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Mine Financing: Now that You’ve Found It, How Do You Finance It? by David LLoyd, National Australia Bank

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This was presented at Mines and Money Australia (www.minesandmoney.com/australia) in October 2012. …

This was presented at Mines and Money Australia (www.minesandmoney.com/australia) in October 2012.

Now that you’ve found it, how do you finance it?

• Trends in the availability of funding for developing projects
• What’s the right balance of equity, sub debt, and debt?
• Financing: what are your options/existing & new financiers in 2012/13
• The government as your friend: ECAs and other pockets of capital

David Lloyd,
Head of Resources,
Project Finance,
National Australia Bank

More in: Business
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  • 1. Page 1NOW THAT YOU’VE FOUND IT...HOW DO YOU FINANCE IT?CHALLENGES AND OPPORTUNITIES IN MINING FINANCE16 October 2012 David Lloyd Head of Natural Resources Project Finance Mines and Money Conference “Now that you’ve found it... How do you finance it?”
  • 2. Page 2Global Financial MarketsRecovering but fragile...Banks have been returning to the market although at lower levels than 2007...Mining finance has been relatively robust. Global capital raising 2007-2012 Project Finance in Mining Sector Globally 14 Global Mining Project Finance US$bn 12 11.5 10.9 11.2 10 8 6 4.6 4.1 4 2.4 2 0 2007 2008 2009 2010 2011 1H2012 Non-Recourse Project Bond Project FinanceSource: Bloomberg, KPMG Source: Project Finance International Mines and Money Conference “Now that you’ve found it... How do you finance it?”
  • 3. Page 3 Divergence in Regional Outlooks: Bank CDS Spreads by Region Divergence in regional economic and financial outlook hasIssue changed traditional sources of capital. 600 500Europe Eurozone uncertainty continues…. 400 • Eurozone growth forecasts fall to -0.4%/2012 and Europe +0.2%/2013 (IMF – 10/12)) bps 300 • 90% likelihood of Greece leaving Eurozone (Citi -7/12) 200 • EU Banks raise E200 bn fresh capital in 2012 (EBA-10/12) • Bank balance sheet constraint/deleveraging to continue 100 Australia & AsiaNorth US stable but weak …. 0America • Growth forecasts 2.2%/2012 and 2.1%/2013 (IMF) • US major banks largely recapitalised, but exposed to weak French UK Spanish Euro Asian Australian real estate, investment banking sectors Source: Bloomberg • Cautious, constrained outlookAsia Decelerating growth, as external demand weakens…. • China growth forecast to rebound from 7.8% to 8.2% as S&P Ratings Update (October 2012): investment picks up (IMF) • Japan forecast to fall from 2.2% to 1.1% as Fukushima 14 “AA-“ Rated Banks (Market Cap>$20bn) } reconstruction completes (IMF) - 4 Australian • Japanese banks limited exposure to GFC, bolstered capital - 3 Canadian 10 “AAA”/ “AA-” Banks with new equity but face weak domestic economy/profits - 3 SingaporeanAustralia Resources Investment boom strong, but peaking …. - 3 European • Growth forecasts 3.3%/2012 dropping to 3%/2013 (IMF) - 1 Hong Kong • Banking sector limited exposure to subprime assets, derivatives, and Euro zone sovereigns interrelated bank-sovereign ratings • Banks strong capital base, record profit levels, Basel 3 Source: S&P, Bloomberg prepared Mines and Money Conference “Now that you’ve found it... How do you finance it?”
  • 4. Page 4Australian Banking Market: Relatively Robust Strong Growth in the Australian Syndicated Loan Market 120.0 Australian Loan market over last 7 years 100.0 Punctuated by GFC, but Loan Volume (US$bn) 80.0 near record level resumed in 60.0 2011 driven by lower credit 40.0 margins and refinancing 20.0 activity .0 2005 2006 2007 2008 2009 2010 2011 1H2012 Q3 2012: $55b total with Source: Thomson Reuters Total volume (US$m) $8-10b pipeline. Base level of Australian Project Finance Market $50-60bn supply, high demand 30.0 25.0% Aussie PF Market currently 19.9% Australia % of Global PF loans 25.0 20.0% #1 in global rankings (1H2012) Global PF loans (US$bn) 20.0 15.0% Compared to other OECD 15.0 9.8% 10.0% markets, Australia has 10.0 5.0% resilient credit and investment 5.0 demand with adequate 0.0 0.0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1H2012 available financial sources Australia Australia % of Global PF market Source: Project Finance International Mines and Money Conference “Now that you’ve found it... How do you finance it?”
