Day 1 - Financing Mining Projects PDF

MINING
Financing Mining Projects

September 16, 2010
Vancouver, BC, Canada
2010 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Introduction
Facilitator:
Peter Gray, Partner, KPMG NYC
Speakers:
Ron Thiessen, Chief Executive Officer, Hunter
Dickinson
Tony Giardini, Chief Financial Officer, Ivanhoe Mines
Dan Wilton, Managing Director, Head of Global Mining
& Metals, National Bank Financial Inc.
An Overiew
Peter Gray,
Partner,
KPMG NYC
Financing in Mining
Advising Through the Cycle
Growth
Client issues
I need to deliver the
synergies and integrate
I need to acquire at the

right price structure the
deal?
I need to align the cost

base with falling revenues
I need a
strategy
for growth
I want to sell
non-core assets
I need to substantially
restructure the business
model and operating model
I need more
capital
Corporate Finance,
Integration,
Sell Side Due
Operational Due
Diligence, Carve Out
I need to avoid
Diligence, Working
/ Vendor Assistance,
I need help
insolvency
Capital Mgmt
M&A Tax
I
need
help
with
a
getting through
Financial &
transformational
the bankruptcy
Business Due
growth strategy
Corporate Finance, IPO Assistance
process
Restructuring,
Diligence, M&A
Lender Due
Tax, Valuation
Financial & Business Due
Strategy
Diligence, Debt
Time
I need to make
Consulting
I need to
Diligence, Valuation, M&A Tax
Advisory
disposals
refinance
Strategy Consulting,
Corporate Finance,
Performance & Technology
Sell Side Due
Diligence, Carve Out /
Vendor Assistance,
Corporate Finance, Lender Due
Valuation
Restructuring,
Diligence, Tax, Debt Advisory
Fresh Start
Accounting
Assistance, Lender
Due Diligence, Tax,
Debt Advisory
I want to make
a series of
acquisitions
Recession Value propositions

Financing Market Trends

Commercial Loan Maturities
Corporate Debt Maturities
1,600,000
1,400,000
1,200,000
800,000
600,000
400,000
200,000
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
0
1990
$M
1,000,000
Note: Maturities based on total offered amount

Source: Cap IQ
Financing - Market Trends

Significant IPO Backlog
30
140
Backlog
Pricings
Filings
Withdrawn
25
100
80
15
60
10
40
03/09
04/09
05/09
06/09
07/09
08/09
09/09
12/09
01/10
02/10
05/10
06/10
04/10
02/09
03/10
01/09
11/09
12/08
10/09
11/08
Withdrawn
10/08
Filings
09/08
0
08/08
0
07/08
06/08
20
Pricings
Source:
20
05/08
Number of deals
120
12
10
13
12
16
10
14
13
15
10
13
23
24
20
12
11
William Blair Merger Tracker, June 2010
Global PE Activity in Mining (2009-10)

1,500
30
25
1,200
600
1,408
16
15
9
820
300
25
10
1,048
137
0
Q1 2009
Q2 2009
Deal value
Q3 2009
Q4 2009
20
15
10
172
394
Q1 2010
Q2 2010
There were a total of 67 PE deals announced
units
900
18
in mining for a total value of $3.4 billion in 2009

and 26 deals for $566 million in 2010 these
include both pending and closed deals
5
0
Size of Mining Deals by Value (2009-YTD 2010)(2)

Number of Deals < $250mn
Number of Deals from $250mn - $1bn
30
18
10
12
6
0
2009
2
1
1
0
YTD 2010
2009
YTD 2010
Number of Deals
23
Number of Deals
Number of Deals
24
Number of Deals > $1bn
0
2009
YTD 2010
In 2009-10, the number of small deals (< $250
million), was the highest, with a total of 33 deals

