Challenges of financing the resources sector - presented at

CHALLENGES OF FINANCING THE RESOURCES SECTOR: 2012 TO 2014“As Clouds Gather”10 October 2011

Mines and Money Conference “Challenges of Financing the Resources Sector”

CHALLENGES OF FINANCING THE RESOURCES SECTOR: 2012 TO 2014

David LloydHead of Natural Resources

“Challenges of Financing the Resources Sector” 10 October 2011

Head of Natural ResourcesProject Finance

Fabian FuentesAssociate DirectorInfrastructure and

Natural ResourcesAdvisory

In October 2007…Before the Storm – Bank Capital Dominant

A. Banks (~75% of total capital)

B. Capital Markets

� Convertible Bonds (Sub debt)

� Bonds (Senior Debt)

C. Offtakers/Trading Companies

D. Equipment vendors, Royalty investors

E. Multilaterals, Bilaterals, Export Credit Agencies

F. Domestic Banks


, Export Credit Agencies


2008-2010: The Perfect Credit Storm & The Aftermath

“Once in a century credit tsunami”– Alan Greenspan, October 2008

The Perfect Credit Storm (2008/09)

• Subprime Mortgages

• Leveraged Finance (“Cov Lite”)

• Credit Derivatives

• Lehman/AIG Exposure

• Real Estate exposure

• Economic Recession

• Sovereign Collapse:

Iceland/Hungary/Ukraine/Pakistan


�Need for bank Recapitalisation

�Interbank funding freeze

2010: The Perfect Credit Storm & The Aftermath

October 2008

After the Storm (2009/10)

• Financial system starting to stabilise

(recapitalisations, government guarantees,,

(recapitalisations, government guarantees,,

return to commercial banking )

• Improvement in bank operating profitability

(record levels, but pre-provision)

• Equity markets up ~60% (@ 80% pre GFC

level)

• Commodity prices rebound (+80-100%

trough to peak)


trough to peak)

• Asset prices recovered (U.S. “Junk” Bonds

55% � 99%) (4/10)

• Global growth: -1%, 2009 � 5% 2010

R-evolution of Financial Markets

Bankers have been returning to the market although at lower levels than 2007...


evolution of Financial Markets

Bankers have been returning to the market although at lower levels than 2007...


Sources: Bloomberg, Capital IQ, Thomson

Reuters Project Finance International

Yes, But Banks Only Part Way Through:

Issues 2011�2012Sovereign uncertainty and bank downgrades

Interbank market freeze

European

Bank

Problems

2011: Bailouts for Irish banks reach €100bn total

Aug 2011: Greece’s two largest lenders mergeProblems Aug 2011: Greece’s two largest lenders merge

Sept 2011: French banks downgraded/assets selldown

UBS US$2.3bn rogue trading loss/CEO resigns

Oct 2011: Franco-Belgian lender Dexia bailout

2011/12: Further recapitalisation of banks?

Known

‘Unknowns’

Continuing Euro sovereign uncertainty

• Greece misses 2011 deficit target

• ECB purchased €160b in sovereign bonds since May 2010

• Germany's 10 biggest banks may need €127bn for

total capital ratio to rise to 5% (DIW – 9/11)

• IMF report says EU banks need €200bn


• IMF report says EU banks need €200bn

Sovereign debt downgrades of US, Japan, NZ, Greece, Italy,

Spain, Portugal, Ireland

Spillover Effects to Europe? Who is next? Break up of the

Euro?

Yes, But Banks Only Part Way Through:

selldown

160b in sovereign bonds since May 2010

127bn for banks'

“CDS numbers count against banking system”, Financial Times Oct. 4 2011


of US, Japan, NZ, Greece, Italy,

Spillover Effects to Europe? Who is next? Break up of the

2012 to 2014: Uncertain Global Climate

• Financial system unstable – Euro and US banks (

• Extreme volatility in equity, commodity and currency markets (VIX up 160%)

• Sept 2011 - worst quarter for Equity markets since GFC (FTSE All

• Falls in commodity prices (Reuters-Jefferies CRB index down 11% for Q3)

• Economic growth – China in driving seat but can it contain inflation and boost domestic demand?

• Global growth: IMF reduces 2011/12 forecast to 4 percent (5% in 2010)


2012 to 2014: Uncertain Global Climate

Euro and US banks (BofA, Citi, WF downgraded 9/11) in particular

in equity, commodity and currency markets (VIX up 160%)

worst quarter for Equity markets since GFC (FTSE All-World index down 18% for Q3)

Jefferies CRB index down 11% for Q3)

China in driving seat but can it contain inflation and boost domestic demand?

