Rob Futter, CRESCO Project Finance (Pty) Ltd - Mining and Infrastructure - Risks and Financing Considerations

Coal Mozambique

Mining / Infrastructure

Risks & Financing considerations

“Your project development partner, delivering value through a multi-skilled team”

15th July 2013

CRESCO COAL MOZAMBIQUE CONFERENCE Print Date: Wednesday, July 17, 2013 • Page 2

AGENDA

RECAP ON TOPIC

Raising capital for SADC coal projects

• Recent financings in coal projects in SADC

• Minimising risk – Key risk areas in the Southern African context and

strategies for safeguarding mitigating against them

• Attracting overseas investment for Southern Africa coal projects –

How are foreign investment patterns developing?

• Coal mining & inter-relationship with Energy Projects

• Coal Asset valuations and linkage as equity to the financing approach


AGENDA

ABOUT CRESCO

COAL & ENERGY - INTERRELATIONSHIP

RECENT FINANCING EXPERIENCES IN MINING & ENERGY

MINIMIZING RISK

ATTRACTING INVESTMENT IN SADC COAL PROJECT


CRESCO’S MARKET NICHE

CRESCO bridges the gap between a concept and reality to achieve a

viable sustainable project

CRESCO has a multi-skilled team to assist investors in securing

and developing high quality businesses and projects

Helping you

bridge the

gap

Concept

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

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

Key Services

• 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

Key Industries

• Mining (Coal, Gold, Chrome etc)

• Infrastructure

• Rail

• Telecoms

• Mineral Beneficiation

• Traditional & Renewable Energy

• Wood & Paper

• PPP structures

Education

Container Scanner

Fleet management


EXPERIENCE IN THE MINING SECTOR

The mining sector does not seem to mirror other industry sectors in

terms of financing norms or processes (reliability of coal resource)

POST FUNDING PRE FUNDING

Operations Commission Implementation

/ construction

Fund

raising

Bankable

Feasibility

Pre-

Feasibility Concept

Diagnosis

Fin

an

cia

l C

lose

Financial

Completion

Technical

Completion

The deal process and key milestones

Strategy & structuring

Marketing to investors

Due diligence

Negotiation

Post-closing support


MIGA is a member of the World Bank Group

Mandate 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

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.

CRESCOs MIGA ADVANTAGE

CRESCO is the appointed agent for MIGA (world bank political

insurance agency) which support projects in unusual destination

CRESCO / MIGA Agency

CRESCO s assistance to clients in respect of Miga products comes at no

additional cost to the client and standard Miga rates will apply.


AGENDA

ABOUT CRESCO



MINIMIZING RISK



MINING / ENERGY INTER-RELATIONSHIP

2 key areas of inter-relationship – 1. Way of “adding value to current

product – 2. Electricity generation or upgrading of commodity

1. Type of coal mining projects in Mozambique

1. Coal mining & energy power projects (Moatize, Riversdale, Ncondezi)

2. South African coal project looking to export through Maputo (Coal of Africa

/ other SA Juniors)

2. Type of Projects in South Africa

1. Coal mining & energy power projects (Exxaro, smaller IPPs)

2. South African coal project looking to export through Richards Bay (BEE

only terminal touted

3. Type of Projects in Botswana

1. Coal mining & energy power projects (Mmamabula, Morupule B)

2. Coal mined for export through Walvis Bay

4. Type of Projects in Zambia

1. Coal / energy power projects (Maamba, other Juniors)

2. No large export potential currently identified (logistics out difficult)


MINING / ENERGY INTER-RELATIONSHIP

Typical projects seen in SADC require large government involvement

to assist in infrastructure upgrade - government off take/ support

Key coal mining & energy related projects aspects in SADC

• Coal mines reliant on energy generation for own operations (often not at

the end of an existing “stable” transmission network)

