head: Mining & Resources
Presentation Overview
1.
Mining Finance Overview
2.
Project Finance
3.
Project Risks & Credit Considerations
4.
Clarifying Roles and Titles
5.
The Special Purpose Vehicle
6.
Mining Value Curve
7.
The Bankable Feasibility Study
8.
Financing Milestones
9.
Example Press Releases
10. Resource Classification

11. Hedging
Mining Finance
Nedbank Capital: Mining & Resources

Project Finance
Acquisition Finance
BEE Finance
Corporate Facilities
Multi-disciplinary
Geology, engineering
Financial modelling
Commodity dynamics supply/demand
Legal structuring
Diverse team
Geologist, engineers, accountants
Project Finance: The glamorous financing
The financing of long-term projects based upon a non-recourse financial

structure where project debt is repaid from the cashflow generated by the
project.
Utilised to fund large mining projects around the globe
Prolific use by Junior Mining companies listed on ASX, TSX, LSE & JSE
Complex, time consuming funding with significant risks and extensive

documentation
e.g. Eland Platinum: Platinum Project on South Africas Western Limb

Arranged and Underwritten by Nedbank
R924 Project Debt, R100m standby debt
e.g. Paladin Langer Heinrich: Uranium Project in Namibia
Arranged and Underwritten by Nedbank, Standard Bank and SocGen:
$71m Project Debt
Project Risks & Credit Considerations
Completion Risk
Management, Plant and mine construction (EPC contractors),

Completion Guarantees, Cost overrun facilities, standby equity
Market Risk
Position on Cost Curve, sales contracts, hedging
Resource Risk
Resource & Reserve, grade, geological complexity, scale (reserve tail)
Operating Risk
Management experience
Environmental Risk
Equator Principals (World Bank Standards), EIA
Technology Risk
Proven Technology, Pilot testing
Currency Risk
US$ revenue stream, Offshore accounts
Political and Sovereign

Risk
Political Risk insurance

Developmental Finance Institutions (IFC, EIB)
Clarifying Roles and Titles: Advisor, Lead Arranger,

Underwriter ???
Project Finance Advisory is the provision of advice on the whole structure of a

project financing, including bid strategy, provision of equity, advantages of different
types of debt, hedging techniques, contractual structuring, financial modelling and
macroeconomic assumptions. Often includes seeking an Arranger.
Project Debt Arranging is the structuring, organisation and provision of a package

of financing instruments to finance a project. This may involve sole underwriting or
seeking sub-underwriting positions from various lenders.
Underwriting is a commitment to provide the debt should certain conditions be met.
E.g. Mandated Lead Arranger and Underwriter; Co-Lead Arranger;
The Special Purpose Vehicle SPV
A key legal tool in Project Finance and leveraged transactions including BEE transactions
A "bankruptcy-remote entity" whose operations are limited to the acquisition and financing of
specific assets.
The SPV is usually a subsidiary company with an asset/liability structure and legal status that
makes its obligations secure even if the parent company goes bankrupt.
e.g. Micawber 234, Pybus 567, Morning Tide 789, Holdco, FundCo
Main Shareholder
Shareholders SPV
1
Shareholders SPV
2
60%
40%
Funding SPV 2
100%
Nedbank Funding
51%
Holding Company
HoldCo
80%
49%
Mining Company
OpCo
Funding SPV 1
20%
Nedbank Funding
Mining Value Curve and Financing

Acquired property & secured
Exploration Permit;
Exploration
Raised seed capital to finance

exploratory work;
Value
Pre-Feasibility Study
Raising of additional debt/equity

through stock exchange, banking
institutions and/or capital
markets
Project Finance
Hedging
Rolled pre-feasibility study

results into a full BFS;
Raising of Project Debt
finance from banks;
Production
Bankable Feasibility Study
Conducted pre-feasibility
studies;
Raised further equity / capital in
order to conduct BFS.
Capital
Development
Predevelopment
Convertible
Debt
Equity
Time
Balance Sheet
Finance
Working Capital
Facilities
Bond Market
The haloed Bankable Feasibility Study
Also termed the Definitive Feasibility Study DFS
A comprehensive forward analysis of a projects economics (+/-15% precision) to be used

by financial institutions to assess the economics for financing (debt and equity)
Undertaken by a technical consultant appointed by project sponsor
Contains a comprehensive engineering study, cost estimate and mining development plan
covering:
Geology and Resource Calculations
Mining Analysis
Metallurgy and process plant
Environmental Aspects
Management
Guided by a set of assumptions, a strategy, development conditions and a planned

outcome.
Modelling
Debt Scoping
Structuring
Negotiation
Due diligence
process
months
10
Legal
Documentation
Negotiation
months
Financial
Close &
Drawdown
Legal
Agreements
signed
Term Sheets
Credit
Approved
Indicative Term Sheets

obtained
Mandate Debt
Arranger/Underwriter
Financing Progress: Key Milestones
Meeting
Conditions
Precedent
9 Contracts
9 Board
resolutions
9 Opinions
Weeks to months
NORD RESOURCES: April 16, 2007 A $25 million secured term loan credit facility that would be used by Nord for the reactivation of Nords
Johnson Camp Mine project in Arizona.
The credit facility will be subject to the entering into of a definitive loan agreement between Nord and
Nedbank. Draw down under the facility will be subject to certain conditions, including the completion by
Nord of a $20 million equity financing within the next three months, pay-out of Nords existing $5 million bridge
loan facility with Nedbank and customary conditions to closing.
Harmony: R2 billion debt facility secured 4 October 2007

