Jeremy Beer, Ernst & Young:Alternative strategies to finance projects in the current economic...
-
Upload
informa-australia -
Category
Economy & Finance
-
view
262 -
download
4
description
Transcript of Jeremy Beer, Ernst & Young:Alternative strategies to finance projects in the current economic...
Alternative strategies to finance projects in the current economic climate Jeremy Beer
Mining South Australia – November 2013
Page 2
Macro and micro factors united against the sector in 2012 ...
Impact
► Squeezed margins
► Share price volatility
► Sub-optimal returns
Macro
► Economic uncertainty
► Volatile markets
► Resource nationalism
Micro
► Weaker metals prices
► Labor unrest
► Cost inflation/overruns
A “risk-off” capital strike
► Slowdown/Cutbacks in capex
► Smaller, “safer” M&A
► Focus on capital optimization
► Capital recycling through divestitures
Companies: slower spending
► Risk aversion
► Retreat of traditional capital providers
► Emergence of private and strategic investors
► Increased funding innovation
Investors: selective investing
Page 3
... perpetuating a two-tier capital environment ...
Record bond proceeds as % of capital
raised
Tightened equity on highly dilutive terms
Bank debt reserved for quality
names/refinancing
▼
▼
▲
Capital raising by asset class: proceeds (2007–1H 2013)
► Constrained capital for junior and mid-tier companies
► Unique opportunities for the investment grade producers
0
50
100
150
200
250
300
350
2007 2008 2009 2010 2011 2012 1H 2012 1H 2013
Pro
ceeds $
b
IPOs Follow-ons Convertible bonds Bonds Loans
Source: EY, ThomsonONE
Page 4
- 100 200 300
2008
2009
2010
2011
2012
1H 2013
Other Asian debt Bonds - Top 6 Loans - Top 6
A new capital era
T6/majors = top six global diversified miners. Source: Ernst & Young, ThomsonONE
Challenging funding conditions for all but the investment grade majors
Capital raising: majors’ proportion of total Debt and equity raising ($b)
Deb
t E
qu
ity
- 100 200 300
2008
2009
2010
2011
2012
1H 2013
Other Top 6 IPOs Top 6 Follow ons Top 6 convertibles
0
50
100
150
200
250
300
350
400
2008 2009 2010 2011 2012 1H 2013
Pro
ceeds $
b
IPOs Follow ons Convertibles
Bonds Loans T6 (all classes)
Page 5
Unique opportunities
The largest miners borrowing large
Glencore
$19bn of syndicated loans in 2012
Largest ever single tranche A$ bond
(non financial)
Long dated tenors (30 years)
Bonds
Unprecedented investor demand for
high grade issuers
Banks
Maintaining strong relationships with
highest grade borrowers and national
champions
Institutional
Rise of the term loan B market
Second largest covenant-lite loan
Investment grade and larger miners
Page 6
Sentiment-driven high-yield market — all about timing
► Volatile high-yield markets,
heavily influenced by economic
news flow and sentiment
► Widening divergence between
coupons on high-yield and high-
grade bonds in 2012
► On the cusp of an apparent turn
in the interest rate cycle, fear of
rising interest rates may drive a
change in investor preferences
US$ bond issues by month (proceeds, 2012–1H 2013)
Coupon ranges on US dollar and Euro bonds, by tenor (2012)
0
20
40
60
80
100
-
5
10
15Ja
n-1
2
Feb-1
2
Ma
r-12
Apr-
12
Ma
y-1
2
Ju
n-1
2
Ju
l-1
2
Aug
-12
Sep
-12
Oct-
12
Nov-1
2
Dec-1
2
Ja
n-1
3
Feb-1
3
Ma
r-13
Apr-
13
Ma
y-1
3
Ju
n-1
3
MO
VE
ind
ex
Bo
nd
pro
ce
ed
s $
b
Proceeds MOVE*
Source: EY, ThomsonONE, Thomson Datastream
*MOVE: Merrill Option Volatility Estimate index
Page 7
Emergence of non-traditional investors
► Retreat of traditional capital providers from higher risk growth projects
► Funding gap that is increasingly being filled by strategic, long-term investors
Page 8
Project funding options typically utilized in current environment
Development stage Exploration Development Construction Mid-tier producer Major producer
Credit quality Unrated Unrated Unrated/High yield High yield Investment grade
Investor perspective Highest risk,
zero/negative yield
High risk,
uncertain yield
High risk,
high yield
Medium risk,
high yield
Lowest risk,
low yield
Public equity
Farm-ins
Standby equity
Strategic equity
Convertible bonds
US PPM
Streaming
Royalties
Offtake
Development finance
Project finance
Equipment finance
Pre-export finance
Fixed income
Commercial loans
Refinancing
Page 9