Note: (1) Deals announced during the period; (2) Number of deals with disclosed values
Source: (1) Capital IQ;(2) PWC Mining Deals Report, 2009 Annual Review
There was only one PE deal over $1 billion
during 2009
Introducing Todays Panelists
Tony Giardini
Ronald Thiessen
Dan Wilton
Chief Financial Officer
Chief Executive Officer
Managing Director, Head

of Global Mining & Metals
Tony Giardini ,
Chief Financial Officer,
Ivanhoe Mines
Overview
Capital Markets Fundamentals
Financing Philosophy
Sources of Financing
Different stakeholders
Timing considerations
Financing Philosophy
(an example)
Maintain a strong balance sheet
Maintain investment grade ratings
Maintain a strong standby facility
Minimize the after tax cost of debt
Avoid issuing shares unless the Company can
demonstrate a long-term need for equity capital
Unsecured corporate debt
Use project financing to mitigate political risk.
Sustain dividends at 5 to 10% of operating cash flow
Divest non-core assets
10
Sources of Financing
Issue
Equity
Issue
Bonds
Cut
Exploration
Manage
Capex
Sell
Non-Core
Manage
Assets
Working
Capital
Selective
Sale
Core
Assets
Hard
Cut
Dividends
Easy
11
Financing Sources
Equity Issue
Debt
Fixed Rate Debt
Short Term Debt (e.g. Commercial Paper)
Project Financing
Hybrid Securities (e.g. Convertible Bonds)
KPMG International Cooperative (KPMG International), a12
Swiss entity. All rights reserved.
12
Financing Spectrum
Decreasing Economic Cost
Increasing Equity Content
Stock
Convertible
Hybrids
Mandatory and/or
possible conversion
Convertible
Debt
Possible
conversion
Long Term
Debt
No
conversion
Short Term
Debt
No
conversion
Standard & Poor's Equity Score

100%
Equity
50% - 80%
-50%
-80%
-100%
Pure Debt
13
Type of Equity Offering

Comparison of Bought versus Overnight Marketed Offerings
Factors to consider include whether investors are familiar with the Company.
In which case, a fully marketed transaction is not necessary. The Company can
successfully proceed with an equity offering either on a bought deal or an
overnight marketed offering.
The following factors should be considered in determining the optimum offering
strategy:
Overnight
Bought
Marketed
Deal
Market Risk
Nil
Size of Deal
Access to U.S. Shareholders
Access to Global Shareholders
Low
Medium
High
Time to Completion
Cost of Deal
14
Overview of Debt Financing Alternatives
New Debt
Convertible
Zero Coupon
Floating rate
Project Financing of
New Development
Rationale
Number of structuring
alternatives available to
optimize cost vs. flexibility
trade-off
Likely to be the cheapest
source of financing vs. project
level
Considerations
Interest expense will be
dilutive to CEPS until
developments ramp-up
Absorbs debt capacity
for external growth
opportunities
Rating Agency Impact

Depending on issue
size, may trigger
negative consequences
Reduced (or no) periodic cash If converted, dilution to

Will be treated as
drain on Company
shareholders
straight debt by
agencies
No impact on CEPS dilution
until conversion
Depending on size,
may trigger ratings
If converted, equity issued at
downgrade
an attractive price given
current stock momentum and
conversion premiums available
Meaningful proceeds available Only short-term funding Some or all debt may be
given size and scale of
available until
treated as Company
projects
construction is complete
obligations even though
non-recourse
Principal payment grace
Loan will need to be
period available until end of
refinanced upon
construction
construction
completion
Interest payments made
from reserve fund deducted Will likely need
from gross proceeds
Company guarantee
15
What is Project Finance?

Project Finance is:
Based on specific project without sponsors corporate guarantees
(non-recourse or limited recourse finance)
Based on the future cash flow projected to be generated by the
project rather than the value of its assets or analysis of historical
financial results
Based on inter-linked contract structures/secure cash flow that
allows a balanced allocation of risk between the parties
Basic requirements for Project Financing:
An independent economic unit with internally generated cash flows
Financially and commercially viable project
Highly predictable long-term revenue stream
Contained risk profile
16
Borrower Rationales For Using Project

Finance
Risk limitation from the investors point of view
Non recourse means that the investor does not guarantee the
repayment of the debt risk is therefore limited to the amount of
equity invested
Isolates specific risks from investors balance sheet
The company usually created in the form of a joint venture that
enables to spread risks by combining expertise (e.g. local +
technical ; construction + operating ; operating + marketing)
Comprehensive security structure and relatively predictable cash
flows facilitate very long term finance, that is necessary if the
assets have a high capital cost that cannot be recovered over
short term
Oil gas and minerals projects financings usually have shorter terms
(10-15 years) because the reserves extracted deplete more quickly
17
Borrower Rationales For Using Project