Harmony Gold Mining Company Limited (Harmony) is pleased to announce that it has secured a R2 billion
debt facility with Nedbank Limited.
11
Tiger Resources: Financing Arrangements

Nedbank Limited (Nedbank) is acting as exclusive arranger of an Export Credit Insurance Corporation of
South Africa Limited (ECIC) supported US$16 million debt facility.
Keaton Energy: 6 December 2010

The project financing debt facility, earmarked for the completion of Vanggatfontein Phase 2, is in the form of a
credit approved offer from Nedbank Capital following a due diligence process by the institution and approval
by its credit committee.
Keaton Energy: 7 April 2011

The offer of the R255 million project financing from Nedbank Capital announced on 6 December 2010 has
reached financial close in record time following an intensive due diligence of the Project and completion of
the legal documentation. The first draw-down of R138.5 million took place on 01 April 2011.
12
Resource Classification: The basis of lending
The South African Code for

Reporting of Mineral
resources and Mineral
Reserves (the 'SAMREC
Code' or 'the Code') sets a
required minimum standard
for Public Reporting on
exploration results mineral
resources or mineral
reserves in South Africa
Banks lend primarily against

RESERVES
13
Geological interpretation
A conservative geologists interpretation
A very optimistic geologists interpretation

14
An optimistic geologists interpretation
A mining engineers interpretation
Commodity Hedging:
Invaluable tool for mitigating price risk and protecting cash flow
Simplest: Forward Sale of commodity

Contango if future price is higher
Backwardation if future price is lower
Buy Put (asset) right to sell at future price
Sell Call (liability) obligation to sell at future price
Sell Call to pay for purchase of Put Zero cost collar
Value of hedge reported on balance sheet (asset if in-the-money, liability if out-the

money)
Well structured hedges effective, poorly structured hedges dangerous
Production risk shortage of commodity to deliver into hedge
15
Thank You
16

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Journalists Education Seminar:

Mining Finance 101

Mining Finance Overview

Project Risks & Credit Considerations

Clarifying Roles and Titles

The Special Purpose Vehicle

Mining Value Curve

The Bankable Feasibility Study

Example Press Releases

10. Resource Classification

Nedbank Capital: Mining & Resources

Project Finance: The glamorous financing

The financing of long-term projects based upon a non-recourse financial

Utilised to fund large mining projects around the globe

Complex, time consuming funding with significant risks and extensive

e.g. Eland Platinum: Platinum Project on South Africas Western Limb

e.g. Paladin Langer Heinrich: Uranium Project in Namibia

Arranged and Underwritten by Nedbank, Standard Bank and SocGen:

$71m Project Debt

Project Risks & Credit Considerations

Management, Plant and mine construction (EPC contractors),

Position on Cost Curve, sales contracts, hedging

Resource & Reserve, grade, geological complexity, scale (reserve tail)

Equator Principals (World Bank Standards), EIA

Proven Technology, Pilot testing

US$ revenue stream, Offshore accounts

Political and Sovereign

Political Risk insurance

Clarifying Roles and Titles: Advisor, Lead Arranger,

Project Finance Advisory is the provision of advice on the whole structure of a

Project Debt Arranging is the structuring, organisation and provision of a package

Underwriting is a commitment to provide the debt should certain conditions be met.

E.g. Mandated Lead Arranger and Underwriter; Co-Lead Arranger;

The Special Purpose Vehicle SPV

Mining Value Curve and Financing

Raised seed capital to finance

Raising of additional debt/equity

Rolled pre-feasibility study

Bankable Feasibility Study

The haloed Bankable Feasibility Study

Also termed the Definitive Feasibility Study DFS

A comprehensive forward analysis of a projects economics (+/-15% precision) to be used

Undertaken by a technical consultant appointed by project sponsor

Geology and Resource Calculations

Metallurgy and process plant

Guided by a set of assumptions, a strategy, development conditions and a planned

Indicative Term Sheets

Financing Progress: Key Milestones

Example Press Releases

Harmony: R2 billion debt facility secured 4 October 2007

Example Press Releases

Tiger Resources: Financing Arrangements

Keaton Energy: 6 December 2010

Keaton Energy: 7 April 2011

Resource Classification: The basis of lending

The South African Code for

Banks lend primarily against

A conservative geologists interpretation