  • 5. Page 5Where is the money? Changes in Composition of Bank Financing Australian Syndicated Loan Market Share By Lenders originIn a relatively strong finance market, 70% 120 the composition of Australian debt 106 104 finance sources has been changing: 60% Australian (%) 60% Percentage market share (line graph) 100 Loan volume US$bn (bar graph) 52% 50% 80 66 NAB + other Australian banks 40% 60 Europe (%) 60 supportive 51 30% 30% 44 European bank retreat continues 40 20% Asian Banks diversify (Japan, 16% Asian (%) +Singapore, +China) 11% N.A (%) 10% 20 10% North America recovers (+Canada) 3% 6% 0% 2007 2008 2009 2010 2011 1H2012 Total volume (US$m) Australia % Europe % Asia % North America % Source: Thomson Reuters, NAB Mines and Money Conference “Now that you’ve found it... How do you finance it?”
  • 6. Page 6Who’s your Finance Partner, Australia?Australian Banks• Big 4 Australian banks among only 14 in the world rated “AA-” by S&P (mkt cap >$20bn)• Record operating earnings/strong Tier 1 capital (ratios between 9.4%-11.1%)• Little/nil exposure to Euro sovereign/subprime/leveraged/credit derivatives/• Healthy balance sheet capacity, but dependent on offshore wholesale funding.International Banks traditionally, but• Deleveraging triggered partial Deglobalisation - banks focus limited capital on:  “home” markets (e.g. Europe: RBS, HBOS, Dexia, UniCredit, Natixis, SocGen, etc)  “core” clients – relationships and product cross-sell necessary to access credit  Asian/North American Banks: expansion, but limited to “franchise” links.International projects: cross-border “orphans”?• Regional Lenders –reduction in “global” lenders• Multilaterals and ECAs Mines and Money Conference “Now that you’ve found it... How do you finance it?”
  • 7. Page 7Australian Mining Finance - Who’s your financing partner? NAB + 4 other Australian banks stable, building out capacity 12 – 15 core Aussie, Euro, Asian, South African banks still active in mining finance (-20%) Chinese/Indian Banks support national client projects (Sino Iron: ~$5Bn-CDB; Lanco/Griffin: ICICI) Increasing participation of local Asian Banks in financing cross-border mining transactions in Asian countries (Kingsgate/Thailand, Sakari Resources/Indonesia) ECA involvement has become important/vital (“Mega”projects) Asia Pacific Mining Project Finance 9.0Mining Transaction Structural Elements: 8.0• National/regional financing support from “franchise” connections 7.0 6.0 Loan volume (US$m)• Large club loans + larger “tickets” ($100m - $1 bn!) 5.0 4.0• Preference to restrain tenor (< 7- 10 yrs) 3.0• More equity, loan security, separate leasing, hedging as 2.0 commodity prices retreat from peaks 1.0 .0• High interest margins, but increasing competitive pressure• Non Bank complementary financing sources are important Asia Pacific Mining PF Source: Project Finance International Mines and Money Conference “Now that you’ve found it... How do you finance it?”
  • 8. Page 8Complementary Financing: Export Credit Agencies (“ECA”)ECAs are now playing an important role in the global – and Australian - financial markets ECAs Increased to over $190bn ECA’s Berne Union ECA Totals in 2011 250,000 PRE-GFC NOW 200,000Purpose MLT (US$m) 150,000- Support domestic - National interest, 100,000employment resource security 50,000- Tied to exports - Fill funding “gaps” - Untied / Relaxation of 0 2007 2008 2009 2010 2011 credit MLT New Business - insured during each year Source: Berne UnionMarkets Growth in US-EXIM Bank Authorisations- “Developing” countries - Broad global mandate- Africa, Asia, Latin  US Exim authorised a total Developed countries - of USD 32.7bAmerica over 3,751 transactions in 2011 backing US-Exim tripled authorisationsTransactions over 5 years- Export support - Inbound / Outbound- Outbound Investment - Direct Loans, equity- Insurance / G’tees support Source: www.exim.gov Mines and Money Conference “Now that you’ve found it... How do you finance it?”