Global growth: IMF reduces 2011/12 forecast to 4 percent (5% in 2010)

FTSE All World index -18% in Q3

Reuters-Jefferies CRB index -11% in Q3


Reuters-Jefferies CRB index -11% in Q3

Chinese manufacturing activity slowed in

September (-1%) for the third month in a row.

India’s HSBC Markit Business

Activity Index (-7%)

2012 to 2014: Uncertain Climate –

� Challenging and deteriorating

� NAB + 4 other core Australian banks stable

� 12 – 15 Euro, Aussie, Asian + Euro banks still active (

20%)

� Increasing participation of Asian Banks in international � Increasing participation of Asian Banks in international

markets (Singapore, Thailand, Indonesia)

� Chinese/Indian Banks

� ECA involvement will increase

Transactions

• National/regional financing support

• Club loans + Larger ‘tickets” ($100m+)


• Club loans + Larger ‘tickets” ($100m+)

• More equity, loan security, hedging

• Continued higher margins

• Alternative financing sources

Banks and Resources Finance

15 Euro, Aussie, Asian + Euro banks still active (-

Increasing participation of Asian Banks in international

150

200

250

300

Bank CDS Spreads

Increasing participation of Asian Banks in international

-

50

100

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11

Australia Asian French, Uk, European Spanish


“Financial Institutions stare into the abyss”, Financial TimesSeptember 22, 2011

As Clouds Gather: Who’s your Finance PartnerAustralian Banks

• Big 4 Australian banks among only 14 in the world rated “AA” by S&P

• Record operating earnings/strong Tier 1 capital (ratios between 9.4%

• Little/nil exposure to Euro sovereign/subprime/leveraged/credit derivatives• Little/nil exposure to Euro sovereign/subprime/leveraged/credit derivatives

• Balance sheet capacity/wholesale US$ funding?

International Banks traditionally but

• Partial Deglobalisation - banks focus limited capital on:

� “home” markets (e.g. Europe: RBS, HBOS,

� “core” clients – relationships are important to access credit

International projects: cross-border “orphans”? Multilaterals and


International projects: cross-border “orphans”? Multilaterals and

How much will they lend?

• Limited underwriting, larger final holds ($100

As Clouds Gather: Who’s your Finance Partner

Big 4 Australian banks among only 14 in the world rated “AA” by S&P

Record operating earnings/strong Tier 1 capital (ratios between 9.4%-11.1%)

Little/nil exposure to Euro sovereign/subprime/leveraged/credit derivatives

Little/nil exposure to Euro sovereign/subprime/leveraged/credit derivatives

Balance sheet capacity/wholesale US$ funding?

banks focus limited capital on:

“home” markets (e.g. Europe: RBS, HBOS, Dexia, UniCredit, Natixis, SocGen, etc)

relationships are important to access credit

border “orphans”? Multilaterals and ECA’s


border “orphans”? Multilaterals and ECA’s

Limited underwriting, larger final holds ($100-500m)� club loans prevail

As Clouds Gather: Loan Structure

More security

More equity, less debt/gearing (debt: EBITDA 9-11x

Credit Rules! – stronger risk controls:

Higher debt coverage ratios (LLCR, PLCR, DSCR)

Full subordination, if any mezzanine debt

More hedging: irs, fx and commodity (Banks: – risk, + earnings)

Basel III: higher bank capital and liquidity requirements


11x � 3-5x)

risk, + earnings)

Basel III: higher bank capital and liquidity requirements�� higher cost of funding


As Clouds Gather: Margins and FeesHave declined substantially since March 2009, but will continue at historically high levels:

Driven by higher bank capital (5-7% � 9-11% Tier 1)

2007

IG ~50bpsHY ~ 200-

300bps


Driven by higher bank capital (5-7% � 9-11% Tier 1)

Continued higher funding costs (deposit competition, interbank funding risk, Basel III capital

requirements)

Stronger credit risk/return calculations – lower risk, better pricing

Pressure to reduce balance sheet use / declining loan books

As Clouds Gather: Margins and FeesHave declined substantially since March 2009, but will continue at historically high levels:

11% Tier 1)

Post GFC

IG ~100bpsHY ~ 400-

500bps


11% Tier 1)

