06_Joeri Van Speybroek_Dell_MeetupDora&Cybersecurity.pdf
Putting the B Back in Bankable Feasibility Studies
1. Putting the B back in
Bankable Feasibility Studies
(BFS)
May 2012
2. Presentation Outline
1. Executive Summary
2. The Good, the Bad & the Ugly
3. Extraordinary Project Growth
4. Massive Regional Infrastructure Constraints
5. Stretched Equity Markets
6. Constrained Debt Markets
7. The Good B in BFS
8. Questions
2
3. 1. Executive Summary
Extraordinary Project Growth
• Unprecedented pipeline of new build projects, investment and non-investment grade
Massive Additional Regional Infrastructure Constraints
• Rail and port infrastructure in primary and secondary regions
Equity Markets Stretched
• ASX and TSX main sources of equity for emerging resource projects (AIM and others losing ground)
• IPOs and secondary issues decreased over the last 12 months and increasingly value dilutive
• Greenfield mine infrastructure equity increasingly in short supply
Debt Markets Constrained
• Local debt markets shrunk in Australia post-GFC (departure of most European Banks and limited
entry from new Asian Banks, typically following sponsors)
• Local debt tenors do not match long life of mining and infrastructure assets
• US high yield market remains open for larger projects with longer tenor, although structures
constrain future growth flexibility
More than ever, it is critical to avoid squandering early seed capital in getting a
“good BFS” as well as tailoring its focus correctly for the relevant capital market. 3
4. 2. The Good, the Bad & the Ugly
The Myth
There is simply no such thing as a standard BFS document for Banks
or Bond markets. Engineers have created good templates that are
very complete, although full of form over substance.
Background of BFS complexity
Fundamental design issues remain outstanding as project moves from PFS to
BFS.
Unclear views as to ultimate capital solution, relevant market & specific needs.
Downstream rail/port infrastructure solutions impacting upstream mine design
issues not factored in.
The myth of what a “BFS” is regarding capital market needs.
Value add option analysis gets integrated into “BFS”.
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5. 2. The Good, the Bad & the Ugly
The Good
Bulk of projects financed up to 5 years ago were financed without “formal
BFS”.
Tens of billions of dollars in infrastructure development have been financed
without “formal BFS”.
Lead banks often do not need “formal BFS” at all.
Domestic and lead commercial banks in Australia and Asia would have a
capacity of $1-$2 billion, depending on location and project.
Many Asian and Indian commercial banks have no such concept in their home
base and little such requirements.
Bank markets are very capable of committing capital earlier than often
expected and deferring on some fairly material approval issues or value
enhancement issues as conditions precedent to the funding allows earlier
equity value uplift and focus on key issues.
Bond markets tend to be less flexible in this regard.
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6. 2. The Good, the Bad & the Ugly
The Bad
More recently, nervous new entrant banks, deep pocket sponsors and willing
engineering companies have expanded the width and breath of BFS beyond
the actual requirement of capital markets.
Compounding this effect, extraordinary inflation in both size and construction
costs of the projects in Australia has led to confusion regarding when a BFS is
required:
Where the scale of the project is beyond domestic banking capacity:
• Export Credit Agencies;
• Chinese bank involvement; and
• Offshore bond markets as principal source of debt.
Where there might be a particularly novel or high processing risk.
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6
7. 2. The Good, the Bad & the Ugly
The Ugly
Waste of early seed capital;
Delays caused to critical path items; and
Distractions to management when there are often more critical and
fundamental design and value add option analysis work to be done.
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8. 3. Extraordinary Project Growth
Australia is experiencing a structural change in the
resources and related infrastructure space with an
unprecedented number of projects in the pipeline
A$B Value of Advanced Projects (in 2011-12 A$) A$B Capital Expenditure Survey (nominal A$)
250 120
200
90
150
100 60
Estimate
50 30
0
2002 2005 2008 2011 0
Minerals and energy processing Infrastructure 2002 2004 2006 2008 2010 2012
Mining Non-mining
Minerals Energy
Source: RBA, BREE 8
9. 3. Extraordinary Project Growth
Mtpa Mtpa Mtpa
Iron Ore Coal LNG
750 600 60
600 450
40
450
Committed Committed Committed
Capacity
300 Capacity Capacity
300
20
150
150
0 0 0
2004 2007 2010 2013 2016 2004 2007 2010 2013 2016 2004 2007 2010 2013 2016
Capacity Exports Capacity Exports Capacity Exports
Source: RBA, ABS
Australian top 3 commodity exports are iron ore, coal and LNG.
Capacity has substantially increased since 2004 and it is expected to continue
expanding at historic rates. 9
10. 3. Extraordinary Project Growth
Historically the majority of this capacity has been investment grade, e.g.
BHP, Rio Tinto, international oil and gas companies.
Non-investment grade project growth has also been outstanding, as
demonstrated by a few key examples; Fortescue, Mt Gibson, etc.
The breakdown for non-investment grade capital expenditure over the
next few years is in the order of:
• 75% for iron ore; and
• 61% for coal.
The changing credit profiles for capacity and capex commitment towards non-
investment sponsors presents a new set of market challenges.
