Michael Ryan - Balance Resources - Model for successfully funding multi-user port and rail facilities


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Michael Ryan delivered the presentation at the 2014 Mining the Pilbara Conference.

The 2014 Mining the Pilbara Conference explored current projects and regulatory updates in the Pilbara region.

For more information about the event, please visit: http://www.informa.com.au/pilbaramining14

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Michael Ryan - Balance Resources - Model for successfully funding multi-user port and rail facilities

  1. 1. Model for successfully funding multi-user port and rail facilities 9 July 2014 www.balanceresources.com.au
  2. 2. page 2 Disclaimer The information contained herein has been prepared by Balance Resources solely for the use of the recipient. It is confidential and for information and discussion purposes only. The information does not constitute, in any jurisdiction, a recommendation, invitation, offer, or solicitation or inducement to buy or sell any financial instrument or product, or to engage in or refrain from engaging in any transaction. It is not the intention of Balance Resources to create legal relations on the basis of the information contained herein. This information does not purport to contain all relevant information. Nothing in this document should be construed as legal, tax, accounting or investment advice. This document has been prepared without taking into account the objectives, financial situation or needs of any recipient. Neither Balance Resources nor any of its respective affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein. The information may include estimates and projections and involves elements of subjective judgment and analysis. Past performance is not indicative of future results. The information contained herein is of a general nature intended to provide a broad overview of the relevant market and is not illustrative of the proposed transaction. Balance Resources believes this information to be accurate, including the certain parts of this information which have been prepared from third party sources, but Balance Resources does not give any warranty of accuracy or completeness of the information. The information on which the statements are based has been gleaned from public sources or provided to us on a non-confidential basis. To the extent permitted by law, Balance Resources, its related bodies corporate, their officers, employees, agents and members (a) disclaim any and all liability relating to this information, including, without limitation, any express or implied representation for statements and conclusions contained in and omissions from this information; and (b) accept no liability (whether in negligence or otherwise) for any loss, damage, costs or expenses of any nature which may be suffered or incurred by any person relying on any information or statement contained herein or otherwise arising in connection with such information or statement. No part of this document may be reproduced without the prior permission of Balance Resources. All material presented in this document, unless specifically indicated otherwise, is under copyright to Balance Resources. The information contained herein may contain “forward-looking statements”. These forward-looking statements may be based upon certain assumptions. Actual events may differ from those assumed. All forward-looking statements included are based on information available on the date hereof and neither Balance Resources nor its respective affiliates assume any duty to update any forward-looking statement. Accordingly, there can be no assurance that any forward-looking statements will materialise or will not be materially lower than those presented. If you are in any doubt about any of the contents in this document, you should obtain independent professional advice.
  3. 3. page 3 Overview 1. Challenges for multi-user infrastructure development 2. Necessity for collaboration 3. Role of Government 4. How much regulation should we have? 5. Case Study – Wiggins Island Coal Export Terminal (WICET)
  4. 4. page 4 Key Challenges • Macro factors (commodity price/exchange rate etc.) • Funding • Government and other regulatory approvals (particularly environmental) • Proving a project is technically and commercially viable (progressive feasibility work). Difficult with multiple parties at different stages of development! • Project timing misalignment (project / rail / port) • Independent proponents and differing business strategies, retaining market sensitive information etc • Coordination of work streams Strategic (critical and dynamic) Technical Commercial Government / Regulatory Funding
  5. 5. page 5 Key Challenges Overall challenge for multi-user developments is the “Chicken & Egg” nature of infrastructure: A project is not “bankable” without an infrastructure solution BUT How can a funding be secured for an infrastructure solution before proving the project is “bankable”? No single or easy answer, but solution will be when all work streams are past “the point of no return” (i.e. the point that bankability becomes highly likely).
  6. 6. page 6 Necessity of Collaboration Major infrastructure developments and expansions require a high level of cooperation amongst new mine explorers and developers Opportunities • Ability to start afresh rather than ‘patch’ legacy systems • Leverage collective experience in designing new infrastructure • Draft well written agreements that promote the best interests of each proponent in the integrated supply chain • Achieve greater transparency in supply chains • Recognise and appreciate differing business strategies and agendas, but as proponents, commit to always look for the win-win solutions Reality • Unlikely to achieve utopian outcomes, but great opportunity to improve upon the past and build a better future
  7. 7. page 7 Role of Government “Good Old Days” – at least a chance of funding / underwriting / building the infrastructure as a ‘build it and they will come’ approach “The New Reality” – not nothing, but not everything, so what is the new role for Governments in Australia? • Establishment of a workable and stable process (for example, access policy regimes) • Assist to clarify parties’ roles and responsibilities • Encourage better communication and collaboration between users, service providers and the State • Enable less interfaces between stakeholders • NOT to ‘pick a winner’
  8. 8. page 8 Level of Regulation • Ideal is somewhere between none and ‘too much’ • If none, monopoly power is exercised by infrastructure owners (the natural counter argument is ‘why shouldn’t they exercise that power, as they paid for it?) • If ‘too much’, then like all other red tape and green tape, it’s a natural disincentive to any investment • Either way too much regulation can reduce competition and restrict growth • Key for investors is simplicity, consistency and clarity
