CHAPTER 12 FINANCING MINERAL PROJECTS IN LATIN AMERICA

• Jurisdiction: Derecho Internacional

Mineral Development in Latin America
(Nov 1997)
CHAPTER 12
FINANCING MINERAL PROJECTS IN LATIN AMERICA^*


Cynthia Urda Kassis
Shearman & Sterling
New York, New York

I. Introduction

In recent years, as the need for debt financing for Latin American mining projects has grown, mining companies have been able to turn to a broader range of financing sources, many of which were unavailable or available only on a limited basis four or five years ago. While this change is good news, it also poses a complex analysis for companies looking for financing: Which sources are available for a particular project? What are their relative advantages and disadvantages? What issues should be considered early in the financing process, and how should that process be managed?

This article will describe the new world of financing for mining projects, and provide a guide to maneuvering through that world in order to emerge with the most effective and efficient financing.

A. Capital Requirements

In August 1997, the Mining Journal reported that, according to its Metallica 2000 database, since January 1, 1995 planned capital expenditures on mining projects have risen over 80% to more than US $34 billion.¹ It also reported that those expenditures are

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spread over about three years, yielding average annual capital expenditures of US $10 billion for the development of new mines and the expansion of existing facilities.²

Although those planned capital expenditures are widely distributed geographically, with increases in all major regions, as has been the case in the recent past Latin America continues to attract the most significant increase in investment. Approximately 40% of the planned capital expenditures are earmarked for Latin America.³

In addition to their geographic distribution, planned capital expenditures are distributed among the major metals with copper and gold each taking significant shares. According to the Metallica 2000 database, about half of the planned expenditures are for copper projects, about one-quarter for gold projects and the balance for other minerals.⁴

The database also indicated that the amount of capital required for individual projects continues to increase. The number of projects costing over US $500 million has nearly doubled since 1995, with "major" projects representing about half of the planned investment in new properties. Over one quarter of these major projects (including Collahuasi, Bajo de la Alumbrera and Salobo) have projected costs in excess of U.S. $1 billion.⁵

B. Availability of Debt Financing

The projections cited in the August 1997 Mining Journal were collected prior to the Busang scandal. In addition to any effect Busang may have on the realization of some of the proposed projects, the continued fall in gold prices will also likely result (and already has resulted) in the deferral or abandonment of some planned gold projects. However, even if only a portion of these planned capital expenditures move from the drawing board to the field over the next several years, the mining industry, which is by its nature capital-intensive, will need significant debt financing resources.

In December 1994, LatinFinance published an Industry Supplement titled "Mining in Latin America 1995". Two articles noted that there were a limited number of sources and a limited amount of funds available to provide debt financing for mining projects in Latin America at that time. These articles also noted, however, that coming out of Latin

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America's "lost decade" of the 1980's a positive trend was developing which over time would diversify the sources and increase the amount of financing available.⁶

One article noted that "[a]lthough there is an emerging syndication market for commercial loans in Latin America, banks are currently not anxious to underwrite large transactions. A growing number of institutions are willing to lend into certain countries in Latin America, but it remains a shallow market...The trend is nonetheless very positive."⁷ That article also stated that "[w]hen a bank is mandated to assist a client in structuring or arranging financing for a project in Latin America, one of the first tasks it performs is a preliminary financing feasibility study, a sort of quick and dirty determination of the availability of financing with regard to the client's objectives, preferences and constraints."⁸ Another article noted that "[t]he international commercial banks, who [sic] potentially represent an important source of syndicated lending for project or corporate finance, are still reluctant to lend in many of the countries of the region."⁹ Because international commercial banks were reluctant to provide financing for mining projects in Latin America in the early 1990's, and the international capital markets had not yet opened up in any significant way to issuances from the emerging markets or in respect of projects, some of the most active institutions in providing financing for such projects were the multilateral development institutions, such as the International Finance Corporation (IFC), and national export credit agencies (ECAs), such as the United States Export-Import Bank (ExImBank).¹⁰

Luckily the situation many mining companies faced in seeking financing for their Latin American projects in the early 1990's no longer exists. Today, the sources of debt financing are more varied, the amount of debt financing available has increased dramatically, and international commercial banks and underwriters are aggressively pursuing attractive mining projects.¹¹ Depending on the characteristics of a particular project, including the country in which it is located, the identity of the sponsoring mining company or

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companies, the countries from which equipment and services will be sourced and the mineral involved, a number of debt financing options may be available. At this time, the most frequently tapped sources are:

1. The international commercial bank market;

2. Multilateral development banks and institutions such as the International Financial Corp. (IFC), the World Bank (IDB) and the Corporation Andina de Fomento (CAF);

3. Export Credit Agencies (ECAs), such as the Export-Import Bank of the United States (ExImBank), the Export Development Corporation of Canada (EDC) and the Export-Import Bank of Japan (J-EXIM);

4. Equipment leasing and other forms of vendor financing;

5. Trading company financing, such as that provided by Marubeni, Mitsubishi and Nippon;

6. Domestic financing from local commercial banks and governmental development institutions; and

7. The international capital markets (including the 4(2) private placement market, the 144A and Reg S markets and registered public offerings).

The task of a mining company developing a project in Latin America and its financial advisor (if any) is first to determine which of the sources of debt financing are available for its particular project and then, after evaluating the advantages and disadvantages of each available source, to determine which are the most attractive for the project.

II. Sources of Debt Financing

Each potential source of financing has advantages and disadvantages for any specific project. Some sources provide for swifter execution than others. Some provide greater flexibility for the borrower due to looser covenant requirements, while others containing stricter covenant requirements provide more flexibility in addressing unanticipated events. Certain forms of financing provide longer tenors and, generally, prefer fixed interest rates, while others provide shorter tenors and floating rates. Certain forms provide more financial structuring flexibility. Finally, some provide implicit or explicit political risk protection which may be essential to the successful financing of a project.

Given the increasing average capital cost of projects, the number of pending projects in some jurisdictions and the limited depth of some of the financing sources, often it is necessary to combine two or more sources of debt financing. Therefore, it is important to

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consider how best to combine such sources and which sources may have characteristics which are complementary.

A. International Commercial Bank Market

The international commercial bank market is now perhaps consistently the deepest source of financing for mining projects in Latin America. This is because as a general matter international commercial banks have a greater capacity than the capital markets to assess and accept project risk.¹² Most major international commercial banks have the in-house capability of analyzing the risks of a mining project during both the construction and operational phases. It is also because multilateral development institutions and export credit agencies often have limited funds available generally or by country or because their financing is linked to the value of equipment or services purchased in a particular jurisdiction.

Since the early 1990's, the number of banks participating in project financing and the geographical diversity of these banks have increased significantly. Today, banks from the US, Canada, Europe and Asia are participating in this market. This has gradually led to more competition among lenders and better terms for the borrowers.

As a general matter, the banks require strict performance covenants (including affirmative and negative covenants), compliance with World Bank or other internationally acceptable environmental standards, freedom to export production and dollars and to maintain dollars offshore, and established mining codes and laws and procedures governing the grant of mortgages and pledges, and the foreclosure, on collateral. In addition, for projects in certain countries, the banks continue to require political risk coverage.¹³

Financing through the use of a syndicated international commercial bank facility has three major advantages...