The Banking Sector’s role in funding Junior Miners · 2014. 7. 22. · coal market uneconomic –finally forcing (some) producer discipline Lagged supply response to period of high

Strictly Private and ConfidentialAn Authorised Financial Services Provider

The Banking Sector’s role in funding Junior MinersFFF 9th Junior Coal Mining Ventures Workshop

27 June 2014

Henk de HoopBusiness Development Director Resources Rand Merchant Bank

Strictly Private and ConfidentialStrictly Private and Confidential

FirstRand Bank Limited

Funding cycle and bank checklist

Macro background and impact on junior miner funding

Case studies

Concluding remarks

Strictly Private and Confidential 3

Overview of FirstRand• FirstRand Group executes its strategy through its portfolio of wholly owned

operating franchises, First National Bank (“FNB”), Rand Merchant Bank (“RMB”), WesBank and Ashburton

FirstRand Limited (“FirstRand”) is the second largest financial institution in Africa, and one of the largest companies listed on the exchange operated by the JSE Limited, with a market capitalisation of c.USD21bn/R227bn

FirstRand provides a comprehensive range of products and services to the South African market and niche products in certain international markets

Listed holding company(FirstRand Limited, JSE: FSR)

Retail and commercial bank Corporate and investment bank Instalment finance Investment management

Strictly Private and Confidential

FirstRand in Africa

4

Gaborone

Lagos

MbabaneMaputo

Maseru

Windhoek

LuandaLusaka

Accra

South Africa

Representative offices

Full banking operations

Target jurisdiction

Deal footprintOn the ground presence


Full service retail banking operations

Investment banking operations

FirstRand branch

FirstRand representative office

5

… and with a presence in India and China…

Trade and investment flows

FNB and RMB offer assistance to companies through branches in London and India, via representative offices in Dubai and Shanghai, and through a co-operation agreement with

China Construction Bank

FNB and RMB are therefore well positioned to assist with trade and investment flows between Europe/the Middle East/Asia and Africa

FNB and RMB offer assistance to companies through branches in London and India, via representative offices in Dubai and Shanghai, and through a co-operation agreement with

China Construction Bank

FNB and RMB are therefore well positioned to assist with trade and investment flows between Europe/the Middle East/Asia and Africa

RMB operates a mining focussed Private Equity business, RMB Resources, which is based in Australia with offices in the

US and the UK

RMB operates a mining focussed Private Equity business, RMB Resources, which is based in Australia with offices in the

US and the UK





Case studies

Concluding remarks


Time/Project Stage

Steady state mining

Early exploration

Resource definition

Pre-feasibility to bankable feasibility

Project development

7

The funding cycle

Structured Equity

Equity

Project Finance

Senior debt

Valu

eBank funding

Royalty, streaming/offtakes


• Royalty finance• Streaming/offtakes/prepayment

• Commercial banks• Development finance institutions• Export credit agencies• Traders

• Equity capital markets• Traders• Private/’Public’ Equity• Partnering with majors/other operators

Funding sources

8

Equity

Alternative

Debt


Debt ‘bankability’ considerations

Qualitative Quantitative

Management Strength

BFS completed/quality

Environmental risk (Equator Principles)

Commodity type & strength of offtake

Brownfields vs greenfields

Cash flows

Capital quantum

Financial strength of equity provider

Position on cost curve

Resources & reserves (quality, size)

Processing: yield, quality, complexity

Logistics solution & cost

Technical complexity/execution risk

+++… +++…

Contractor quality (financial+technical)


Contractors vs owner operator model

Contractor model Owner operator

ü Upfront capital cost savings

û Increased operating cost – capital fees

ü Experienced operators

ü Preferred for short LoM assets

ü Could assist bank funding (use reputable firms)

û Conflict risks – i.e. production targets for mining vs plant contractors

ü Improved operational control, e.g. quality control and assurance

ü Preferred for longer life assets or use of large, specialised machinery

û Much broader in-house skill set required

û Could complicate bank funding (especially new junior/team)

