Henk de Hoop, Rand Merchant Bank - Raising capital and local partner equity funding options for Mozambican coal projects
 

Henk de Hoop, Rand Merchant Bank - Raising capital and local partner equity funding options for Mozambican coal projects

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Henk de Hoop, Rand Merchant Bank delivered the presentation at IMM’s Mozambique Coal Conference 2013. ...

Henk de Hoop, Rand Merchant Bank delivered the presentation at IMM’s Mozambique Coal Conference 2013.

The IMM’s Mozambique Coal conference features a comprehensive program which discusses the latest mining developments, assesses the way forward for the country’s crucial port and rail progress and examines Mozambican Government policies and the investment opportunities.

For more information about the event, please visit: http://www.immevents.com/mozambiqueconference

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Henk de Hoop, Rand Merchant Bank - Raising capital and local partner equity funding options for Mozambican coal projects Henk de Hoop, Rand Merchant Bank - Raising capital and local partner equity funding options for Mozambican coal projects Presentation Transcript

  • Strictly Private and ConfidentialAn Authorised Financial Services Provider Raising capital and local partner equity funding options for Mozambican coal projects Henk de Hoop – Rand Merchant Bank July 2013 Henk de Hoop Business Development Director: Resources Tel: +27 11 282 4970 Email: henk@rmb.co.za 0 10 Seri es 1
  • Introduction Where do banks play Why and how have funding options changed Sources of funding, focus on ECA Financing local partner participation Conclusion
  • Strictly Private and Confidential Introduction 3 FirstRand Limited (“FirstRand”) is the 2nd largest financial institution in Africa with a market capitalisation of c.US$16.5bn and one of the largest companies listed on the Johannesburg Stock Exchange FirstRand operates through 3 divisions: Rand Merchant Bank (“RMB”) (investment banking) First National Bank (“FNB”) (retail and commercial banking) Wesbank (asset financing) FNB operates throughout Africa, including Mozambique RMB is the entity that would lend into mining projects and infrastructural development
  • Strictly Private and Confidential FirstRand in Africa 4 On the ground presence Gaborone Lagos Mbabane Maputo Maseru Windhoek Luanda Lusaka Accra South Africa Representative offices Full banking operations Target jurisdiction Deal footprint
  • Strictly Private and Confidential FirstRand’s international footprint 5
  • Strictly Private and Confidential # Bookrunner Deals Value ($ m) Market share 1 RMB Morgan Stanley 30 7 181 44.4% 2 UBS 6 1 193 7.4% 3 Standard Bank 11 951 5.9% 4 Java Capital 17 828 5.1% 5 Deutsche Bank 8 715 4.4% 6 BofA Merrill Lynch 3 545 3.4% 7 Goldman Sachs 2 523 3.2% 8 Macquarie Group 4 468 2.9% RMB is the leading adviser in South Africa (2007 - 2013YTD) PwC Peer Ranking of Banks # Adviser No of deals Value (R’m) Mergers & Acquisitions 1 Rand Merchant Bank 151 370,376 2 Goldman Sachs 18 266,535 3 Standard Bank 78 246,274 4 JP Morgan 25 220,288 5 Deutsche Bank 51 219,920 General Corporate Finance 1 Rand Merchant Bank 175 720,322 2 JP Morgan 30 260,421 3 Goldman Sachs 9 244,206 4 Investec 179 155,590 5 Deutsche Bank 34 140,471 6 M&A deal value (2005 – 2012) 432 284 258 230 210 200 250 300 350 400 450 500 Rand Merchant Bank Standard Bank JP Morgan Deutsche Bank Goldman Sachs R'bn Listings M&A Equities Underwriting 2013 1st 1st 1st 1st 2011 1st 2nd 1st 1st 2009 1st 1st 2nd 1st 2007 3rd 1st n/a 1st South African ECM (2010 - 2013YTD)
  • Introduction Where do banks play Why and how have funding options changed Sources of funding, focus on ECA Financing local partner participation Conclusion
  • Strictly Private and Confidential 8 The funding cycle Structured Equity Time/Project Stage Steady state mining Early exploration Resource definition Pre-feasibility to bankable feasibility Project development Equity Project Finance Senior debt Value Bank funding Streaming, royalties, offtakes
  • Introduction Where do banks play Why and how have funding options changed Sources of funding, focus on ECA Financing local partner participation Conclusion
  • Strictly Private and Confidential What has changed since last year 10 Lagged supply response to period of high margins exacerbating oversupplied market Estimated 16% of seaborne met coal market uneconomic – finally forcing (some) producer discipline Cost competitiveness / capital efficient capacity addition again key in assessing project quality for both equity and debt providers …but easing contractor/capital equipment market constraints, offering better deals and likely less project delays
  • Strictly Private and Confidential Project funding impact 11 Increased equity cheque constraints for both big and small players Fewer banks, smaller cheques, but more competition for high quality assets Revenue line outlook more uncertain Likely increased hedging requirements from funders Offtake contracts becoming more important (volume, and/or price) Longer tenors likely required, and longer project reserve tails Projects likely to require a more phased approach More palatable capital cheques Market timing risk reduced Increased stress testing of project risk, forecast ramp-up, costs, etc
