Robert Futter, Cresco Project Finance

INVESTMENT REQUIREMENTS FOR MINERAL BENEFICIATION PROJECTS IN AFRICA

INVESTMENT REQUIREMENTS FOR MINERAL BENEFICIATION PROJECTS IN AFRICA

[IRON ORE CONFERENCE]

17TH MARCH 2014

17 March 2014

Contents:

About CRESCO

Market Overview – Iron Ore Projects

in Africa

Recent Financing of Iron Ore Projects

Mitigating Financing Risk

Competitive Long Term Finance For

This Asset Class

MIGA Coverage Of Iron Ore Projects

Questions

ABOUT CRESCO

Helping you

bridge the

gap

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

Concept Viable

A well structured and

bankable project

Efficient project

implementation

Skilled operational and

financial management of

project

CRESCO SERVICES AND INDUSTRY FOCUS

CRESCO can tailor the services per project and per industry based on client requirements – complementing available technical skills

• 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

• Mining (Coal, Gold, Chrome etc.)

• Infrastructure

• Rail

• Telecoms

• Mineral Beneficiation

• Traditional & Renewable Energy

• Wood & Paper

• PPP structures

Education

Container Scanner

Fleet management

KEY SERVICES KEY INDUSTRIES

EXPERIENCE IN MINING

CRESCO is the appointed agent for MIGA (world bank political insurance agency) which supports projects in unusual destinations.

MIGA is a member of the World Bank Group Mandated 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

POLITICAL RISK COVER WITH CRESCO

CRESCO’S ASSISTANCE TO CLIENTS IN RESPECT OF MIGA PRODUCTS COMES AT NO ADDITIONAL COST TO THE CLIENT AND STANDARD MIGA RATES WILL APPLY.

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.

MIGA ADVANTAGE

17 March 2014

Contents:

About CRESCO

Market Overview – Iron Ore Projects in

Africa




This Asset Class


Questions

MARKET OVERVIEW

8

Iron Ore Projects in Africa (seldom on the coast)

OVER 32 PROJECTS IN FEASIBILITY AND PREFEASIBILITY STAGE ACROSS AFRICA

THE IRON-ORE DEPOSITS IN WEST AFRICA ARE SAID TO BE OF A HIGH GRADE, WITH LOW IMPURITIES AND ENTAILING LOW PROCESSING COSTS

COUNTRIES INCLUDE:

• CAMEROON

• LIBERIA

• GUINEA

• MAURITANIA

• MOZAMBIQUE

• NAMIBIA

• REPUBLIC OF CONGO

6 March 2014 Source: Raw Materials Data

IRON ORE PROJECTS IN AFRICA

FEASIBILITY PROCESS & FINANCE

THE PROJECT APPEARS TO BE IN BFS STAGE, CERTAIN AREAS IN JUST FINISHED PFS AND CERTAIN AREAS QUITE ADVANCED

NEED TO BRING ALL AREAS UP TO SAME LEVEL AND ENGAGE WITH LENDERS ON PROPOSED FUNDING STRUCTURE – COMMERCIAL ISSUES TO BE FINALISED A.S.A.P

KEY INTERACTION BETWEEN TECHNICAL TEAM AND FUNDING TEAM TO UNLOCK “ECA” OR OTHER FINANCE INSTRUMENTS

KEY POINTS

Done

- Partially

complete - Certain

areas BFS, certain PFS

Funders to confirm final contract approach - EPC - Split Turnkey - EPCM

- Link to

loan docs and equity inputs

-Run in parallel with BFS completion

1.

2.

3.

4.

5.

17 March 2014

Contents:

About CRESCO


Africa




This Asset Class


Questions

IRON ORE NOT JUST ABOUT THE MINING ASSET

Different financing approaches for all asset classes

EACH ASSET HAS OWN FINANCING REQUIREMENT

Iron ore (similar to coal) requires large scale infrastructure

2+8 year tenor norm

Less sensitive to interest rates

Combination of: – ECA – DFIs – Commercial

banks Asset and working

capital facilities Project Financed on

limited recourse basis (as much as possible)

Mining Asset

2+12 year tenor norm if coal p/station

Sensitive to interest rates

Combination of:

– ECA

– DFIs

– Commercial banks

Need a strong off take (PPA/ supply agt) Government involvement

Power / Energy Asset

2+14 year tenor norm


Large scale operator

Combination of:

– ECA

– DFIs

– Commercial banks

Needs government support (guarantees

Rail Asset

2+16 year tenor norm


Combination of: – ECA – DFIs – Commercial

banks Full government

(Finance Ministry) Concession type

structure Use of MIGA to

credit enhance

Port Asset

TONKOLILI IRON ORE PROJECT - SIERRA LEONE

Financing arrangements from Standard Bank of South Africa Ltd. worth a combined $350 million

$250 million secured loan facility

$100 million revolving credit facility

Debt Facility

Issued $350 million in convertible bonds

$1.5 billion investment from China's Shandong Iron and Steel Group in exchange for a 25 percent stake

The three-phase project has put in place new rail and seaport infrastructure to export the extracted ore

African Minerals' on-site work has also set the framework for replacing existing power infrastructure — an inefficient oil-fired plant, supplied by oil shipments that arrived by rail, with a cleaner, more reliable hydroelectric facility that can better shoulder the power burden.

Other funding sources

Infrastructure

THE CHINESE COMPANY'S BUY-IN ALSO STIPULATED A DISCOUNTED OFFTAKE DEAL THAT GIVES IT BETWEEN 2 MILLION AND 10 MILLIONS TONS OF TONKOLILI IRON ORE THROUGH THE PROJECT'S FIRST PHASE

AFRICAN MINERALS LTD.

LONDON LISTED COMPANY INVESTING IN SIERRA LEONE

NOT AFRICAN BUT SALIENT FEATURES: ROY HILL IRON-ORE PROJECT

Finalising a $7.8-billion financing deal

Includes a working capital facility of about A$600-million

Debt Facility

Around $3 billion from commercial banks.

Syndicate of 14 banks from Australia, Japan, China and Europe

Export credit agencies (ECAs) including Export-Import Bank of the United States, Export Import Bank of Korea (KEXIM), Japan Bank for International Cooperation (JBIC) and Nippon Export & Investment Insurance (NEXI) are backing Roy Hill with guarantees and direct loans

Included in the financing was a yuan tranche provided by Industrial and Commercial Bank of China (ICBC) and Bank of China to pay for equipment from China

Source

ECA’s

INFRASTRUCTURE CONSIDERATIONS INCLUDE A 344 KM RAIL LINE AND PORT FACILITIES

AFRICAN PROJECTS COMPETING FOR FINANCE

16

Financed Iron Ore Projects in Africa stiff competition

VERY FEW FINANCED IRON ORE PROJECTS IN AFRICA

SIGNIFICANT NUMBER OF PROJECTS IN FEASIBILITY STUDY PHASE ALONG WITH FEASIBILITIES ON LINKED / ASSOCIATED INFRASTRUCTURE PROJECTS

STIFF COMPETITION BY FINANCE AND UNLOCKING “LONG TERM / “SOFT” FINANCE FOR GOVERNMENTS

UNFORTUNATELY AFRICAN GOVERNMENTS ALSO NOT CREDIT WORTHY OR STABLE

17 March 2014

Source: Raw Materials Data

17 March 2014

Contents: About CRESCO


Africa




This Asset Class


Questions

FINANCING CONSTRAINTS

Power – Utility – Co-gen / Co-cycle

Transportation

– Rail – Airports

Telecoms

– Broadcast / Fixed – Cellular (‘Rule of 3’)

Oil and Gas

– Upstream – Pipelines

Mining

– Exports – Coal / Iron Ore – Gold / Platinum

Financing Iron Ore Mining Projects

• COMPLEXITY AND EASE OF PROJECT FINANCE, DEPENDS ON MITIGATION OF RISK AND GOOD PROJECTS WITH FIRM MARKET OFF TAKES

GOOD PROJECT FINANCE TARGETS

DIFFICULT PROJECT FINANCE TARGETS

• MINING IS NOT DIFFICULT TO PROJECT FINANCE DUE TO AVAILABILITY OF MARKET OFF-TAKE

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

19 16 PROJECT RISK REVIEW AND ASSESSMENT OFF KEY RISKS

PARTICIPANT/ SPONSOR PARTICIPANT/ SPONSOR

ENGINEERING ENGINEERING COMPLETION COMPLETION

OPERATING MANAGEMENT OPERATING MANAGEMENT

OPERATING TECHNOLOGY OPERATING TECHNOLOGY

OPERATING COST OPERATING COST

SUPPLY SUPPLY MARKET MARKET INFRASTRUCTURE INFRASTRUCTURE

ENVIRONMENTAL ENVIRONMENTAL POLITICAL POLITICAL FORCE MAJEURE FORCE MAJEURE

FOREIGN EXCHANGE FOREIGN EXCHANGE

SYNDICATION SYNDICATION FUNDING FUNDING LEGAL LEGAL

Within

Control of

the

Company

Outside of

Company’s

Control

Within

Financier’s

Control

Completion risk:

• EPC contracting structure

to mitigate along with

proper technical design

and integration

Supply risk:

• Fuel / supply agreement

linkage to long term

usage

• Other key supply

Market Risk (Off-take):

• Iron ore off take

• Power

KEY RISKS CAN BE MITIGATED CONTRACTUALLY WITH BOTH EXTERNAL AND INTERNAL STAKEHOLDERS KEY RISKS CAN BE MITIGATED CONTRACTUALLY WITH BOTH EXTERNAL AND INTERNAL STAKEHOLDERS

Funding Risk:

• Long term finance /

match currency funding /

lower rates

16 Risk Project Finance Methodology

19


20

Even through Iron Ore production projected to increase – similarly competing projects

OFF TAKE RISK IS KEY AND THUS REQUIREMENT FOR A PORTION OF THE OFF TAKE TO BE UNDERWRITTEN BY LARGE CREDIT WORTHY CUSTOMER (AT LEAST FOR DEBT PERIOD)

HOPEFULLY WEST AFRICAN SUPERIOR PRODUCT WILL CREATE THE IMPROVED DEMAND

17 March 2014

Source: SNL Metals & Mining presentation Raw Materials Data


21

Similarly “fixing” a stable iron ore price for financing purposes for loan tenor (need cap and floors)

OFF TAKE RISK IS KEY AND THUS REQUIREMENT FOR A PORTION OF THE OFF TAKE TO BE UNDERWRITTEN BY LARGE CREDIT WORTHY CUSTOMER (AT LEAST FOR DEBT PERIOD)

HOPEFULLY WEST AFRICAN SUPERIOR PRODUCT WILL CREATE THE IMPROVED DEMAND

17 March 2014

Source: SNL Metals & Mining presentation Raw Materials Data

TYPICAL COMPLEX PROJECT FINANCE STRUCTURE

Typical Mining project – similar to Energy

PROCESS VERY LEGALLY INTENSE AND REQUIRE A STRONG LEGAL REGIME

Source: Norton Rose presentation to IPFA March 2012

NUMBER OF STAKEHOLDERS (SPECIFICALLY LINKED TO INFRASTRUCTURE)

Regulatory regime / framework

O&M at operating levels for Junior Miners

17 March 2014



Africa




This Asset Class


Questions

EXPERIENCE IN IRON ORE MINING IN AFRICA

Iron Ore mining major houses generally can take a longer term view on returns / viability

POST FUNDING PRE FUNDING

Operations

Commission Implementation

/ construction

Fund

raising

Bankable

Feasibility

Pre-

Feasibility Concept

Fin

an

cia

l C

lose

Financial

Completion

Technical

Completion

Financial Investors • Long term returns on iron ore generally high enough to satisfy investors (whilst

considering country risk, local currency). • Generally projects require at least [20%] equity returns (also country specific) • Investment appetite will vary with market outlook • Difficult to match every changing market outlook with 12 year financing needs

Market Outlook • Steel demand • Demand from China • Future price • Offtake agreements

ATTRACTING INVESTMENT IN AFRICA

Some key “stability” considerations to ensure an improved investment climate for attracting further investment in Africa

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

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

POSITIVE STABILITY CONSIDERATIONS

NEGATIVE CONSIDERATIONS

17 March 2014



Africa




This Asset Class


Questions

POLITICAL RISK INSURANCE

Provides political risk insurance

cover for long term (15 to 20

years)

Pricing 1 to 1.5% sector

dependent

Provides “inherent” credit risk

cover if counterparty is

Sovereign or sub sovereign

MIGA

ECIC

MOST INVESTORS REQUIRE POLITICAL RISK COVER

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.

South African Export Credit

Insurance supporting SA

contractors – 1.5% annualised

costs including Commercial

cover.

Total – R1.5bn exposure (31

March 2013).

Tenors limited to 12 years.

Office Details: 1st Floor 267 West Building 267 West Avenue Centurion Gauteng South Africa

Tel: +27 12 663 3660 Fax: +27 12 663 3651

THANK YOU

Robert Futter

Director

CRESCO Project Finance

+ 27 82 88 11 870

Robert is a Director at

CRESCO Project Finance and

has significant Mining and

financing experience across

the continent.

www.crescopf.co.za

Questions?

Business

Robert Futter, Cresco Project Finance