Finance
Long term finance fosters high leverage (debt / equity ratio)
Minimizes investment from sponsors own resources
Improves the return for the sponsors (debt cheaper than equity)
Project Finance contributes to increase an investors borrowing capacity
Non recourse finance raised by a project company is not normally counted
against the investors corporate credit lines
Improves the investors ability to undertake several major projects
simultaneously
Enhances credit
Where the offtaker has a better credit standing than the equity investor
May allow debt to be raised for the project on better terms than the
investor would be able to obtain from a corporate loan
Projects can be large in relation to small and medium sized corporates
Increases flow of inward investment into developing countries
18
Contractual Structures
19
Contractual Structure
Role of the contractual structure
Covers all aspects and phases of the project:
Concession, Financing, Construction, Operation
Defines each stakeholder's role, responsibilities and
liabilities
Defines apportionment of risk between stakeholders
Foresees potential adverse events and prescribes
penalties and remedies in case of non-performance
Creates the foundation upon which lenders can
confidently advance funds to a paper company
20
Key Financial Ratios

Investors Returns
Internal Rate of Return on Equity invested (IRR): average annual return received
from dividends over the life of the project
Payback Year: year when equity invested is paid back by cumulative dividend
distributions from the project
Lenders Ratios
A monitoring tool for Senior Lenders
Also determines cash flow to be distributed to the Shareholders after meeting all
obligations
Periodic Debt Service Cover Ratio (DSCR): assesses the level of cashflow
available for debt service against the level of debt service payable (interest and
principal repayments)
= Cash flow available for debt service
debt service
Loan Life Cover Ratio (LLCR): assesses the level of cash flow generated by the
project over the life of the loan which would be available to repay the loan principal
= Net present value of future cashflow for debt service over life
life of the loan
debt outstanding as at the calculation date
21
Project Finance: Key Risks
22
Cost of Financing No Free Lunch

COUNTRY RISK
Political risk
Foreign exchange convertibility
PROJECT RISK
Commercial Risk
Price
Operating Risk
Construction
Operating
measured through
sovereign risk
Assessed
through
coverage, loan
tenure, debt:
equity, sponsor
guarantees,
sponsor track
record
KPMG International Cooperative (KPMG International), a23
Swiss entity. All rights reserved.
23
Mine Development Challenges

Ron Thiessen ,
Chief Executive Officer,
Hunter Dickinson
24
Mine Development Challenges

Opportunities for value creation in the mining industry are at their highest during
the exploration and discovery phase following which come the challenges of dealing
with reality.
Source: DavidJ.Hall October18th 2006.
25

Dan Wilton ,
Managing Director, Head of Global
Mining & Metals,
National Bank Financial Inc.
26
Evolution of a Mining Company

Critical Decision
Point
Seed
Exploration
Development Construction Production

Lower
Risk
Higher
Risk
Secure
Project
Discovery
Production
Decision
Production
27
Financing Alternatives
Seed
Exploration
Development
Construction
Higher Risk
Higher Cost
Production
Lower Risk
Equity
Royalty
Convertible Debt
Mezzanine Debt
High Yield Debt
Lower Cost
Project Finance Debt
Joint Venture
28
Canadian Equity Market Overview

Continued strong equity markets supporting mining
companies across the risk spectrum
2009 dominated by large cap financings
New Issues History by Quarter ($ billions) (1)
Common Share
Converts
Flow Through
Unit
Special Warrant
$7.39
$8
$6
$4.29
$4.38
$4.10
$4.54
$4.50
$4
$2.93
$2.15
$2
$0.59
$0.15
$2.94
$2.71
$1.74
$0.95
$0.70
$0
Q107
Q207
Q307
Q407
2007
$13.4Bn
Q108
Q208
Q308
2008
$7.7Bn
Q408
Q109
Q209
Q309
2009
$17.8Bn
Q409
Q110
Q210
Qtr to
Date
YTD
$5.1Bn
(1) Source: NBF database. As at September 7, 2010
29
Recent Trends in Mining Capital Markets

Increasing project sizes necessitates creative
financing solutions
Almost unlimited equity available for the right projects
Osisko, Detour, Andean
Equity markets willing to fund large asset acquisitions
Torex, Primero
Traditional project debt capital is scarce
JV opportunities abound
but be careful what you wish for!
30
Key Lessons Learned