  • Introduction Where do banks play Why and how have funding options changed Sources of funding, focus on ECA Financing local partner participation Conclusion
  • Strictly Private and Confidential Debt funding market for Mozambique projects 13 Universe of the debt funding market generally available for projects include: Regional DFIs (ZAR+USD) International DFIs (US$ + MZM guarantees) Local commercial banks (MZM&US$) Regional commercial banks (US$ + ZAR) International commercial banks (US$, EUR, other) ECA-backed funding Regional DFIs (ZAR+USD) International DFIs (US$ + MZM guarantees) Local commercial banks (MZM&US$) Regional commercial banks (US$ + ZAR) International commercial banks (US$, EUR, other) ECA-backed funding DBSA, IDC, AfDB, PIC EIB, Proparco, DEG (KfW), FMO, IFC, EBRD, CDB, BNDS Africa Exim, ECIC, Coface, Sace, China Exim, US Exim, JBIC, EKN Broad range of international banks Regional banks, among which FirstRand (RMB/FNB) Range of 15-20, single project limit <50m$ max
  • Strictly Private and Confidential ECA: South Africa’s ECIC scheme 14 The Export Credit Insurance Corporation of South Africa (“ECIC”) is an independent, limited liability company in which the Government of South Africa is the sole shareholder Principal objective is to facilitate and encourage South African export trade by underwriting bank loans, supplier credits and investments outside the country Very attractive funding rates can be achieved The project must be commercially robust and include, as applicable: Bankable feasibility studies, completion guarantees, structured payment mechanisms (non-recourse, limited recourse or full recourse), off-take agreements, environmental / social impact assessment studies, security over the assets, Independent Technical Engineer’s review
  • Strictly Private and Confidential ECA: South Africa’s ECIC scheme 15 15 Premium SA Bank Interest+ capital The ECIC issues a policy covering: 100% political risk 85% commercial risk Moz Borrower The Borrower: Pays a premium to the ECIC for the policy Obtains a loan from a commercial bank South Africa i.e. Mozambique The Bank: Advances a loan to the borrower 85% Loan SA Contractor Supply contract 15% down payment Insurance cover Payment on behalf of Moz Borrower
  • Introduction Where do banks play Why and how have funding options changed Sources of funding, focus on ECA Financing local partner participation Conclusion
  • Strictly Private and Confidential RMB - leading local partner adviser in SA 17 45.3% 58.8% 37.9% 71.8% 47.9% 51.7% 0% 10% 20% 30% 40% 50% 60% 70% 80% 2004 / 2005 2006 / 2007 2008 / 2009 2010/2011 2012 2004 - 2012 RMB % of deal value RMB has helped craft the vision of some of South Africa’s foremost BEE transactions
  • Strictly Private and Confidential The evolution of BEE in SA 18 • Focus on strategic partners • Small group of politically well- connected individuals involved in most of the landmark transactions • Growing discontent with ‘enrichment of a few’ • More broad-based empowerment partners • Encouragement of the involvement of employees, communities and social-upliftment organisations • Significant increase in the number of Employee Share schemes • Realisation that selecting individuals may not be the most ‘productive’ method of empowerment • More balanced and inclusive ownership • Importance of strategic partners in driving localisation within the organisation • Increased emphasis on ‘new entrant’ strategic partners • Inclusion of broad- based groups continues to be incentivised • Local public offers increase in popularity 2012 + Emphasis on: -broad based ownership (employees, communities) -skills development -enterprise and supplier development 1994 2000 2006 2009 2012
  • Strictly Private and Confidential Local partner funding solutions 19  RMB has developed a number of bespoke solutions to structure and fund transactions where local partners are not able to finance their participation  These solutions utilise a facilitation mechanism by a company and its shareholders and can be provided in a variety of forms  If structured correctly value loss from the facilitation is recovered through value created in the project by the introduction of local shareholders Nature of facilitation is ultimately a function of the transaction structure Subordination of shareholder loans SOFT FACILITATION HARD FACILITATION Restricted dividend policy Access to underlying cash flows Put optionGuarantee Subsidised vendor funding Free options Discounted purchase price Donation of shares Soft facilitation is likely to affect credit lines Hard facilitation is more expensive for shareholders Facilitationcontinuum
