Rob Futter, CRESCO Project Finance (Pty) Ltd - Mining and Infrastructure - Risks and Financing Considerations
 

Rob Futter, CRESCO Project Finance (Pty) Ltd - Mining and Infrastructure - Risks and Financing Considerations

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Rob Futter, CRESCO Project Finance (Pty) Ltd delivered the presentation at IMM’s Mozambique Coal Conference 2013. ...

Rob Futter, CRESCO Project Finance (Pty) Ltd 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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    Rob Futter, CRESCO Project Finance (Pty) Ltd - Mining and Infrastructure - Risks and Financing Considerations Rob Futter, CRESCO Project Finance (Pty) Ltd - Mining and Infrastructure - Risks and Financing Considerations Presentation Transcript

    • Coal Mozambique Mining / Infrastructure Risks & Financing considerations “Your project development partner, delivering value through a multi-skilled team” 15th July 2013
    • CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 2 AGENDA  RECAP ON TOPIC Raising capital for SADC coal projects • Recent financings in coal projects in SADC • Minimising risk – Key risk areas in the Southern African context and strategies for safeguarding mitigating against them • Attracting overseas investment for Southern Africa coal projects – How are foreign investment patterns developing? • Coal mining & inter-relationship with Energy Projects • Coal Asset valuations and linkage as equity to the financing approach
    • CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 3 AGENDA  ABOUT CRESCO  COAL & ENERGY - INTERRELATIONSHIP  RECENT FINANCING EXPERIENCES IN MINING & ENERGY  MINIMIZING RISK  ATTRACTING INVESTMENT IN SADC COAL PROJECT
    • CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 4 CRESCO’S MARKET NICHE CRESCO bridges the gap between a concept and reality to achieve a viable sustainable project CRESCO has a multi-skilled team to assist investors in securing and developing high quality businesses and projects Helping you bridge the gap Concept  Promoters do not have time and/or necessary skills to develop their projects  Often project risks have not been adequately addressed  Promoters have unrealistic expectations of investor requirements Viable  A well structured and bankable project  Efficient project implementation  Skilled operational and financial management of project
    • CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 5 CRESCO SERVICES AND INDUSTRY FOCUS CRESCO can tailor the services per project and per industry based on client requirements – complementing available technical skills Key Services • Project Facilitation • Project Advisor • Project Structuring • Can co-develop projects • Approaching the “right” funder • Closing the equity and debt finance • Financing Modeling • Debt refinancing • Turnaround • Debt re-structuring Key Industries • Mining (Coal, Gold, Chrome etc) • Infrastructure • Rail • Telecoms • Mineral Beneficiation • Traditional & Renewable Energy • Wood & Paper • PPP structures  Education  Container Scanner  Fleet management
    • CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 6 EXPERIENCE IN THE MINING SECTOR The mining sector does not seem to mirror other industry sectors in terms of financing norms or processes (reliability of coal resource) POST FUNDINGPRE FUNDING OperationsCommission Implementation / construction Fund raising Bankable Feasibility Pre- Feasibility Concept Diagnosis FinancialClose Financial Completion Technical Completion The deal process and key milestones Strategy & structuring Marketing to investors Due diligence Negotiation Post-closing support
    • CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 7 MIGA is a member of the World Bank Group Mandate to promote foreign direct investment in developing countries by providing guarantees (political risk insurance) to investors and lenders MIGA very helpful to supplement investments in projects in politically sensitive jurisdictions or where the Government is the counterparty MIGA covers the following key political risks:  Currency inconvertibility and transfer restriction;  Expropriation;  War, terrorism and civil disturbance;  Breach of contract;  Non-honoring of sovereign financial obligations. CRESCOs MIGA ADVANTAGE CRESCO is the appointed agent for MIGA (world bank political insurance agency) which support projects in unusual destination CRESCO / MIGA Agency  CRESCO s assistance to clients in respect of Miga products comes at no additional cost to the client and standard Miga rates will apply.
    • CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 8 AGENDA  ABOUT CRESCO  COAL & ENERGY - INTERRELATIONSHIP  RECENT FINANCING EXPERIENCES IN MINING & ENERGY  MINIMIZING RISK  ATTRACTING INVESTMENT IN SADC COAL PROJECT
    • CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 9 MINING / ENERGY INTER-RELATIONSHIP 2 key areas of inter-relationship – 1. Way of “adding value to current product – 2. Electricity generation or upgrading of commodity 1. Type of coal mining projects in Mozambique 1. Coal mining & energy power projects (Moatize, Riversdale, Ncondezi) 2. South African coal project looking to export through Maputo (Coal of Africa / other SA Juniors) 2. Type of Projects in South Africa 1. Coal mining & energy power projects (Exxaro, smaller IPPs) 2. South African coal project looking to export through Richards Bay (BEE only terminal touted 3. Type of Projects in Botswana 1. Coal mining & energy power projects (Mmamabula, Morupule B) 2. Coal mined for export through Walvis Bay 4. Type of Projects in Zambia 1. Coal / energy power projects (Maamba, other Juniors) 2. No large export potential currently identified (logistics out difficult)
    • CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 10 MINING / ENERGY INTER-RELATIONSHIP Typical projects seen in SADC require large government involvement to assist in infrastructure upgrade - government off take/ support Key coal mining & energy related projects aspects in SADC • Coal mines reliant on energy generation for own operations (often not at the end of an existing “stable” transmission network) • Coal fired power stations in turn require larger output transmission lines and grid connections • Power stations often sell to a combination of private & government off takers • Coal mines that are exporting coal require large government infrastructure in investment • In South Africa – Eskom & other SoEs providing logistics solutions for own power stations • Generally bottleneck to project development – Government supported infrastructure
    • CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 11 AGENDA  ABOUT CRESCO  COAL & ENERGY - INTERRELATIONSHIP  RECENT FINANCING EXPERIENCES IN MINING & ENERGY  MINIMIZING RISK  ATTRACTING INVESTMENT IN SADC COAL PROJECT
    • CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 12 FINANCING YOUR COAL / ENERGY PROJECTS Complexity and ease of project finance, depends on mitigation of risk Good projects – firm market off takes / reliable resource, infrastructure  Power – Utility – Co-gen / Co-cycle  Transportation – Rail – Airports  Telecoms – Broadcast / Fixed – Cellular (‘Rule of 3’)  Oil and Gas – Upstream – Pipelines  Mining – Exports – Coal – Gold / Platinum Good Project Finance Targets Difficult Project Finance Targets  Infrastructure – Off take difficult (roads) – Long term funding  Petrochemicals – Anything named “-lene” – Bulk Chemicals have long – cycles  Manufacturing – Domestic market only – Multiple competitors / Ease of entry  Agriculture – Long lead times – High performance risk
    • CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 13 FINANCING INVESTMENT CRITERIA / PERCEPTION OF MOZAMBIQUE – COAL MINING Selected list of current projects in SADC – complete list over 100 long with majority of projects in feasibility or exploration phase Project Commodity Location Project phase Estimate value Exxaro UCG Project UCG sub-Saharan Africa Concept & Evaluation n/a China-Africa Sunlight Energy Thermal coal Gwayi, Zimbabwe Evaluation US$21bn Rukwa coal project Coal Tanzania Evaluation/Exploration US$700m Mkomolo, Namwele and Muze projectsCoal Tanzania Evaluation/Exploration US$75m Mmamabulo coal Thermal coal Botswana Evaluation/Exploration n/a Songo & Mutarara projects Coal Mozambique Evaluation/Exploration n/a Revuboe cocking coal mine Coking coal Tete, Mozambique Pre-feasibility US$555m Vlakplaats Thermal coal South Africa Pre-feasibility ZAR32.5m Ncondezi thermal coal Project Thermal coal Tete, Mozambique Feasibility US$627m Makhado Project Thermal & coking coal Limpopo, South Africa Feasibility ZAR4.2bn De Wittekrans Complex Thermal coal South Africa Feasibility ZAR2.042bn Morupule South Coal Botswana Feasibility US$200m Boikarabelo mine Coal Waterberg, South Africa Funding A$62.6m Zambeze Project Coal Tete, Mozambique Construction n/a Maamba Thermal coal Zambia Construction USD700m Moatize Coal Project Thermal & coking coal Tete, Mozambique Production US$1.3b Chirodzi coal mining project Thermal coal Tete, Mozambique Production US$180m Minas Moatize coking coal project Coking coal Mozambique Production n/a Benga coal mine Coking coal Mozambique Production US$3b
    • CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 14 FINANCING – SOURCE OF FUNDS Source for coal and coal fired power stations in Africa are primarily in the top 5 sources with Multilaterals the largest by some way Source: Global Coal Risk Assessment 2012 Sources of funds (internationally)  Multilaterals still provide the majority of funding (IFC, AdB, EIB others)  Japan is a large financier internationally but not seen active in SADC  US focus on non SADC countries - Small % in West Africa • Chinese large providers of finance (Morupule B, ZESCO, ZESA and other utilities)
    • CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 15 FINANCING – SOURCE OF FUNDS Although the American banks were the top 4 and over 50% - not seen very active presence in SADC Source of funds by Top 20 Commercial banks Source: Global Coal Risk Assessment 2012
    • CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 16 PROJECT FINANCE .VS CORPORATE LENDING Project Finance “complex” / “costly to implement” – minimum amount USD25m and off take risk difficult to mitigate for infrastructure OPERATOR PROJECT SPONSORS  Financiers central to structuring the deal either unfamiliar or uncomfortable with the risks posed by energy technologies, some not been in commercial operation Typical complex project finance structure  Lack of project finance capacity / experience / Moz exposure has been one of the barriers to the widespread deployment of energy technologies in commercial-scale projects.
    • CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 17  Extract from presentation – Norton Rose on IPP program for typical structure updated for Base Load coal Plant structure Source: Norton Rose presentation to IPFA March 2012 1. Internal Electricity sales 2. Shared services 3. Land lease1. Coal supply agt 2. Water term supply agt Brown leaf supply Mine interface POSSIBLE PROJECT FINANCE STRUCTURE FOR THE BASE LOAD COAL PROGRAM - ESKOM The possible Base Load coal project would follow (RSA REIPPP) and would be structured with many legal agreements
    • CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 18  Seeking “quality” / “reliable’ infrastructure to fulfil export contracts  Linked to SA limitations on rail infrastructure  Requiring major upgrades in Maputo / Matola FINANCING - INVESTMENT CRITERIA / PERCEPTION OF MOZAMBIQUE Mining is now a major investment focus – coal being key area of interest – with the 3 large projects in Tete key focus Type of coal mining projects in Mozambique 1. Moz coal mining projects (Moatize, Riversdale etc) 2. South African coal project looking to export through Maputo (Coal of Africa / other SA Juniors0 1. Moz Coal Mining projects  Large projects requiring significant capital  Need to build own infrastructure to allow reasonable “all in cost of transport”  Projects promising for many years – now need to deliver 2. South African Coal Projects - Use of Moz export potential
    • CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 19 FINANCING - INVESTMENT CRITERIA / PERCEPTION OF MOZAMBIQUE – COAL MINING 2 different approaches taken by promoters (large corporate with vast resources - Vale) vs. Junior mining Large promoters  Don’t generally require Project Finance (perhaps some structuring)  Large enough to influence government policy  Can start production without full financing in place  Ability to also ‘subsidise” the required infrastructure (i.e. rail & road link)  Can take a longer term view on returns / viability Junior miners  Focused on ensuring that share price ‘creeps steadily up”  Although portion equity financed – requires project finance debt to fully unlock opportunity  Always considering the large sale to Mining Major (short term decisions)  Cannot assist in any major infrastructure funding
    • CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 20 POLICTICAL RISK INSURANCE FOR MOZ Mozal project opened up Moz as a investment destination for large mega projects – however most investors still require political risk Key coal resources and links to ports South African Export Credit Insurance supporting SA contractors – 1.5% annualised costs including Commercial cover Mozal – R2.1bn exposure Non Mozal R1.6bn Tenors limited to 12 years and large existing exposure in Moz Tete Hwange Limpopo ECIC (4 active projects) Provides political risk insurance cover for long term (15 to 20 yrs) Pricing 1 to 1.5% sector dependent Provides “inherent” credit risk cover if counterparty is Moz Govt / Sovereign or sub sovereign MIGA (10 active projects) R2.1bn exposure
    • CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 21 AGENDA  ABOUT CRESCO  COAL & ENERGY - INTERRELATIONSHIP  RECENT FINANCING EXPERIENCES IN MINING & ENERGY  MINIMIZING RISK  ATTRACTING INVESTMENT IN SADC COAL PROJECT
    • CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 22 RISKS ANALYSIS OF YOUR MINING PROJECTS Each of the key project risks need to be mitigated – 3 key risks of particular focus to satisfy debt & equity funders WITHIN THE PROMOTERS CONTROL OUTSIDE THE PROMOTERS CONTROL WITHIN THE FINANCIER’S CONTROL 1.Operating: Technical 2.Operating: Cost 3.Operating: Management 4.Sponsor/Participant 5.Engineering 6.Completion 1. Resource Profile 2.Market 3.Infrastructure 4.Environmental 5.Political 6.Force Majeure 7.Foreign Exchange 1.Syndication 2.Interest / Funding 3.Legal Set out below are the key risks that we experienced to be difficult to mitigate
    • CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 23 EXPERIENCE IN THE MINING SECTOR The commodity boom / resource grab has seen many “one” man bands now developing projects – but needing assistance POST FUNDINGPRE FUNDING OperationsCommission Implementation / construction Fund raising Bankable Feasibility Pre- Feasibility Concept FinancialClose Financial Completion Technical Completion The deal process and key milestones Financial Investors • Entrenching rights earlier than later • Very beneficial as provides fund to do correct work • Promoters battle with “huge” loss in equity Engineering companies as Investors • Engineering companies entrench use of own services by taking equity stakes • Many companies are seeking equity upside – not just services • Problems with related party transactions – i.e. Equity participant, basic engineering, EPC contractor, O&M contractor
    • CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 24 EXPERIENCE IN THE MINING SECTOR Many promoters / contractors under estimate how much is needed to complete a “pure” project financing – limited recourse POST FUNDINGPRE FUNDING OperationsCommission Implementation / construction Fund raising Bankable Feasibility Pre- Feasibility Concept FinancialClose Financial Completion Technical Completion The deal process and key milestones Funding terms • High gearing levels previously experienced no longer available • Loan tenors linked to 75% of resource life Funding issues • Moz Commercial banks have limited capacity and risk profile for funding • South African banks are taking up difference but country limits for Moz • Development finance institutions are plugging the gaps / focus on infrastructure • DFIs can offer both equity and debt + many infrastructure funds seeking equity
    • CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 25 RISKS ANALYSIS OF INFRASTRUCTURE PROJECTS Infrastructure is harder to finance requiring large amounts, long term off takes / market support linked to long term finance WITHIN THE PROMOTERS CONTROL OUTSIDE THE PROMOTERS CONTROL WITHIN THE FINANCIER’S CONTROL 1.Operating: Technical 2.Operating: Cost 3.Operating: Management 4.Sponsor/Participant 5.Engineering 6.Completion 1. Supply 2.Market / Traffic 3.Infrastructure 4.Environmental 5.Political 6.Force Majeure 7.Foreign Exchange 1.Syndication 2.Interest / Funding 3.Legal Set out below are the key risks that we experienced to be difficult to mitigate
    • CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 26 EXPERIENCE IN THE INFRASTRUCTURE SECTOR Infrastructure promoters generally more Govt focused and supported by contractors “keen” to sell construction services POST FUNDINGPRE FUNDING OperationsCommission Implementation / construction Fund raising Bankable Feasibility Pre- Feasibility Concept FinancialClose Financial Completion Technical Completion The deal process and key milestones Financial Investors • Long term returns on infrastructure generally not high enough to satisfy investors (whilst considering Moz country risk, local currency) • Generally projects require at least 40 to 50% equity returns • Institutional investors not yet making large investments in Moz infrastructure Engineering companies as Investors • Many Engineering companies preparing feasibilities @ risk • South African contractors are well set up to unlock this sector • Generally will sell out at financial close
    • CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 27 EXPERIENCE IN THE INFRASTRUCTURE SECTOR Infrastructure financing is more difficult then mining due to loan tenors required - whilst trying to limit interest rate pricing POST FUNDINGPRE FUNDING OperationsCommission Implementation / construction Fund raising Bankable Feasibility Pre- Feasibility Concept FinancialClose Financial Completion Technical Completion The deal process and key milestones Funding terms • Projects require long term tenors (over 10 years with > 2 years construction) • Need to leverage off lower US linked interest rates Funding issues • Moz Commercial banks have limited capacity and risk profile for funding • Hard to fund in US currency whilst off take in local currency • Always the same usual suspects being involved (limited personnel capacity)
    • CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 28 AGENDA  ABOUT CRESCO  COAL & ENERGY - INTERRELATIONSHIP  RECENT FINANCING EXPERIENCES IN MINING & ENERGY  MINIMIZING RISK  ATTRACTING INVESTMENT IN SADC COAL PROJECT
    • CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 29 ATTRACTING INVESTMENT IN SADC COAL PROJECT Some key “stability” considerations to ensure an improved investment climate for attracting further investment in SADC Positive Stability considerations  Government certainty / implemented precedent on Government Mining Legislation  Minimize “free carry” for local country participation  Allow linkage of contracts to non local currencies (in the short term)  Government investment in linked infrastructure assets Negative Considerations  Changing Government legislation – differing implementation for differing parties (“no one size fits all)  Forcing significant “local buy-in” at zero of highly discounted value  Requiring all the infrastructure to be funded by “private sector”  Embarking on PPP programs which do not materialise in Projects
    • CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 30 CONTACT US CRESCO offers both services per deliverables, usually on a time & materials basis, to arranging mandates on a fixed fee basis Directors contacts Focus area Robert Futter, Director Projects / Financial / Francois Viljoen Energy Focus  robert@crescopf.co.za  francois@crescopf.co.za  +27 (0) 83 704 0335 Office details  Manhattan office Park 16 Pieter Street Unit 6 South Ground floor Centurion Johannesburg South Africa 186  +27 (0) 12 665 2612  +27 (0) 12 665 3837
    • CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 31 © 2006 Electric Power Research Institute, Inc. All rights reserved. Opportunities in SSAfrica QUESTIONS Questions?