CHAPTER 7 CRAFTING MULTI-SOURCE, MULTI-STRUCTURE FINANCING PLANS POST-2008: LESSONS LEARNED1
| Jurisdiction | Derecho Internacional |
(Apr 2015)
CRAFTING MULTI-SOURCE, MULTI-STRUCTURE FINANCING PLANS POST-2008: LESSONS LEARNED1
Partner
Shearman & Sterling LLP
New York
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CYNTHIA URDA KASSIS is a senior partner in the Project Development & Finance practice of Shearman & Sterling in New York City. She acted as Trustee-at-Large of the Rocky Mountain Mineral Law Foundation (RMMLF) from 2011-2014 and is a Member of the Steering Committee of RMMLF's 2015 Special Institute on International Mining and Oil & Gas Law, Development, and Investment. Cynthia's depth of experience includes representing both lenders and sponsors on project, corporate, and acquisition financings with respect to precious, base, and specialty metal and energy mineral projects in Argentina, Brazil, Canada, Chile, Colombia, Mexico, Pakistan, Peru, Venezuela, Vietnam, and the United States, including Arizona, California, Idaho, Illinois, Indiana, Kentucky, Minnesota, Nevada, South Carolina, Utah, and West Virginia. In the oil & gas sector, Cynthia's breadth of experience ranges from high-profile pipeline projects in Peru and Colombia to notable LNG projects in Uruguay, Chile, and Canada, and from gas compression and storage projects in Mexico and the United States to offshore drill ships in Brazil. She has also worked on large scale petrochemical projects in the United States. Cynthia is ranked as a leading project finance lawyer by Chambers Global, Chambers Latin America, Chambers USA, IFLR 1000, Legal 500, Guide to the World's Leading Lawyers in Project Finance and The International Who's Who of Project Finance Lawyers, of Banking Lawyers and of Mining Lawyers. She has also been named "Dealmaker of the Year" by The American Lawyer, "Projects/Energy Lawyer of the Year" by Chambers & Partners and "Project Finance MVP" by Law 360.
Introduction
Background
Despite steadily improving conditions in traditional financial markets since the crisis of 2008, available funding for mining and metals companies from these markets has remained significantly constrained. Today, this is the case whether it is a major, mid-tier or junior company looking to raise debt or equity. It is particularly the case if the company is seeking funding for greenfield development on a limited recourse basis.
The volume of issuances in the capital markets, one of the main sources of funding for the mining and metals industry, has declined significantly over the past several years. Current market conditions make the issuance of equity generally highly dilutive and the high yield corporate debt market is challenging at best. With respect to international commercial banks, a key source of funding for greenfield mining and metals projects, following the 2008 financial crisis a number of international commercial banks active in project financing either ceased to exist, exited the product or substantially reduced their activity levels. Though in recent years a number of commercial banks have come back into the market with increased activity levels, a material gap persists as against pre-2008 available bank project finance funding. The third key source of funding for these projects, export credit agencies and multilateral development agencies have sought to increase their available funding to fill some of the gap, but given the constraints under which these institutions operate as a result of their enabling legislation or charters and the multiple demands on their resources, there is a limited amount such institutions can do particularly for this sector to fill the funding gap.2
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Reduced availability of funding in the traditional markets to which mining and metals companies turn to fund their development projects has had several consequences. First, competition for funds which are available from the traditional sources is fierce. Second, new sources and structures, developed both by entrepreneurs who saw the need and stepped in and by creative bankers and sponsors who developed funding products designed to entice funding sources which had not previously invested in the sector to do so, have arisen seeking to fill the gap. Third, for projects large and small, multi-source, multi-structure financing plans are often required - no single source is likely to be sufficient. Thus, financing plans for projects are becoming increasingly complex. Finally, creativity and flexibility is required by the company and the various sources of funding, if a financing plan is to be successfully executed and a project developed to its full potential.
The news is not all dire. Companies should not assume traditional sources and structures are completely unavailable. Recent examples of fairly traditional financing plans for greenfield mine development include Guyana Goldfield's financing of its Aurora Gold Project in Guyana,3 Torex Gold's financing of its El Limon-Guajes Project in Mexico,4 Midway Gold's financing of its Pan Gold Project in Nevada5 and Romarco Mineral's financing of its Haile Gold Project in South Carolina.6 That said, at least in the near term, it is likely that even if traditional sources provide a portion of the funding, a non-traditional or alternative source or structure will need to be accessed to fully fund the development costs of a greenfield mining and metals project.
Overview of Non-traditional Funding Sources and Structures
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Six of the key non-traditional sources for funding greenfield mining and metals projects are the following: (1) streaming or royalty company financing, (2) high yield bonds, (3) private equity or hedge funds, (4) commodity trading companies, (5) strategic or industry investors and (6) construction contractors. There has been great fanfare over the last several years regarding the promise of a variety of the above sources of funding. In particular, numerous articles have been written about the significant sums of money which has been raised and is sitting in private equity and hedge funds looking to be invested in this sector. In addition, much ink has been spent on streaming and royalty finance as all sector participants seek to understand the nature of this new and innovative source of funding.
Like traditional sources and structures for financing mining and metals projects, these new sources and structures each have advantages as well as potential disadvantages. Whether any one of these new sources is a good fit for any particular project will depend on whether the particular characteristics of the project and objectives of the sponsors match the requirements and objectives of the financing source and structure. The challenge is that with traditional sources there exists decades of experience through boom and bust cycles of the sector and the full evolution of numerous projects. As a result, the advantages and disadvantages of those sources and structures are well known. The alternative sources and structures are for the most part quite new. If not completely new, their application to the mining and metals sector generally or in the form of a non-recourse structure to mining and metals projects is new. For example, the first streaming transaction is reported to have been completed by Silver Wheaton little more than ten years ago.7 The first time the high yield bond structure was applied to funding a greenfield mining project by a project company is generally cited as Fortescue Minerals' 2006 issuance.8 Construction contractors are only now stepping into the financing side as the market has moved from one in which they were capacity constrained to one in which they have significant excess capacity.
Because these alternative sources and structures have been developed so recently, the terms of these sources and structures are still evolving. This is both a positive and a negative. It is positive as it allows for the flexibility often needed to successfully execute the full financing plan. It is a negative as it adds unpredictability to the process of crafting the financing plan both
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because the terms are not as predictable and because how those terms may impact future phases of the development of the project and the evolution of the financing plan is hard to foresee. Second, there is limited experience with how these sources and structures will act through the full life cycle of a project and through the different boom and bust cycles of the commodity industry. As a result, it is not always possible to accurately predict the consequences of using particular sources and structures on future business plans of a company. It is also not always possible to accurately predict how the use of a particular alternate source or structure will later be viewed by other traditional and alternative sources as the development of the project and build out of the financing plan progresses.
It will likely be some time before these new sources and structures of funding have been used widely enough and for a long enough period that market participants will have the level of comfort in understanding these sources and structures that they have with traditional funding sources and structures. Nonetheless, we have now had a critical mass of use of a number of these new sources and structures on projects which have progressed through development, into financing and in some case into operations. It is, therefore, a reasonable time to look back and see what lessons we have learned thus far.
Streaming/Royalty Finance
Background
Streaming and royalty financing is perhaps the most prevalent alternative source of funding for the mining and metals sector. Many would argue that it has in fact become mainstream financing for the industry, so active have the streaming and royalty companies been in the last five to eight years.9
Initially used by companies with operating properties to raise working capital funds, streaming and royalty finance...
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