Focus on your project, not your share price
Under-promise and Over-deliver
Raise capital when it is available
Keep it simple
Keep a conservative capital structure
Community/Government relations is a strategic
function
Dont be afraid to share information
Think and act BIG
31
Questions
32
Questions
What challenges do mining companies face in
financing or re-financing their maturing debt in todays
economy?
33
Questions
Where will the equity come from for mining and how
do mining companies balance the risk/return equation
for shareholders?
34
Questions
What is the present and future for Project Finance in
Mining?
35
Questions
What role do Multilateral Agencies play in Mining
Finance are they competitors or complementary to
Mining Banks?
36
Questions
We have continued to see the emergence of Sovereign
Wealth Funds and Private Equity as part of the
funding/finance mix in mining. What are the
implications for mining companies? For Banks?
37
Questions
Regionally Latin America and Australia continued in
2009/10 to be the major destinations for exploration
spend. Where (and why) will companies spend their
exploration and development dollars in the future?
What is the prospect for developing and financing
major projects in Asia and Africa?
38
Questions
Political Risk and expropriation are often held up as
primary risks of Developing or Emerging Markets.
What in your experience have proven to be the most
significant risks and challenges in developing or
financing projects in emerging countries?
39
Questions
The Fraser Institute Survey places Russia and Brazil
as among the higher ranking countries from a
composite Policy and Mineral perspective. China and
much of Africa trail in many measures. What needs to
happen politically or from a risk perspective to
improve the attractiveness of China and Africa as
Mining investment drivers?
40
Questions
Cash is king is it cheaper to buy than build?
Joint Ventures and Earn-ins friend or foe?
41

Audience questions
42
Financing Services
Advising through the cycle
Growth
Client issues
I need to deliver the
synergies and integrate
I need to acquire at the

right price structure the
deal?
I need to align the cost

base with falling revenues
I need a
strategy
for growth
I want to sell
non-core assets
I need to substantially
restructure the business
model and operating model
I need more
capital
Corporate Finance,
Integration,
Sell Side Due
Operational Due
Diligence, Carve Out
I need to avoid
Diligence, Working
/ Vendor Assistance,
I need help
insolvency
Capital Mgmt
M&A Tax
I
need
help
with
a
getting through
Financial &
transformational
the bankruptcy
Business Due
growth strategy
Corporate Finance, IPO Assistance
process
Restructuring,
Diligence, M&A
Lender Due
Tax, Valuation
Financial & Business Due
Strategy
Diligence, Debt
Time
I need to make
Consulting
I need to
Diligence, Valuation, M&A Tax
Advisory
disposals
refinance
Strategy Consulting,
Corporate Finance,
Performance & Technology
Sell Side Due
Diligence, Carve Out /
Vendor Assistance,
Corporate Finance, Lender Due
Valuation
Restructuring,
Diligence, Tax, Debt Advisory
Fresh Start
Accounting
KEY:
Assistance, Lender
Mature T&R Offerings
Due Diligence, Tax,
Developing T&R Offerings
Debt Advisory
Not a current T&R Offering
Non-T&R KPMG Offerings
I want to make
a series of
acquisitions
Recession Value propositions

43
44
45

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MINING

Financing Mining Projects

I need to acquire at the

I need to align the cost

Recession Value propositions

Financing Market Trends

Note: Maturities based on total offered amount

Financing - Market Trends

William Blair Merger Tracker, June 2010

Global PE Activity in Mining (2009-10)

There were a total of 67 PE deals announced

in mining for a total value of $3.4 billion in 2009

Size of Mining Deals by Value (2009-YTD 2010)(2)

Number of Deals from $250mn - $1bn

Number of Deals > $1bn

In 2009-10, the number of small deals (< $250

million), was the highest, with a total of 33 deals

There was only one PE deal over $1 billion

Introducing Todays Panelists

Chief Financial Officer

Chief Executive Officer

Managing Director, Head

Increasing Equity Content

Standard & Poor's Equity Score

Type of Equity Offering

Overview of Debt Financing Alternatives

Rating Agency Impact

Reduced (or no) periodic cash If converted, dilution to

What is Project Finance?

Borrower Rationales For Using Project

Borrower Rationales For Using Project

Key Financial Ratios

Project Finance: Key Risks

Cost of Financing No Free Lunch

Mine Development Challenges

Mine Development Challenges

Source: DavidJ.Hall October18th 2006.

Financing Mining Projects

Evolution of a Mining Company

Development Construction Production

Project Finance Debt

Canadian Equity Market Overview

(1) Source: NBF database. As at September 7, 2010

Recent Trends in Mining Capital Markets

Key Lessons Learned

Financing Mining Projects

I need to acquire at the

I need to align the cost

Recession Value propositions

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