Continued higher funding costs (deposit competition, interbank funding risk, Basel III capital

lower risk, better pricing

Pressure to reduce balance sheet use / declining loan books

Sources: Bloomberg, Markit

Recent TransactionsMillennium Minerals Pty Ltd JUNIOR

A$25m Syndicated Loan Facility, A$10m Performance Bonding and A$10m Leasing Facility

Purpose: Development of Nullagine Gold Mine

Lenders: BNP Paribas, National Australia Bank Limited

Facility Type:Syndicated Loan Facility (A$25m) , Performance Bonding Facility (A$10m), Leasing Facility (A$10m), Gold Hedging

Tenor: 3 yearTenor: 3 year

OZ Minerals Group Treasury Pty Ltd MID TIER

Purpose: General corporate purposes

Lenders: National Australia Bank Limited, Westpac, ANZ, HSBC

Facility Type:Revolving Syndicated Loan Facility (US$180m) and Working Capital Facility (US$20m)

Debt Size: 1 year

3 year

US$20m

US$180m

US$180m Revolving Syndicated Loan Facility and US$20m Working Capital Facility

Wiggins Island Coal Export Terminal Pty Ltd LARGE


Purpose: Project Finance

MLA:National Australia Bank Limited, ANZ, BoC, CDB, DBS, SMBC, KDB

Facility Type:US$2,850m Senior Secured Project Finance Facility, A$50m Working Capital Facility, A$150m Letter of Credit Facility

US$2,850m Senior Secured Project Finance Facility, A$50m Working Capital Facility, A$150m Letter of Credit Facility

JUNIOR

A$25m Syndicated Loan Facility, A$10m Performance Bonding and A$10m Leasing Facility

Key Transaction Highlights

• Millennium Minerals first bank debt facility

• Comprehensive project financing package plus gold hedging

MID TIER


• OZ Minerals’ first bank debt facility since the GFC

• NAB Facility Coordinator and Agent

• Reinforced NAB’s position as leading financier to the resource sector and #1 loan syndication bank in Australia

US$180m Revolving Syndicated Loan Facility and US$20m Working Capital Facility

LARGE



• Largest Australian greenfield Project Finance transaction for 2011

• NAB is a Mandated Lead Arranger and sole spot FX dealer for A$1.7761bn.

• Fourteen banks plus five development/export credit agencies (ECA)

US$2,850m Senior Secured Project Finance Facility, A$50m Working Capital Facility, A$150m Letter of Credit Facility

Funding Competition

A look into the future

• Currently there are over 400 global Greenfield mining projects earmarked for

development by 2020 requiring up to US$500Bn of funding

• Australia accounts for more than a quarter of these developments with an

estimated funding requirement of $US145Bn

• The resources boom will place a significant strain on banks balance sheets with

80

100

120

Nu

mb

er

of

Pro

ject

s b

y R

egi

on

• The resources boom will place a significant strain on banks balance sheets with

projects forced to compete for funding.

• This competition for funding will be further exacerbated by the introduction of

Basel III as banks are forced to meet tougher capital adequacy requirements.

• Capital markets and Export Credit Agencies are likely to play a more

significant role in the financing of Australia’s resources sector though this will

still require intermediation from commercial and investment banks

• Sponsors will also seek to attract cheap Chinese financing on the back of

strategic investment by Chinese Sponsors or through significant offtake or

procurement contracts


0

20

40

60

80

Arg

en

tin

a

Au

stra

lia

Bra

zil

Can

ada

Ch

ile

DR

Co

ngo

Ind

on

esi

a

Kaz

akh

stan

Me

xico

Mo

ngo

lia

Mo

zam

bi…

PN

G

Pe

ru

Ph

ilip

ine

s

Ru

ssia

Sou

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USA

Oth

er

Nu

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of

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ject

s b

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egi

on

Source: Brook Hunt

Base Case Company Commodity Potential Start

Year

Production

(mtpa)