Financing Considerations
Equity Convertible Royalty
Finance
Off-take
Finance
Structured
Loan
Project
Finance
ECA Finance Corporate
Bonds
Corporate
Loan
Summary
IPO, Private
placement etc
Hybrid debt
instrument with
equity component
Financing
provided as
consideration for
the right to a
percentage of
future project
revenues
A form of debtor
financing secured
by an off-take
agreement
Non bank loan
secured against
company’s
assets
Bank loan
secured against
project assets
Debt provided by
export credit
agencies
Non bank debt
security, private
placement,
USPP (144A)
Bank debt
Min Transaction
Size
Transaction
specific
Public US$25m
Private none
Transaction
specific
Transaction
specific
Transaction
specific
US$10-15m US$20m US public bond
US$250m
USPP US$25m
None
Timing
IPO 3 months,
placement 2
weeks
Public 4 weeks
Private 8 weeks
4-10 weeks 8-12 weeks 6-12 weeks 3-6 months 6-12 months 3-6 months 4-10 weeks
Advantages
Flexible
structure
Short prep
periods
Lower interest
coupon than
vanilla debt
No covenants
Less dilutive
than equity
Negotiated
bilaterally
Flexibility
Limited
refinance risk
Off balance
sheet financing
Long term
demand
secured
Leverage off-
takers’ credit
profile
Straight
forward
process
Structural
flexibility
No dilution
Non recourse
Relatively
cheap
Easy to
restructure
Relatively
cheap
Long tenor
Provides
liquidity
Depth of
market can
fund large
transactions
Majority of
deals
unsecured
Non amortising
Relatively
cheap
Straight
forward
process
Long term
financing
relationship
Considerations
Potential
dilution
Deep discounts
given weak
market
conditions
Cashflow
required to
service coupon
Public bond
requires min
market cap of
$250m
Can prove to
be costly
In effect
increases
project costs
Financiers
require “hell or
high water” off-
take
Risk premium
payable to off-
taker/discount
pricing
Complex
financial
structures
Can include
warrants
Strict covenants
Lengthy DD
and docs
process
Commodity
hedging
Long time to
execution
Not flexible
once
established
Availability
linked to
exports
Credit rating
preferable
More
expensive than
bank debt
Lengthy DD
and docs
process
More
covenants than
bonds
Amortisation
required
Page 10
Alternative Funding Examples
Glencore Offtaker Finance
• Precious and base metals junior
miner (mkt cap ~A$70m)
• Financing package (Nov-12)
• A$3m Equity Placement
• A$70m Converting Notes
• A$85 Debt Facilities
• Life of mine base metals offtake
with Glencore
• Glencore as project partner
(technical committee & board)
• DFS completed on the Hera project
• Structural highlights
• No hedging requirements
• Financial flexibility (YTC
conversion option)
US Term Loan B Financing
• Australia iron ore producer (mkt cap
~A$1.2bn)
• Financing package (Dec-12)
• US$275m term loan
• A$50m RCF
• First debt facility Atlas has raised,
historically funding operations with
equity and cash flow
• Structural highlights
• “Covenant lite” (no earnings
based maintenance
covenants)
Sandstorm Royalty Finance
• Junior gold miner (mkt cap
~CAD$18m)
• Financing package (May-12)
• US$7.5m upfront cash
payment for granting of
royalty
• US$0.5m share subscription
• Pre-feasibility study completed on
the Coringa project
• Structural highlights
• 2.5% royalty on the Coringa
gold project
• 1% royalty on the Cuiu Cuiu
gold project
Page 11
Moving up the curve
Value
A
B
Stage of Development
Exploration Scoping Pre-feasibility Feasibility Development Operational
Cost of Funding Equity dilution
20-25%
Likely to include equity component
15-25%
May include equity component
15-20%
May include equity component
Base rate +
300-800bpsVarious
Direct comparison of funding structures is often complex across equity, royalty and hybrid and fixed
interest instruments
Pricing feedback from investors compared to stage of development
Page 12
Instrument Comparison
Current
Share Price
(A$[])
Equity A$[] VWAP +
[]% Premium
Convertible Note (A$[]m) Evaluation
Upside Price
Scenario
>A$[] p/s
► New shares as % of prior
shares outstanding: []%
► No. shares Issued @
A$[] placement price: []m
A$[] VWAP
Inc. Premium
► New shares as % of prior
shares outstanding: []%
► No. shares issued on
conversion : []m
In an increasing share price scenario,
the CN is more dilutive despite
exercise price > equity raise price.