10
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12. 4. Massive Regional Infrastructure Constraints
Rail and port infrastructure in primary and secondary regions
has been constrained for a number of years and is playing catch
up in key states, particularly for bulk commodities.
Key examples include:
• WA Ports & Rail • NSW Ports & Rail
• Pilbara – Expansion for incumbents • South & West Coalfields – Expansion
• Pilbara – Greenfields for entrants • Newcastle – Expansion
• Midwest – Greenfields • South Australia Ports & Rail
• Yilgarn – Expansion • Olympic Dam – Expansion
• Queensland Ports & Rail • Other – Expansion & Mostly
Greenfields
• Bowen Basin – Expansion
• Surat Basin – Expansion & Greenfields • Northern Territory
• Galilee Basin – Greenfields • Key continues to be link to the
Adelaide – Darwin rail line
12
13. 5. Stretched Equity Markets
US$B
Global Volume of Equity Issues Investors remain nervous about Europe and slow
900
US recovery.
600
Global equity financings are down over 35% from
post-GFC peaks.
300
Australian equities weak – in the year to May 2012:
0
2009 2010 2011 2012 YTD • IPOs fell to 89 new issues from 143 in pcp;
Australia/NZ Volume of Equity Issues
• Secondary issues fell to 563 from 737 in pcp;
60
US$B
• Basic Materials fell to 359 ($2.99B) from 547
($6.24B); and
40
• Basic Materials drop in the average deal size from
20 $11.4m to $8.3m.
Cash holdings by Australian investors remain at
0
2009 2010 2011 2012 YTD historically high levels.
Source: Bloomberg
Liquidity at current prices would be insufficient to meet demand for non-
investment grade miners or infrastructure related requirements. 13
14. 6. Constrained Debt Markets
Global project finance (PF) strongly recovered since the GFC, though stalled recently.
The withdrawal of most European banks who accounted for around 12% of the
Asia/Pacific project finance market in 2007, has contributed to this dynamic and enabled
existing lenders to be more selective.
Nevertheless, the Australian PF market remains strong ($10.5B 1H 2011) and the Asia-
Pacific PF market represents the highest proportion of the Global market (47%).
Australian PF loan volumes up 60% from 2010 to 2011 and expected to hold in 2012.
US$B Project Finance Regional Breakdown (1 Jan - 31 March)
75
50
25
0
2005 2007 2009 2011
Asia/Pacific & Japan Americas EMEA 14
Source: Bloomberg, Project Finance
15. 6. Constrained Debt Markets
High-Yield markets, particularly the US, reopened post-GFC and remains open both for
investment and selected non-investment issuers.
US High Yield issues peaked during 2010 (864) following the GFC low point (191).
US$B US High Yield
450
300
YTD
150
0
2005 2007 2009 2011
Source: Bloomberg, Project Finance
Whilst local debt markets have risen to the challenge, the capacity is still
insufficient to meet the demands of non-investment grade mining companies.
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16. 7. The Good B in BFS
What is putting the real B for Bankable into BFS about?
What market will the project be financed in?
What size is the capital requirement?
What is initial likely financing structure?
Is there is a material processing risk?
What are the requirements of the technical work required for equity?
Are port/rail infrastructure logistics costs properly factored in?
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17. 7. The Good B in BFS
Armed with the answers to these questions, management can then ascertain:
The “substance or B” required in addition to equity’s requirements for any BFS
to minimize equity spend pre finance.
The items that can be deferred as CPs to the financing, the value add and
process enhancement work that can be done post financing and financed from
debt (not equity).
The proper schedule to earliest financial close.
In the bulk commodities and related rail/port infrastructure, industrial and food
related sectors, there will be hundreds of billions of dollars invested in the next five
years that can be domestically financed without the requirement for a formal BFS.
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18. 8. Questions
Alister McConnell, Director Project & Structured Finance Origin Capital Group
Email: mcconnell@origincapital.com.au
Phone : +61 (0)2 8243 9622
Origin’s typical early stage involvement process to properly design the BFS includes:
Approach potential
Evaluation of options Negotiations and closing
funders
• Set realistic commercial and • Prepare information • Run competitive process to select
financial objectives & financing memorandum, financial model banks/ECA’s/bond investors
structure/sources and presentations for • Negotiate final terms and conditions on
• Set Prefeasibility and BFS work financiers/rating agencies an individual basis to maximise
scope to properly fit capital • Run related due diligence & BFS competitive tension and optimise
markets & not over- work process to fit funding commercial benefits to client
engineer/overspend option • Assist in evaluation of terms received
• Select technical consultants to best • Prepare detailed term sheets & and advise on financier selection
fit above requirements negotiate with financiers • Work with lawyers in finalising
• Preliminary dialogue with banks, • Develop cost-efficient hedging documentation
ECA’s & rating agencies to test strategy • Assist in finalising due diligence and
structure • Drive the issue & negotiation of satisfaction of CP’s to drawing
• Financial modelling testing all financing • Assist client’s interpretation of facility
options agreement after signing as required
• Advise on any other likely due
diligence requirements 18