Solomon Fortescue Iron ore 2013 60

Roy Hill Hancock

Prospecting

Iron Ore 2014 55

Top Australian Projects

Prospecting

Wandoan

Project

Xstrata, Itochu,

Sumisho

Thermal Coal 2011 30

Alpha Coal

Project

Hancock

Prospecting


Kevin’s Corner

Project

Hancock

Prospecting


China First Coal

Project

Waratah Coal Thermal Coal 2014 30

West Pilbara

Project

Aquila

Resources

Iron Ore 2013 30

Eagle Downs

Project

Aquila

Resources, Vale

Coking Coal 2013 8

Belvedere

Project

Vale, Aquila &

AMCI

Coking Coal 2014 8


Project AMCI

Wingellina Metals X Nickel 2014 NA

Barnes Hill Proto Resources Nickel 2013 NA

Karara Gindalbie Iron Ore 2011 NA

Marillana

Project

Brockman

Resources

Iron Ore 2010 NA

Washpool

Project

Aquila

Resources

Hard Coking

Coal

2012 NA

Project Timeline – Major Global Project PipelineA look into the future

•China First Coal

•Las Bamabas Copper

•Alpha Coal

•Roy Hill Iron Ore

•West Pilbara Iron ore

•Mbalam Iron Ore

•Rio Blanco Copper

•Esperanza Copper

•Panantza Copper

•Tampakan CopperEl

Pachon Copper

•Cerro Colorado Copper

•Quellaveco CopperWafi

Golpu Copper/Gold

$18.1Bn$37.4Bn$2.9Bn

Thermal Coal,

11%

Global growth projects by number

2011 2012 2013 2014 2015 2016

•Maules Creek (semi soft coal)

•Benga Thermal Coal

•Crosslands Iron Ore

•Cobre Panama CopperGrosvenor

Coking Coal

•Simandou Iron Ore

•Wandoan Coal

•Kevins Corner Coal

•Boikarabelo Thermal Coal

•Toromocho Copper

•Oyu Tolgoi Copper

$2.6Bn $33.3Bn$6.2Bn


Coking Coal, 4%

Uranium, 3%

Gold, 33%

Nickel, 15%

Iron Ore, 9%

Copper, 25%

Source: Brook Hunt

Major Global Project Pipeline

Panantza Copper

Tampakan CopperEl

Pachon Copper

Cerro Colorado Copper

Quellaveco CopperWafi-

Golpu Copper/Gold

•Donlin Creek Gold

•Pebble Copper•Resolution Copper

$14.7Bn $4.0Bn$18.1Bn

Commodity Metric Greenfield

Supply

Current

Supply

Greenfield as % of

current supply

Copper Kt 8978 20387 44%

2017 2018 2019 2020 2021

Cobre Panama CopperGrosvenor

•Frieda River Copper

•La Granja SxEw Copper

•No significant projects

currently planned

$6.0Bn


Copper Kt 8978 20387 44%

Iron Ore Mt 649 1009 64%

Nickel Kt 1323 1559 85%

Gold Moz 27.5 130.9 21%

Coking Coal Mt 103 247 42%

Thermal Coal Mt 278 663 42%

ECA Financing

• In the current context ECA’s represent a significant potential source of liquidity for large

projects. ECA’s support is based on national economic interests and not on profitability

prospects

• ECA financing can provide a key financing bridge for large projects where bank funding may

not be sufficient.

A Source of Liquidity

• Current market trends show that large ECA involvement is being driven off equity investments,

offtake agreements and procurement

• Most banks have the ability to hold larger participations when covered by ECA’s

ECA Financing comes in two main forms, tied (direct) and untied (indirect)

• ‘Tied’ ECA financing is conditional to the procurement of equipment and materials from the

ECAs home country

• ‘Untied’ ECA financing is not conditional on procurement of equipment and materials, untied

financing is conducive to

– Strategic interest has been indentified and the project has been indentified as a ‘national

interest’

– Helping secure access to stable supplies of energy and mineral resources

– Promoting ECA s home country business activities


– Promoting ECA s home country business activities

In the current context ECA’s represent a significant potential source of liquidity for large

projects. ECA’s support is based on national economic interests and not on profitability

ECA financing can provide a key financing bridge for large projects where bank funding may

Case Study – Pluto LNG Project

• JBIC approved loans in co-financing with private

financial institutions in the aggregate amount of

US$1.3bn for the Pluto LNG Project in 2008, out of

which JNIC’s direct loan amounted to US$1bn

• Project undertaken jointly by Japanese electricity Current market trends show that large ECA involvement is being driven off equity investments,

Most banks have the ability to hold larger participations when covered by ECA’s

‘Tied’ ECA financing is conditional to the procurement of equipment and materials from the

‘Untied’ ECA financing is not conditional on procurement of equipment and materials, untied

Strategic interest has been indentified and the project has been indentified as a ‘national

Helping secure access to stable supplies of energy and mineral resources

• Project undertaken jointly by Japanese electricity

and gas companies and Woodside Petroleum for

the development of this US$10bn LNG project in

north western Australia

• LNG produced under this project will be exported

to Japan over 15 years

Likely ECAs Involvement in Australia

• ECA’s have a strong appetite for Australian

resource projects. This is primarily driven by the

high level of direct and indirect interests which

can be sourced from any one project.