This is driven by the fees and interest
which results in an increased CN
facility size to achieve net A$[]m
funding
Downside
Price
Scenario
A$[] p/s
► New shares as % of prior
shares outstanding: []%
► No. shares Issued @
A$[] placement price: []m
A$[] VWAP
Inc. Premium
► New shares as % of prior
shares outstanding: []%
► No. shares issued @ A$[]
equity raise given no
conversion: []m
In a decreasing share price scenario,
the CN is more dilutive given the
requirement to raise equity to repay
the CN at the decreased price
Flat price
scenario
A$[] p/s
► New shares as % of prior
shares outstanding: []%
► No. shares Issued @
A$[] placement price: []m
A$[] VWAP
Inc. Premium
► New shares as % of prior
shares outstanding: []%
► No. shares issued on A$[]
equity raise given no
conversion: []m
Where the share price at conversion is
between the equity raise price and the
CN exercise price, the relative
attractiveness is determined by the
scale of the CN fees and interest vs.
the premium to VWAP at which the
exercise price is set
Convertible note vs. equity raising example
► Retrospective analysis of the shareholding that is required to be sold to achieve net funding in each option
► Interestingly, the equity raising was likely to result in lower relative dilution in all share price scenarios
Page 13
In focus: Alternative sources of finance
Page 14
Royalty agreements
The provision of an upfront payment to the mining
company in return for future payment, typically based
on either a) a percentage of the value of the product
produced or b) the profits or revenues generated from
the mine. Royalties are most frequently granted over
precious metals, but there are no limitations.
KEY PROVIDERS
► Royal Gold (Nasdaq/TSX) – one of the oldest royalty companies,
also becoming active in streams (e.g., Thomson Creek); 83% of
2013–15 revenues precious metals, 17% base metals; 76% from
royalties, 24% from streams; 36 producing and 22 development
stage assets
► Franco-Nevada (TSX) – 2012 revenues: royalties – revenue-based
45%, profit-based 10%, 45% streams; 75% gold, 14% PGMs, 10%
O&G, 1% base
► Premier Royalty – newest royalty company to emerge; 60% owned
by Sandstorm Gold; NSRs on operating and exploration assets
(gold)
► Anglo Pacific (LSE) – established royalty provider with 21-strong
portfolio of producing, development and early stage royalties;
diversified exposure to coal (53%), iron ore (21%), gold (11%),
chromite (4%), uranium, copper, nickel, PGMs and others
► Callinan Royalties (TSX-V) – 1 producing (Hudbay), 2
development and 14 exploration assets
► Americas Bullion Royalty (TSX) – precious metal royalties and
streams; 32 agreements, including Barrick Gold; able to receive
payments-in-kind (bullion instead of cash)
► Royalco Resources (ASX) – ASX’s only royalty company; nine
royalties in Aus and NZ (petroleum, silver and gold); and royalties
on exploration projects in the Philippines (gold/copper) and Uganda
(gold)
► Gold Royalties Corp (TSX-V) – relatively new entrant; NSR
structures on early stage and producing mines in Canada; royalties
on nine mines (as at June 2013)
Royalties typically take the following forms:
► Gross revenue – right to a fixed percentage of gross revenue
on metals sales
► Net smelter return – right to a fixed percentage of net revenues
(gross revenues less treatment, refining and freight charges –
i.e., cash flow that is free from any operating and capital costs
or environmental liabilities)
► Net profit interest – right to a fixed percentage of the profits
from an underlying asset. Terms vary but royalties are
commonly payable after the recovery of certain pre-production
costs and typically deduct mine site operating and
administrative costs plus tax.