û “Loss of control” – requires strong company management team

ü Operating cost benefits

û Increases upfront capitalü Provides operational flexibility

ü Less complex contract structure





Case studies

Concluding remarks


Macro background

12

Resources sector performance

AIM equity fundraising (2004 – 2013)

-

20

40

60

80

100

120

2011 2012 2013 2014

ASX Resources TSX Resources JSE Resources

0%

5%

10%

15%

20%

25%

30%

35%

-

500

1 000

1 500

2 000

2 500

3 000

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Q1

2013

Q2

2013

Q2

2013

Q4

2013 M

inin

g pr

ocee

ds a

s %

of a

ll AI

M

Min

ing

proc

eeds

(£m

)

Mining further issues Mining new issues % Mining of AIM

Weak equity markets resulting in limited capital and low liquidity

Historically low levels of funds raised – ‘financial steroids’ not chasing commodities anymore

Source: Capital IQ, EY Mining Eye (inferred)


Macro background

13

Seaborne thermal coal sector under pressure

Weakness across commodities

Estimated 25-30% of seaborne thermal coal market uneconomic – finally forcing (some) producer discipline

Lagged supply response to period of high margins exacerbating oversupplied market

Cost competitiveness / capital efficient capacity addition again key in assessing project quality for both equity and debt providers

Source: WoodMackenzie, Dow Jones

0

20

40

60

80

100

120

0

20

40

60

80

100

120

0 100 200 300 400 500 600 700 800

FOB

cas

h co

sts

US$

/t

FOB

cas

h co

sts

US$

/t

Cumulative Production mt

Current Price


Project funding impact

14

§ Increased equity cheque constraints for both big and small players

§ Fewer banks, smaller cheques, but more competition for high quality assets

§ Revenue line outlook more uncertain – prefer commodities that can behedged or have long term offtakes with price protection

§ Larger projects likely to require a more phased approach

§ Increased stress testing of project risk, forecast ramp-up, costs, etc

Sharp reduction in fundable projects


SA specific issues

15

§ Offshore equity interest VERY poor – apart from general junior miningmalaise, SA mining reputation has not helped to say the least

§With export channel economics questionable at current FOB prices,domestic coal projects becoming increasingly attractive…

§…while Eskom offtake (appropriately priced & sufficient term) greatlyenhances junior project fundability (up to 70% debt)

§ Indian/Chinese interest subdued, but trading companies increasingly willingto support equity cheques, even for largely domestic projects

Particularly relative to other junior miner sectors, positive outlook for

junior coal miners





Case studies

Concluding remarks


Funding can be sourcedCoal Case Study - greenfields Funding Structure

• Life of mine Eskom offtake and price underpin

• Low cost open pit producer

• Low strip ratio

• Simple processing technology

• Detailed BFS including extensive metallurgical

testwork

• Strong project management team

• Raised equity in tough market

• Stringent capex control

• Realistic targets

• Reasonable gearing (65% debt)

• Capital cost: R450m

• Debt facility: R300m

• Tenor: 6.5 years

• Capital grace & interest roll-up: 21 months

17

Listed Co

Holdco as Borrower

Project 1 Project 2

Equity

Debt

Development Funds

Offshore

RSA





Case studies

Concluding remarks


Conclusion

19

§ Constrained funding environment

§ Increased stress testing of project risk, forecast ramp-up, costs

§ Good projects with strong management are attracting funding

§ Domestic coal sector increasingly attractive, Eskom offtake support crucial

§ Engage with potential funders early in the process


Contacts

20

Halvar MathiesenCo-Head: Resources FinanceTel: +27 11 282 1310Email: [email protected]

Sandile MbulawaCo-Head: Resources FinanceTel: +27 11 282 1020Email: [email protected]

William McFerrenResources FinanceTel: +27 11 282 1309Email: [email protected]

Henk de HoopBusiness Development Director: ResourcesTel: +27 11 282 4970Email: [email protected]

mailto:[email protected]




The Banking Sector’s role in funding Junior Miners · 2014. 7. 22. · coal market uneconomic –finally forcing (some) producer discipline Lagged supply response to period of high

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