– Roy Hill Iron Ore Project


– Ichthys LNG

– Jack Hills Iron Ore Project

– Collie Urea Fertiliser Plant

– AP LNG

– Wheatstone

ECA Financing What volume of funding can be sourced from ECAs? Tied V Untied

• As a general rule, for Tied financing an ECA will lend up to 85% of the eligible foreign content (equipment and services), af

down-payment (as per OECD rules)

– Plus additional eligible local content

– Plus up to 100% of the interest during construction period

– Plus up to 100% of the ECA insurance premium/guarantee fee

Japan

ECA � J-BIC which acts as the direct lender

� NEXI only provides insurance

� K-EXIM which acts as the direct lender

� KEIC

Eligibility Criteria � Not conditional on procurement of

equipment & materials from Japan. J-BIC

invests heavily into projects that secure

the supply of natural resources

� No clear guidelines but NEXI usually

require min DSCR 1.25x

� K-EXIM require at least 5%

AND some offtake

� KEIC requires a

AND offtake or EPC

Amount Covered Guidelines � J-BIC maximum commitment is 70% of

total debt, however J-BIC is not

committal on maximum debt until late in

� K-EXIM will finance a maximum 50% of

total debt

� KEIC will cover up

Plus up to 100% of the ECA insurance premium/guarantee fee

• Due to the more subjective eligibility criteria for untied ECA financing terms are more discretionary.


committal on maximum debt until late in

the process

� NEXI will provide insurance cover for

97.% of commercial risk and 100%

political risk

� KEIC will cover up

political risk

Recent Deals � J-BIC: Pluto LNG Project - Direct loan of

US$1bn

� J-BIC: PNG LNG Project - Direct loan of

US$1.8bn

� K-EXIM: Yemen

US$240m

� K-EXIM and KEIC: Ambatovy Nickel: Direct

loan of US$455m and US$195 political

risk guarantee

What volume of funding can be sourced from ECAs? Tied V Untied

As a general rule, for Tied financing an ECA will lend up to 85% of the eligible foreign content (equipment and services), after payment of 15% minimum

Korea China

EXIM which acts as the direct lender

KEIC only provides insurance

� China ExIm which acts as the direct

lender

� Sinosure only provides insurance

EXIM require at least 5% ownership

AND some offtake

KEIC requires at least 10% ownership

AND offtake or EPC

� Eligibility criteria is more subjective,

heavy emphasis on “national interests”. A

combination of ownership and offtake is

helpful, but either can be sufficient

EXIM will finance a maximum 50% of

total debt

KEIC will cover up to 100% of total

� Chinese banks keep their lending

guidelines private

Due to the more subjective eligibility criteria for untied ECA financing terms are more discretionary.


KEIC will cover up to 100% of total

political risk

EXIM: Yemen LNG - Direct loan of

US$240m

EXIM and KEIC: Ambatovy Nickel: Direct

loan of US$455m and US$195 political

risk guarantee

� Lahore transport Company: Direct loan of

US$1.7bn

Capital Markets Considerations

• Scale of upcoming funding requirements and

Basel III pressures on international banks will

likely increase participation and competitiveness

of capital markets alternatives

• However, key markets are only selectively open

to offshore project finance or non-investment

Capital markets are strong supplementary funding sources as competition for funding and market volatility increase

2.00

2.50

3.00

3.50

4.00

4.50 US Treasury Yields (%)

to offshore project finance or non-investment

grade issuers

• In the US markets, strong inverse correlation

between US Treasury yields and credit spreads

– The boxes highlight periods of rapid change

in US Treasury yields and indicate when

Treasury yields fall, credit spreads generally

increase and vice versa, especially at ~3%

– Demonstrates investors’ strong liquidity and

preference for minimum coupons above 4%

US Private Placement Market

— Potential to offer debt with long tenors and competitive pricing at smaller volumes