► Typically registered to the underlying property title, giving
priority over creditors in financial distress
► Long-term, passive investments – no commitment to fund
capital or operating costs
► A large degree of flexibility can usually be built into contracts
► Normally limited to between 2% and 5% of a project’s net
revenue after certain charges
► Costs are usually limited to legal fees in drawing up contract
terms; no hedging requirement.
► Royalties can change hands among (be acquired by other)
royalty providers.
Mid producer Maj. producer
Construction Advanced
Early
Page 15
Standby equity
Key providers to mining industry:
► YA Global (Yorkville Advisors)
► Darwin Strategic (Henderson Global Investors)
► Dutchess Opportunity Cayman Fund (Dutchess Capital Management)
Example:
Company X agrees a $5m SEDA facility with Provider Y. CX may draw down these
funds over a period of up to three years, in exchange for the issue of shares to PY
at a discounted price (5% to market price during a 10-day drawdown period), with
the maximum advance by PY linked to share trading volumes. A fee of $150,000,
payable to PY on first drawdown, secures the facility.
Benefits for the company:
► Is in control of the timing – funding can be drawn when needed
► Provides level of comfort over availability of near-term funding
► Eliminates the need for roadshows to bankers and investors
► Allows companies to set a price floor to each tranche
Drawbacks:
► Can be lengthy and expensive to set up, depending on
regulatory environment (structures differ according to market)
► Setup costs
► Drawdown can negatively impact share price – dilution of
existing shareholdings usually includes a purchaser discount
Recent deals:
Standby equity (a.k.a. equity line, equity-linked) facilities provide
companies with an option to issue shares to a facility provider over
a multi-year time period, giving companies assurance of a future
buyer of shares and the flexibility to choose the timing of the
issuance. There is no upfront capital injection but there may be an
arrangement/security fee.
The equity provider commits to purchase a pre-established dollar
amount of a company’s shares in a series of drawdown at the
option of the issuer. The purchaser is committed for a fixed period
to buy the securities. The issuer has the ability, but not the
obligation, to sell the shares. There are normally no penalties for
inactivity or termination of the agreement.
There are also SEDA-backed loan facilities whereby the borrowing
company has the option to convert outstanding loan amounts into
ordinary shares for the SEDA loan provider. Some providers also
offer equity-linked promissory notes – short-term upfront capital
injection (usually 90-180 days), repaid with cash from operations or
funds drawn from the associated equity agreement.
Provider Company Value Type
Dutchess Baobab Resources
Sunkar Resources
£17m
£10m
Equity line facility
Equity line facility
YA
Global
Red Rock Resources
ECR Minerals
Kibo Mining
Conroy Gold
Strategic Minerals
Shanta Gold
£3m
£2.75m
£3m + $1.5m
$5m
Financing package
Financing package
Stock purchase agreement
SEDA
SEDA+ Loan
Loan
Darwin Horizonte Minerals
Altona Energy
Noventa
Orogen Gold
Sunrise Resources
DiamondCorp
Ortac Resources
£8m
£2m
£5m
£5m
£3m
£10m
£20m
Equity finance facility
Equity finance facility
Equity finance facility
Equity finance facility
Equity finance facility
Equity finance facility
Equity finance facility
Mid producer Maj. producer
Construction Advanced
Early
Page 16
Offtake agreements/ pre-export finance
Offtake agreements typically comprise payment for a determined
volume or percentage of production over a determined time span,
often with exclusivity attached. Typically provided by customers,
traders and specialist finance providers.