  9. 9. page 9 Regulation Challenges Consequences of poor regulation (perceived or otherwise): • Almost worse than none – monopoly power in effect exercised by delays to regulatory processes • Economically inefficient • Increased sovereign risk • Decreased incentive to invest in Australia • Reduced competitiveness of export supply chains • Inbuilt inefficiencies – policy framework drives unintended outcomes Need the right balance for sensible commercial outcomes
  10. 10. page 10 Development Alternatives There are a number of different funding models that can be utilised when developing infrastructure projects: In an age of reduced Government funding for major infrastructure projects, there has been a significant rise in the incidence of user- funded infrastructure developments (fully or partly funded) Government (State and/or Federal) funding Third-Party / Investor funding Consortium-based user funding
  11. 11. page 11 Case Study – WICET • Wiggins Island Coal Export Terminal Pty Limited (WICET) is owned by a consortium of coal producers • Will be operated by Gladstone Ports Corporation (GPC) (currently GOC but most likely will be privatised) • Industry ownership and funding model with 8 coal company ‘A Class’ Shareholders • $2.5 billion of private funding with a total $4 billion external funding envelope • 27Mtpa Stage 1 capacity with an ultimate design capacity of 110Mtpa
  12. 12. page 12 Case Study – WICET Rail Infrastructure and Stage 1 Mines (now Aurizon)
  13. 13. page 13 Case Study – WICET May 2008 Industry invited to propose an alternative infrastructure development model to QLD State Government August 2008 Proposal for industry to own and finance the terminal with GPC as contract operator submitted with broad coal industry support October 2008 Industry group selected as preferred proponent December 2009 Framework Deed (including access policy) and ancillary documents executed with State and Gladstone Ports Corporation (GPC) May 2010 Access Policy (WITAP) agreed between industry group and State August 2010 Eight shippers agree to contract 27Mtpa of Stage 1 capacity November 2010 Information Memorandum released September 2011 Financial Close March 2015 Scheduled Stage 1 completion
  14. 14. page 14 Case Study – WICET The WICET development model facilitates efficient infrastructure development through: • Industry owned and largely privately funded • Open, equitable and transparent Access Policy (Wiggins Island Terminal Access Policy (WITAP)) agreed with State, port corporation and industry • Broad industry support • No cost to Government • Terminal charges limited to cost recovery only
  15. 15. page 15 Case Study – WICET
  16. 16. page 16 Case Study – WICET Commercial Framework Alignment •Risks, ownership and control rests with Shippers •Rights of future users preserved •Objective to reduce infrastructure costs •Coal chain performance of one Shipper not to adversely affect others Capacity •Capacity fully contracted under 10 year Take or Pay Agreements •Terminal Handling Charges based on cost recovery model •Rail and Port capacity also required to be contracted by Shipper Finance •Underpinned by ToP Agreements •Optimised for lowest overall cost •Shareholders were required to provide subordinated funding Tenure •Long term tenure agreements with State, GPC and Aurizon Construction •Contracted and managed by WICET •No risk to State or GPC Operations •GPC contracted as Operator – responsible for day to day operation •WICET approves Annual Plans and Budgets
  17. 17. page 17 Case Study – WICET Funding Overview Element Tiers of Capital • Senior Facilities • GiLTS (subordinated notes) • WIPS (preference securities) External Funding Envelope • P90+ capital cost estimate + • Six months delay to Mechanical Completion + • Interest during construction, working capital + • Ramp up costs Shareholder Support • ToP Guarantees available to meet costs above P90 level Revenue • Capacity fully contracted • Take or Pay Contracts • Cash cost recovery tariff model – variable tariff, not regulated Due Diligence • Independent Reports provided to financiers: Market, Technical, Environmental. Logistics. Insurance, Tax, Accounting, Legal
  18. 18. page 18 Case Study – WICET Wiggins Island Terminal Access Policy (WITAP) Governs items such as: • Open access processes • Capacity allocation and trading at the terminal • Expansions processes • Termination rights • Pricing mechanism and Terminal Handling Charges Potential users of the port need to qualify to apply for access (proof of JORC reserves and resource base; mine technical feasibility; evidence of supporting infrastructure; security), reviewed by independent credible experts
  19. 19. page 19 WICET Collaboration Challenges: • Multiple existing and new miners – some requiring expansion tonnage • Numerous large, junior & mid-tier explorers seeking capacity • Constrained existing rail network requiring significant upgrades • 2 above-rail operators (Aurizon Operations and Pacific National) • Port of Gladstone (Government owned) at full capacity Result: The successful greenfield development of the Wiggins Island Coal Export Terminal (WICET) – a multiuser, open access facility owned and funded by a consortium of producers, together with upgrades to the existing rail network to support the increased volumes
  20. 20. page 20 Infrastructure Investment Providing leadership and guidance on securing, developing, delivering and managing essential infrastructure to support the resources sector: Providing leadership and guidance on investment opportunities and transactions relating to both infrastructure and resource projects:  Bid preparations  Identify investment opportunities  Government liaison  Market intelligence  Connecting Joint Venture Partners  Analysis and due diligence  Risk Management  Project Management Balance Resources
  21. 21. page 21 Contacts www.balanceresources.com.au Queensland Level 10, 500 Queen Street Brisbane, QLD 4000 Western Australia Level 3, 267 St Georges Tce Perth, WA 6000 Northern Territory GPO Box 4783 Darwin, NT 0801 Jamie Freeman – Director BTech MBA GDIFSM GCMM GAICD Mobile : 0431 912 776 Email : jfreeman@balanceresources.com.au Michael Ryan – Director BCom LLB(Hons) CA AAICD Mobile : 0427 701 666 Email : mryan@balanceresources.com.au Jim Brosnan – Associate Director BEng (Met.), MAICD Mobile : 0439 928 841 Email : jbrosnan@balanceresources.com.au Wayne Trumble – Associate Director MAICD, HBA Mobile : 0438 939 767 Email : wtrumble@balanceresources.com.au Toronto, Canada Suite #466, 100 2 Toronto St Toronto ON M5C 2B5