Australian Corporate Bond Market

— Undersupply of non-financial names in bank and sovereign dominated market

Source: Bloomberg, Private Placement Monitor

2.00

Dec-09 Apr-10 Jul-10 Oct10 year UST Yield

100

150

200

250

300

350

Dec-09 Apr-10 Jul-10 Oct-

NAIC2 10 year Spread History (bps)

NAIC2 10 yr Low


RMB “Dim Sum” Bond Market

— Typically short dated market

— Use of funds is limited by PBOC exchange controls

smaller volumes

US 144A / Reg S Markets

— Largest and most liquid capital market

— Greater opportunity for lower pricing due to diverse / deep investor base

Hybrid / Convertible Bond Market

— Global market returning with strong Resources activity given development of commodity prices and suitability for growth companies looking to diversify funding sources

Euro / Sterling Markets

— Ability to fund for very long tenors but more accessible for higher rated issuers

market

Capital markets are strong supplementary funding sources as competition for funding and market volatility increase

• Timing of entry is a key consideration especially in

current volatile market conditions

• Pricing volatility in recent uncertain times is

demonstrated in example below – reinforces the

benefits of early engagement, paving the way for

timing / funding flexibility

Centennial Coal Melbourne Airport

Date Oct-11 June-11

Volume US$225m US$600m

Tenor (yrs) 10, 12, 15 10,12,15

Rating NAIC-2 NAIC-1

Pricing (bps) T+270-305 T+150-180

Coupon 4.47, 4.62, 4.82% 4.47, 4.57, 4.77%

Market USPP USPP

timing / funding flexibility

US Private Placement Market

Potential to offer debt with long tenors and competitive pricing at smaller volumes

Source: NAB Private Placements

Source: Bloomberg, Private Placement Monitor

Oct-10 Jan-11 May-11 Aug-1110 year UST Yield

-10 Jan-11 May-11 Aug-11

NAIC2 10 yr High

• Australian issuers generally access offshore markets


RMB “Dim Sum” Bond Market

Typically short dated market

Use of funds is limited by PBOC exchange controls

smaller volumes

S Markets

Largest and most liquid capital market

Greater opportunity for lower pricing due to diverse / deep investor base

• Australian issuers generally access offshore markets

following operational commencement to refinance

earlier project financing or fund further expansion:

– FMG US$2.04b 7% Senior Notes (2010)

– Mirabela Nickel US$395m 8¾% Senior Notes (2011)

– Consolidated Minerals US%405m 8 7/8% Senior

Secured Notes (2011)

Capital Markets ConsiderationsCurrent volatile market conditions limit the availability of capital markets that can be efficiently accessed by Australian

Resources issuers

US 144A Australian Corporate Bond

Ratings Rating required but open to

both investment grade and high

yield credits

Investment grade rating

required

• The maturity of the project will be a key factor in determining which capital market is most appropriate for the Issuer

both investment grade and high

yield credits

required

Capacity (New Issue) ≥US$250m A$200 – A$300m

Tenor Up to 30 years 3 – 10 years

Advantages • Deepest and most liquid

market with large volume and

tenor available

• Pricing highly competitive

• Strong demand for

financial names

• Competitive funding for 5

10 year maturities

Investor Base Qualified Institutional Buyers

(QIBs) accounting for ~90% of

the US institutional buyers;

includes all USPP investors

Well educated investor base

comprising of insurance and

superannuation funds

Timeline Up to 8 weeks to establish an 8 – 10 weeks


Timeline Up to 8 weeks to establish an

inaugural program

8 – 10 weeks

Covenant Profile Standard bond undertakings

with no maintenance financial

covenants

Standard bond undertakings

but may require some financial

covenants

Ongoing Issuance Strong capacity to support

ongoing issuance; 6 months

wait is recommended

Support for ≥A$500m

Project Suitability Brownfield Brownfield

Current volatile market conditions limit the availability of capital markets that can be efficiently accessed by Australian

Australian Corporate Bond US Private Placement Hybrids / Convertible Bond

Investment grade rating No ratings required but

investment grade credit metrics

desired

No ratings required

The maturity of the project will be a key factor in determining which capital market is most appropriate for the Issuer

investment grade credit metrics

desired

US$50 – US$1,000m Up to US$200m

Up to 30 years Typically 5 years

Strong demand for non-

Competitive funding for 5 –

10 year maturities

• Pricing highly competitive

• Provides access to US

investors, who are ‘passive’

• Flexible structure (size, tenor,

timing, etc.)