Terms vary significantly from deal to deal. Some offtake
agreements are required components of funding facilities (debt or
equity), securing advance payments or used toward repayment or
arrangement of the financing. Offtake-linked loans typically require
some form of security over the assets or company.
Pre-export financing is secured against determined production
volumes, though additional security may be required to account for
production/supply risks.
Offtake prices are usually market-linked, and sometimes
discounted. Offtakes provide a guaranteed source of revenue for
the project, which can help secure other sources of finance.
Type Offtaker Company Advance Type
State-
backed
buyers
►Tongling
►Sinosteel
►Yunnan TCT
►Nautilus Minerals
►Kaboko Mining
►Sirius Minerals
-
-
-
►Take or pay
►Exclusive take
►Fixed tonnage
Private
capital
►Red Kite
►Allied Gold
►Nevada Copper
►EMED Mining
►Augusta Res.
►$80m
►$200m
►$80m
►$83m
►Loan repayment
►Loan
►Equity + loan
►Loan
Banks ►Stand. Chart. ►Archipelago Res. - ►Exclusive take
Customers ►Tiffany’s
►Wolfram Bergbau
►Tata Steel
►DuPont
►Sinosteel
►Yara Int’l
►Toshiba
►DiamondCorp
►Wolf Minerals
►Northern Iron
►Base Resources
►Kaboko Mining
►IC Potash
►GoviEx Uranium
►$6m
►$75m
-
-
-
►$40m
►$40m
►Term loan
►Loan
►Long-term offtake
►Purchase
►Take or pay
►Equity
►Convertible
Commodity
traders
►Noble
►Glencore
►Trafigura
►JP Morgan
►Samsung
►Kaboko Mining
►Bellzone
►OceanaGold
►Straits Resources
►Amara Mining
►$10m
►$15m
-
►$98m
►$20m
►Loan
►Early payment
►Purchase
►Upfront payment
►Loan
Typically comprise any of the following:
► Pre-production advances in return for future offtake in form of:
► Equity stakes
► Loans (interest- and non-interest-bearing)
► Convertible bonds
► Exclusive right to purchase production at a determined price
(which is usually index/market linked)
► Built-in options to extend – based on mutual consent
► Take or pay agreements (purchase product or pay a penalty)
► Additional marketing/distribution terms
► Some minimum stipulations are common:
► Minimum volume of offtake over agreed period of time
► Minimum price in volume-based offtake contracts
► Hedging to protect against volatility
Recent deals:
Mid producer Maj. producer
Construction Advanced
Early
Page 17
Development finance
Development Finance Institutions (DFIs) (or multi-lateral
development banks) provide credit in the form of higher
risk loans, equity stakes and risk guarantee instruments
to companies investing in developing countries.
In principle, DFIs can accept higher project and country
risk than commercial banks, but borrowers must
demonstrate their commitment to benefitting the host
nation, and compliance with high environmental, social
and transparency standards.
Typical funding structures
► Provide a variety of investment instruments – e.g., senior
debt, subordinated debt, equity and convertibles
► Usually invest at BFS (post-DFS) stage
► Usually invest in base, precious or industrial minerals, but
recent investments also seen in diamonds
► Follow stringent environmental and social standards –
and under public scrutiny over their mining investments
► Frequently come with ancillary value-add services, such
as environment and social (E&S) risk management
advice, community engagement strategies
► Can be a more costly source of funding than other
alternatives
► Represents vote of confidence/recommendation, which
lends support to future financing opportunities
Key recent investments by DFIs in the mining sector:
DFI Company Project Value Type
IFC ►Oyu Tolgoi
►Unigold
►Finsch Diamond Mine
►Hummingbird Resources
►Sama Resources
►Guyana Goldfields
►Copper, Mongolia
►Gold, Dom. Rep.