  • Strictly Private and Confidential Typical facilitation solutions 20  A transaction with employees and communities is likely to be vendor financed or a combination of vendor financed and “unfunded” • Dilution • Disposal price and funding rates • Dilution • Disposal price • Recourse for financiers • Entire “sale proceeds” used for financing • Shareholders dilute over time on an agreed basis • Sale proceeds accrue to company • Agreed hurdles need to be achieved • Share and/or financial outperformance is essential • Share and/or financial outperformance is essential • Dividend flow required • Financial covenants “Unfunded” structure Vendor financed Third-party financed • Earn-out structures that overcome many traditional tax and financial assistance obstacles are used • Value to local partners is dependent on growth of the business • Robust and flexible structure • In a private environment, regular valuations required • The optimal mix of equity, mezzanine and/or senior debt within a tax efficient framework is required • Difficult and expensive to raise in volatile markets Subsidy Effect Requirement Comments
  • Strictly Private and Confidential Notional vendor financing example 21 21 • Shares issued to local partner at nominal value, Mine A has the right to repurchase a certain number of the shares at maturity at nominal value: • Number of shares based on a formula: N = [ ($100m x (1 + r) ^ t ] / share price at maturity • r is the notional interest rate Mine A requires on its notional vendor finance, which is a function of the level of facilitation that Mine A is willing to provide • Dividends paid on the shares can either be remitted to local partner, used to re-invest in Mine A shares or used to repay the notional vendor financing • Re-investment of dividends allows local partner to acquire additional Mine A shares at varying share prices - reduces exposure to a single entry price Mine A Issue of shares (or a new class of shares) to local SPV at nominal value Call option to acquire a variable number of shares at nominal value at maturity Local partner SPV
  • Strictly Private and Confidential Third party funding example 22 Developer Mine A Equity by Developer (100%-X) Equity by Local Partners (X%) Project funding Non-recourse funding (DFI’s, FI’s, Developer) Recourse funding by Fin Institutions (backed by Developer) 100%-X <49% X% Local Partner SPV Equity by Developer (<49%) Equity by Local Partners (>51%) Acquisition funding Non-recourse funding (DFI’s, FI’s, Developer) Recourse funding by Fin Institutions (backed by Developer) Local partner(s) >51%
  • Introduction Where do banks play Why and how have funding options changed Sources of funding, focus on ECA Financing local partner participation Conclusion
  • Strictly Private and Confidential Conclusion 24 • A more subdued bulk commodity environment is forcing a changed approach to project funding, both from an equity and debt perspective • Regional banks have built up significant experience in integrating project funding and local partner equity funding requirements • It will be beneficial for Mozambique to make use of the lessons learned on how NOT to structure local partner participation • RMB is keen to assist in advising and funding the required solutions for the inclusive development of Mozambique’s exciting growth opportunities
  • Strictly Private and Confidential Contacts 25 Henk Deist Head: Resources Finance Tel: +27 11 282 4345 Email: henk.deist@rmb.co.za Jan Cronje Corporate Finance Tel: +27 11 282 8597 Email: jan.cronje@rmb.co.za Werner van Oudenhove Head: Infrastructure Finance Tel: +27 11 282 8121 Email: werner.vanoudenhove@rmb.co.za Greg Mckenzie Head: Asset Based Finance Tel: +27 11 282 8143 Email: greg.mckenzie@rmb.co.za Henk de Hoop Business Development Director: Resources Tel: +27 11 282 4970 Email: henk@rmb.co.za
  • Strictly Private and Confidential Strictly Private & Confidential This presentation has been prepared by FirstRand Bank Limited, acting through Rand Merchant Bank (“RMB”). The information contained in this presentation is confidential and intended solely for the use of the intended recipient. This presentation may contain information proprietary to RMB and accordingly may not be reproduced, acted upon or disseminated in whole or in part without RMB’s prior written consent. By attending this presentation, the intended recipient undertakes to keep the information contained in the presentation confidential and not to do any act or allow same to be done on his behalf which is in breach of the above mentioned prohibition. This presentation contains information which has not been independently verified by RMB. RMB and its directors, officers, employees and agents make no representation and give no warranty with respect to, and assume no responsibility for: the correctness, accuracy and completeness or otherwise of the information contained in this presentation; or the correctness or otherwise of the Advisers’ conclusions based on such information. Any liability of whatsoever nature and howsoever arising on the part of RMB, their directors, officers, employees and agents relating to the contents of this presentation is hereby expressly disclaimed. This presentation is intended for discussion purposes only and does not represent a commitment, proposal, recommendation, offer open for acceptance or agreement to enter into a transaction. Any transaction is subject to the agreement of final terms to be set out in a separate written agreement. The decision to enter into any transaction and to assume the risks associated with the transaction rests solely with the intended recipient. July 2012 Disclaimer 26