• Dilution delayed and occurs

up to 30% above the current

share price

• Cost effective debt due to the

value of the imbedded call

option

Well educated investor base

of insurance and

superannuation funds

~40 key investors comprising

of insurance companies and

pension funds who generally

‘take and hold’

Asian and European based

specialised funds, but in

particular out of Singapore and

Hong Kong

6 – 8 weeks 4 – 6 weeks


6 – 8 weeks 4 – 6 weeks

Standard bond undertakings

may require some financial

Covenants similar to bank debt

covenants, maintenance in

nature

No financial covenants,

negative pledge and listing

documentation requirements

Support for ≥A$500m Support for ≥US$1bn Total size generally limited to

15 – 20% of market cap

Greenfield Greenfield

Alternative Funding Sources

An expanded role for EFIC?

EFIC

• Established to support Australian export trade by providing insurance

• Does not fund directly but through the provision of guarantees• Does not fund directly but through the provision of guarantees

• EFIC’s obligations are guaranteed by the Commonwealth

guarantee

• EFIC’s role is to complement, not complete with, private financiers

Challenges

• Potential candidates for EFIC support must be able to demonstrate

demonstrate ahead of time

• Funding capacity for an individual transaction must not exceed

results in a ceiling of c. A$175M for an individual project

• Maximum funding capacity falls well short of international ECAs


• Maximum funding capacity falls well short of international ECAs

projects across Australia (e.g. Roy Hill, Icthys, APLNG etc)

• At present, the only alternative for large projects to seek

ministerial approval and is reserved only for Projects that serve

• The uncertainty, long lead time and politics surrounding applications

therefore unlikely source of funding for large scale projects

insurance and finance

guaranteesguarantees

making it simple for financial institutions to lend against the

financiers and insurers

demonstrate a genuine ‘market gap’ – this can be difficult to

exceed 25% of the assets on commercial account – this currently

ECAs and below the potential demand for major resource and LNG


ECAs and below the potential demand for major resource and LNG

seek funding through the National Interest Account. This requires

serve the ‘national interest’

applications for ‘national interest’ status makes this an unreliable and


Problem

• Commercially viable mines unable to access markets due to lack of infrastructure

and/or capacity constraints (Port Hedland, Dalrymple Bay etc)

• Private sector solution typically requires a ‘joint funding’ approach by common

Easing the Infrastructure bottleneck – Asking the hard questions

• Private sector solution typically requires a ‘joint funding’ approach by common

users (e.g. Wiggins Island)

• Difficult to achieve in practice with commercial disputes resulting in protracted

delays and even forfeiture of developments (e.g. Oakajee Port)

• Junior miners left stranded or forced to sell material stakes in order to progress

development (e.g. Magnetite mines in SA)

Who Should Pay?

1. Private Sector Infrastructure Investors?

– Will require many users with sufficient credit quality / credit support

– Financiers will require certainty of revenues to ensure infrastructure

can be serviced (i.e. mandatory hedging , offtake contracts)

– Long proven mines lives required to fund long term infrastructure charges


– Long proven mines lives required to fund long term infrastructure charges

(Greenfield mines will be challenging)

2. The Public Sector?

– Public Infrastructure funding is now largely channeled through

Business Australia Fund (BAF). To date focus has been on roads and

transport with commodity based infrastructure missing out

– For BAF to be a meaning part of the solution, federal funding will need

increase combined with a shift in focus towards commodity infrastructure


infrastructure

common

Infrastructure Projects receiving BAF support

Project StateBAF Funding

(A$M)

Regional Rail Link VIC 3,200

Hunter Expressway NSW 1,500common

protracted

progress

support

infrastructure costs

charges

Hunter Expressway NSW 1,500

Ipswich Motorway QLD 884

Pacific Highway – Kempsey Bypass NSW 618

Gold Coast Rapid Transit QLD 365

Gawler Rail Modernisation SA 293

Noarlung to Seaford Rail Extension SA 291

Melbourne Metro 1 VIC 40

Total 7,191

Source: Department of Infrastructure and Transport

Other Potential Candidates ?

� Oakajee Port

� Point Anketell Port & Rail


charges

through the

and public

need to

infrastructure

Point Anketell Port & Rail

� Port Bonython, Sheep Hill, Point Lowly

� Hunter Valley Rail Network

� Galilee Basin to Abbot Point Rail Project

� Pilbara / Port Hedland Accommodation Projects

� Port of Portland – Green Triangle Region

Challenges of financing the resources sector - presented at

Economy & Finance

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