►Diamonds, S. Africa
►Gold, Liberia
►Nickel, Cote d’Ivoire
►Gold, Guyana
►$400m
►$12m
►$25m
►$9m
►$1m
►$10m
►Loan
►Equity
►Loan
►Equity
►Equity
►Equity
China
Dev’t
Bank
►MMG/China Minmetals
►Gindalbie Metals
►Generaly Moly
►Zijin Mining
►SLZ, Australia
►Iron ore, Australia
►Molybdenum, US
►Investm’t/acq’n
►<$1b
►$250m
►$665m
►$4.9b
►Loan
►Loan
►Loan
►Loan
EBRD ►Dundee Precious Metals
►Coal Energy
►Oyu Tolgoi
►Lydian International
►Hambledon Mining
►Gold, Bulgaria
►Coal, Ukraine
►Copper, Mongolia
►Gold, Armenia
►Gold, Kazakhstan
►$67m
►$70m
►$400m
►$45m
►$30m
►Loan
►Loan
►Loan
►Equity
►Loan +
equity
IDCSA ►Scaw Metals
►Sedibelo Platinum
►DiamondCorp
►Village Main Reef
►Metals, South Africa
►PGMs, South Africa
►Diamonds, S Africa
►PGMs, South Africa
►$340m
►$328m
►$28m
►$15m
►Equity
►Equity
►Loan
►Loan
Mid producer Maj. producer
Construction Advanced
Early
Page 18
EY Capital & Debt Advisory
The Capital and Debt Advisory Group advises clients across the capital spectrum in a broad range of debt
transactions
► We provide objective and independent advice to our clients who are typically pursuing
► We are a core part of Ernst & Young’s broader corporate finance business. Our product excellence is supported
by exceptionally strong sector coverage capability and where it adds value, we are able to bring the wider service
offerings of Ernst & Young to the situation, including transaction tax, specialist modelling and due diligence teams
► Our approach is flexible, from leading a debt raising to advising from the sidelines. Typically we undertake a two
phase approach to ensure the debt structure and funding sources match your needs, as follows:
► Transaction financing / acquisition financing
► Refinancing
► Debt capital markets issues
► Structured financings
► Growth capital
► Debt restructuring
► Credit ratings advisory
► Cross border financing
Assessment of
Objectives Options Appraisal
Process
Preparation and
Market Sounding
Formal Process &
Execution
“Objective and independent funding advice, excellence in executing transactions and
access to a local and global network of banks, financiers and investors”
Page 19
Contacts
Jason Lowe
Executive Director, Joint National Head of Capital & Debt Advisory
Tel: +61 3 8650 7600
Mobile: +61 412 699 778
E-mail: [email protected]
Jeremy Beer
Associate Director, Capital & Debt Advisory
Tel: +61 3 9288 8717
Mobile: +61 413 976 634
E-mail: [email protected]
Thank you
EY | Assurance | Tax | Transactions | Advisory
About EY
EY is a global leader in assurance, tax, transaction and advisory
services. The insights and quality services we deliver help build trust
and confidence in the capital markets and in economies the world over.
We develop outstanding leaders who team to deliver on our promises
to all of our stakeholders. In so doing, we play a critical role in building
a better working world for our people, for our clients and for our
communities.
EY refers to the global organization and may refer to one or more of the
member firms of Ernst & Young Global Limited, each of which is a
separate legal entity. Ernst & Young Global Limited, a UK company
limited by guarantee, does not provide services to clients. For more
information about our organization, please visit ey.com.
About EY’s Global Mining & Metals Center
With a strong but volatile outlook for the sector, the global mining and
metals sector is focused on future growth through expanded
production, without losing sight of operational efficiency and cost
optimization. The sector is also faced with the increased challenges of
changing expectations in the maintenance of its social license to
operate, skills shortages, effectively executing capital projects and
meeting government revenue expectations. EY’s Global Mining &
Metals Center brings together a worldwide team of professionals to
help you succeed — a team with deep technical experience in
providing assurance, tax, transactions and advisory services to the
mining and metals sector. The Center is where people and ideas come
together to help mining and metals companies meet the issues of today
and anticipate those of tomorrow. Ultimately it enables us to help you
meet your goals and compete more effectively.
© 2013 EYGM Limited.
All Rights Reserved.
EYG no. ER0107
ED None
This material has been prepared for general informational purposes only and is not intended to
be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for
specific advice.