  • 9. Page 9Complementary Financing: ECAs (continued)JBIC (& NEXI) – Japan Multilateral lending for project finance $100bn MoF funding in 2011 to acquire resource/foreign assets 90% 80.0 MoU with W.A. and QLD 79% Transactions: 80% 70.0 Multilateral lending for Project Finance (US$bn) • $819m to fund Sony buyout of Sony Ericsson (2/12) 70% • £1bn UK Intercity Express PPP PF (Hitachi trains) (7/12) 60.0 • $211m to Osaka Gas to finance its share of Gorgon LNG 60% 50.0US EXIM 50% 50% % Tripled activity to over $32bn in 2011 40.0 40% Australia: $500k (2008) to $5bn (US EXIM forecast for 2012) 30.0 • $2.95bn Australia Pacific LNG 30% • $ (?) Roy Hill Iron Ore (Hochberg/US Exim – 8/12) 20.0 20%EFIC Australia 14% 10% 10.0 Support where a “market gap” exists: • $100m Export Finance G’tee in $3bn WICET financing (2011) 0% 0% 0.0 • A$40.5m guarantee in $475m syndicated facility for Macmahon 2008 2009 2010 2011 1H2012 • $250m Export Finance G’tee in a $1.2b ECA facility for Santos Developing Countries Other Developed CountriesOther Australian ECA transactions Australia Developing as % of Total Australia % of Developed Energy Developments: A$28m NAB/Finnvera facility for Wartsila Source: Project Finance International gensets at McArthur River zinc (10/12) Hydro Tas/Guohua Energy: NAB arranging debt with EKF/Denmark participation for $395m Musselroe wind farm project (current) Mines and Money Conference “Now that you’ve found it... How do you finance it?”
  • 10. Page 10Advantages of ECA FundingAccess on the basis of a link to that ECA country; equity investments, off-take agreements and/orprocurement of major plant and equipmentBenefits of ECA FundingBenefit DetailTenor • Up to 18 year tenor (including construction) for projects with long offtake contracts Pricing • Favourable pricing in view of the longer tenor Certainty • Greater funding and pricing certainty for the Project (reduces refinancing risk) Terms • Prepared to accept terms and conditions acceptable to Domestic Bank Funding Diversity • Diversity of funding sources  Mines and Money Conference “Now that you’ve found it... How do you finance it?”
  • 11. Page 11Non Bank Financiers: filling the gapA. Debt Capital Markets/Bonds – ‘Strong issuance’  Primarily investment grade: ~US$1 Trillion deep market; ~45bn Aussie global new issuance  Sub Investment grade (most mining companies): Hi Yield/Private Placement/Term Loan “B” • More expensive and volatile; less restrictive, longer tenor (“beware the speed bumps”) • Fortescue $4.5bn TLB (10/12), Ausdrill, Mirabela, Atlantic/Windimurra, Boart Longyear  Convertible Bonds: Strong demand for new A$/US$ issues (~35% premium /~5% coupon)B. Offtakers/Trading Companies – Glencore, Trafigura, Noble, Japanese, Korean  Straits Resources/Glencore – Equity Underwrite + $20m W/C facility w/copper offtake for Tritton (7/12)  Lynas Corp/Sojitz & JOGMEC (Japan) - $225m term loan w/8,500 tpa Rare Earths Distribution and Agency agreement (2011)C. Royalty/Metal Investors: Franco Nevada, Royal Gold, Sandstorm  Thompson Creek Metals: $781m of C$1.5bn Mt Milligan Copper/Gold Project Capex financed by sale of 52% gold production to Royal Gold (2011/2012)  Metal Investors: Red Kite: Allied Gold $80m gold “prepayment” loan (Jan’/12) Mines and Money Conference “Now that you’ve found it... How do you finance it?” 11
  • 12. Page 12Non Bank Financiers: filling the gapD. Multilaterals, Bilaterals, - complement commercial bank financing.  KfW/EDC/KDB – “Emerging Markets” but bilaterals support national interest clients in OECD countries (eg: financed Wiggins Island C.E.T)E. Equipment vendors – Cat Financial, Siemens, Samsung C & TF. Investment Funds –  Focus on Hi Yield/Distressed: Mezz/”vulture” funds  Senior Debt ? Mines and Money Conference “Now that you’ve found it... How do you finance it?” 12
  • 13. Page 13 How much does it cost? Higher (but overall lower) is here to stay … Lending margins declined substantially since 2009, but continue at very high levels: base rates in US$ and A$ have fallen to more than compensate iTraxx Corporate CDS Spreads Post GFC 1,500 IG ~100bps Base Rates (Interbank Borrowing Rates) Index Value (bps) HY ~ 400- 9.00% 1,000 500bps 8.00% US$ LIBOR A$ BBSW 500 7.00% 2007 6.00% 0IG ~50bpsHY ~ 200- Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 5.00% 300bps Asia Ex-Japan IG Asia Ex-Japan HY Europe IG Europe HY Source: Bloomberg 4.00% Historical Australian pricing trend 3.00% 2.00% 1.00% 0.00% Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Source: Bloomberg Source: Thomson Reuters, NAB internal sources All-in borrowing costs are likely to be Higher margins driven by: lower than your base rate in 2007 Higher bank capital (5-7%  9-11% Tier 1) Higher bank funding costs (deposit competition, interbank funding risk, Basel III capital requirements) Pressure to optimise balance sheet use / limit loan books Sources: Bloomberg, Markit Mines and Money Conference “Now that you’ve found it... How do you finance it?”
