Chapter 3 PROJECT FINANCE 2021: SOURCES, TRENDS AND KEY ISSUES

• Jurisdiction: United States

Mining Law
Chapter 3

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PROJECT FINANCE 2021: SOURCES, TRENDS AND KEY ISSUES
Cynthia Urda Kassis Shearman & Sterling, LLP New York, NY

CYNTHIA URDA KASSIS is a Partner with Shearman & Sterling, LLP in New York. She has decades of experience representing sponsors/borrowers as well as providers of finance in project, finance and joint-venture transactions worldwide, with extensive experience in the mining industry, as well as in infrastructure and energy. For her impact in the space she has been a three-time recipient of the "Project Finance Lawyer of the Year" award by Who's Who Legal. Cynthia's notable work in the mining space includes the representation of: (i) Orion and Blackstone in the financing of Lundin Gold's $1B+ Fruta Del Norte Project in Ecuador; (ii) Orion Mine Finance on its acquisition of Occidental Petroleum's Wyoming, Colorado and Utah Land Grant assets for about $1.33 billion and the financing thereof; and (iii) Société Générale and ING on the structured acquisition financing, in the form of term loan and borrowing base facilities, for Pala's acquisition of Cobalt 27.

2021 is an apropos time to step back and consider the state of the mine project finance market.

As a result of events in the first part of the 21^st century, including the 2008 global economic crisis and the end in 2011/12 of the long commodity price super cycle, the period from 2000 to 2020 saw major developments in the mine finance market. In particular, the sources and structures of funding for the industry changed substantially. Out of necessity, both proliferated. The world of mine project finance transformed from one which was dominated by a few products and sources - common equity and senior secured debt from international commercial banks, export credit agencies and multilateral lending institutions - and in which the typical capital structure of a mining company was quite straightforward, to one in which not only were more sources and structures available, but they were brought together such that the capital structures for particular projects became much more complex. These market changes drove not only adjustments in the financing plans for particular projects, but permanent revisions to the capital structures of many mining companies, making them much more layered and complex. These changes will have permanent consequences for the industry, the full understanding of which will be fully understood only over time.

The changes to the mine finance market will likely not stop or even pause for now. Unfortunately, there will not be a period of consolidation during which mining companies and financiers can digest these changes and assess their short, medium and long term impacts. 2020 brought the COVID pandemic and served as a catalyst to heighten awareness globally of major societal issues ranging from climate change to long-standing diversity and other inequities to commercial matters, such as supply chain security and ethical sourcing. As a result, the industry enters the third decade of the 21^st century poised to experience another series of dramatic changes which will likely have major consequences for the mine project finance market.

Notwithstanding the transformational changes in the mine finance market over the past two decades and those inevitably to come, the fundamental building blocks, from the point of view of both mining companies and their finance providers remain remarkably familiar, with a few twists and turns to be considered. Certain fundamental building blocks are now receiving renewed or heightened attention, the scope of some has expanded and a few new ones have appeared.

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This article explores the current state of mine project finance as it comes to the end of twenty years of significant developments and stands on the precipice of a period of equal if not greater change.

Mine Project Finance: Sources/Structures

At the start of the 21^st century, mine project finance remained dominated, as it had been for some time, by a handful of long-standing funding sources: the equity capital markets, international commercial banks and the "Agencies" (i.e., export credit agencies (ECAs) and multilateral or national development banks (DFIs)). These so-called "traditional sources" provided funding predominantly in the form of common equity (in the case of the capital markets) and senior secured loans (in the case of the commercial banks and Agencies).

While these traditional sources remain relevant today and, in fact, continue to be major sources of funding to the industry and for mine project development, the prevalence and depth of these sources is down dramatically from their peak, both in terms of the number of participants and the available liquidity. The 2008 global financial crisis has had a lasting effect on the traditional sources. Consequently, creative minds in the finance sector have risen to the challenge of bridging the resultant industry funding gap, raising funding from new sources and developing new financial instruments by which to invest those funds. These new sources and structures are generally referred to as "alternative" or "non-traditional" sources. These include financiers such as streaming/royalty companies, private equity funds and commodity trading firms, and new capital markets products, such as project bonds, among others.

Traditional Sources

Though there has been substantial recovery in available funding from the traditional sources of funding to the mining sector in the aftermath of the 2008 global financial crisis, the number of participants in this market and the aggregate amount of funding available has not returned to pre-crisis levels. Outside of the coal sector, funding and participation from the Agency lenders has not changed that significantly; in fact, it may even have increased. However, with the exception of major mining companies, for which funding in the capital markets and from international commercial banks has continued in large part to be available, the ability of the mid-tier and junior mining companies to access these traditional sources of financing has decreased; in the case of the capital markets, availability for these mid-tier and junior mining companies is certainly more volatile.

A key indicator of this is the volume of issuances in the Australian and Canadian capital markets (two of the major sources of capital market funding for the sector especially for junior mining companies) which has declined dramatically since their hey days. In addition, prior to the 2008 global crisis, there were numerous international commercial banks active in the mine project finance sector. Today a

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number of the institutions formerly active in the sector no longer exist and others have exited either the sector or the project finance product altogether.

Despite the foregoing, and notwithstanding the significant increase in funding coming from the alternative sources and the undeniable impact they have had on the sector, the traditional sources of mine finance continue to dominate the market in terms of the volume of funding provided. The traditional sources, as a result of their long history of activity in the sector, remain the most transparent and most predictable in good times and in times of distress. Some would argue that the traditional sources also offer mining companies the most financial flexibility in the short, medium and long terms. Most importantly in this regard, typically, traditional sources include voluntary prepayment provisions which give borrowers the right to optionally prepay the financing. These provisions have very flexible terms often allowing prepayment at any time and generally there is no prepayment premium or a prepayment premium which is much less costly than is the case with many alternative source financings - to the extent they permit prepayment. Thus, traditional sources allow for changes in the capital structure to optimize financing costs over the term of the financing, including, for example, as the project is de-risked as it reaches completion or as there are improvements in the terms and conditions for financings of this nature in the market. In addition, should the project be sold, in whole or in part, it allows for a re-optimization of the capital structure reflecting the new equity ownership.

Alternative Sources

The so-called "alternative sources" -- a term which started as a reference to a few new pools of capital and investment instruments such as streaming and private equity fund investments -- has now come to refer to an ever expanding list of potential financing sources and arrangements not typically associated with international commercial banks, Agencies or common equity issuances. The latest additions to the list include such things as crowd funding, tokenization, green or ESG or sustainability-linked funding and others addressed below in the section discussing "Next Generation" financing sources and products. The more common alternative sources employed at this time, however, are through (i) streamers/royalty companies, (ii) private equity funds, (iii) commodity trading firms and (iv) the issuance of project bonds.

Streams/Royalty Companies: Royalty financings, created in the late 1990's, and streams, created in the early 2000's, sky-rocketed from esoteric funding options to main stream funding sources in less than twenty years.¹ Though some claim streaming passed its peak in 2018, it would be remiss today for any mining company to disregard a stream or royalty financing as a potential funding source.

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In addition, as a result of all the streaming transactions closed over the past ten years, it sometimes seems hard to find a greenfield or brownfield mining project that does not have a stream embedded in the capital structure of such project. Typically, such streams cannot be removed and, in the limited cases in which they can be removed, it is generally not without a substantial...