  • 14. Page 14NAB Recent Transactions Acquisition Finance Borrower St Barbara Ltd Facility A$120m (NAB hold AUD90m) Purpose Acquisition financing for the takeover of Allied Gold Mining Plc Financiers NAB (MLA and Lead Bookrunner) , European Bank (MLA and Co-Bookrunner) Facility Type Syndicated Facility Agreement Tenor 4 years Close Date Sep-12 Largest Syndicated Master Lease Facility in Australia Borrower Fortescue Metals Group Limited (“FMG”) Facility US$965m (Oversubscribed +93.0%) Purpose Fund equipment related to expansion of mining operations in the Pilbara region of WA Financiers NAB plus several other banks Facility Type Syndicated Master Lease Facility Tenor 5 yr leases, 2 yr Availability (max 6 yr tenor) Close Date May-12 “Greenfield” Gold Project Development Borrower Millennium Minerals Limited Facility A$50m Project Finance + $8m Leasing Purpose Construction and Term Loan funding to underpin development of the 1.5mtpa gold mine near Nullagine, WA Financiers NAB and a European bank. Facility Type Term Loan and Cost Overrun Facility, Gold Hedging Facility, Equipment & Accommodation Leasing Tenor 4.5 years door-to-door. 1.5 years construction, 3 years term. Close Date Mar-12 Mines and Money Conference “Now that you’ve found it... How do you finance it?”
  • 15. Page 15Key ContactsNAB Resources ContactsAndrew Wright Managing Director, Institutional Banking +61 3 8641 4193 Andrew.W.Wright@nab.com.au Project Finance David Lloyd Head of Natural Resources, Project Finance +61 2 8220 5365 David.Lloyd@nab.com.au Julia Hinwood Director, Project Finance & ECA +61 3 8641 3352 Julia.Hinwood@nab.com.au Simon Esposito Director, Project Finance +61 3 8697 7398 Simon.Esposito@nab.com.au Stewart Findlay Director, Project Finance - WA +61 8 9441 9273 Stewart.Findlay@nab.com.au Institutional Banking Brad Calleja Head of Institutional Banking, WA +61 8 9441 9431 Brad.Calleja@nab.com.auStuart Glen Head of Institutional Banking, QLD +61 7 3234 5021 Stuart.Glen@nab.com.auOmer Molad Director, Natural Resources, VIC +61 3 8641 5766 Omer.Molad@nab.com.auMatthew Sandham Director, Natural Resources, NSW +61 2 9237 9419 Matthew.Sandham@nab.com.auKevin Jamieson Director, Natural Resources, WA +61 8 9212 7830 Kevin.Jamieson@nab.com.au Asset Finance & Leasing Greg Hampton Head of Asset Finance & Leasing +61 2 8220 5304 Greg.Hampton@nab.com.au Markets Henry Walsh Global Head of Commodities +61 2 9237 1092 Henry.Walsh@nab.com.au Jonathan Baker Head of Corporate & Institutional Markets FX +61 2 9237 1313 Jonathan.B.Baker@nab.com.au Mines and Money Conference “Now that you’ve found it... How do you finance it?”
  • 16. Page 16National Australia Bank Global Customers Experience Access Rating StrengthOperating across the Number of customers Supporting our Branches and service Standard & Poor’s long Employees world serviced customers centres term rating 10 11.56 150 1,800 AA- 43,339 countries million years branches stable People We are a financial services organisation providing products, advice and services through our major Australian franchise and our businesses in Asia, United Kingdom, New Zealand and United States. Mines and Money Conference “Now that you’ve found it... How do you finance it?”