• Coal fired power stations in turn require larger output transmission lines

and grid connections

• Power stations often sell to a combination of private & government off

takers

• Coal mines that are exporting coal require large government infrastructure

in investment

• In South Africa – Eskom & other SoEs providing logistics solutions for own

power stations

• Generally bottleneck to project development – Government supported

infrastructure


AGENDA

ABOUT CRESCO



MINIMIZING RISK



FINANCING YOUR COAL / ENERGY PROJECTS

Complexity and ease of project finance, depends on mitigation of risk

Good projects – firm market off takes / reliable resource, infrastructure

Power – Utility – Co-gen / Co-cycle

Transportation – Rail – Airports

Telecoms

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

Oil and Gas

– Upstream – Pipelines

Mining – Exports – Coal – Gold / Platinum

Good Project Finance Targets Difficult Project Finance Targets

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


FINANCING INVESTMENT CRITERIA / PERCEPTION OF MOZAMBIQUE – COAL MINING

Selected list of current projects in SADC – complete list over 100 long

with majority of projects in feasibility or exploration phase

Project Commodity Location Project phase Estimate value

Exxaro UCG Project UCG sub-Saharan Africa Concept & Evaluation n/a

China-Africa Sunlight Energy Thermal coal Gwayi, Zimbabwe Evaluation US$21bn

Rukwa coal project Coal Tanzania Evaluation/Exploration US$700m

Mkomolo, Namwele and Muze projectsCoal Tanzania Evaluation/Exploration US$75m

Mmamabulo coal Thermal coal Botswana Evaluation/Exploration n/a

Songo & Mutarara projects Coal Mozambique Evaluation/Exploration n/a

Revuboe cocking coal mine Coking coal Tete, Mozambique Pre-feasibility US$555m

Vlakplaats Thermal coal South Africa Pre-feasibility ZAR32.5m

Ncondezi thermal coal Project Thermal coal Tete, Mozambique Feasibility US$627m

Makhado Project Thermal & coking coal Limpopo, South Africa Feasibility ZAR4.2bn

De Wittekrans Complex Thermal coal South Africa Feasibility ZAR2.042bn

Morupule South Coal Botswana Feasibility US$200m

Boikarabelo mine Coal Waterberg, South Africa Funding A$62.6m

Zambeze Project Coal Tete, Mozambique Construction n/a

Maamba Thermal coal Zambia Construction USD700m

Moatize Coal Project Thermal & coking coal Tete, Mozambique Production US$1.3b

Chirodzi coal mining project Thermal coal Tete, Mozambique Production US$180m

Minas Moatize coking coal project Coking coal Mozambique Production n/a

Benga coal mine Coking coal Mozambique Production US$3b


FINANCING – SOURCE OF FUNDS

Source for coal and coal fired power stations in Africa are primarily in

the top 5 sources with Multilaterals the largest by some way

Source: Global Coal Risk Assessment 2012

Sources of funds (internationally) Multilaterals still provide the

majority of funding (IFC, AdB, EIB

others)

Japan is a large financier

internationally but not seen active

in SADC

US focus on non SADC countries

- Small % in West Africa

• Chinese large providers of

finance (Morupule B, ZESCO,

ZESA and other utilities)


FINANCING – SOURCE OF FUNDS

Although the American banks were the top 4 and over 50% - not seen

very active presence in SADC

Source of funds by Top 20 Commercial banks

Source: Global Coal Risk Assessment 2012


PROJECT FINANCE .VS CORPORATE LENDING

Project Finance “complex” / “costly to implement” – minimum amount

USD25m and off take risk difficult to mitigate for infrastructure

OPERATOR

PROJECT SPONSORS

Financiers central to structuring the deal either unfamiliar or uncomfortable with

the risks posed by energy technologies, some not been in commercial operation

Typical

complex

project

finance

structure

Lack of project finance capacity / experience / Moz exposure has been one of

the barriers to the widespread deployment of energy technologies in

commercial-scale projects.


Extract from presentation – Norton Rose on IPP program for typical structure

updated for Base Load coal Plant structure

Source: Norton Rose

presentation to IPFA

March 2012

1. Internal Electricity sales

2. Shared services

3. Land lease 1. Coal supply agt

2. Water term supply agt

Brown leaf

supply

Mine interface

POSSIBLE PROJECT FINANCE STRUCTURE FOR THE BASE LOAD COAL PROGRAM - ESKOM

The possible Base Load coal project would follow (RSA REIPPP) and

would be structured with many legal agreements


Seeking “quality” / “reliable’ infrastructure to fulfil export contracts

Linked to SA limitations on rail infrastructure

Requiring major upgrades in Maputo / Matola

FINANCING - INVESTMENT CRITERIA / PERCEPTION OF MOZAMBIQUE

Mining is now a major investment focus – coal being key area of

interest – with the 3 large projects in Tete key focus

Type of coal mining projects in Mozambique

1. Moz coal mining projects (Moatize, Riversdale etc)

2. South African coal project looking to export through Maputo (Coal of Africa

/ other SA Juniors0

1. Moz Coal Mining projects

Large projects requiring significant capital

Need to build own infrastructure to allow reasonable “all in cost of transport”

Projects promising for many years – now need to deliver

2. South African Coal Projects - Use of Moz export potential


FINANCING - INVESTMENT CRITERIA / PERCEPTION OF MOZAMBIQUE – COAL MINING

2 different approaches taken by promoters (large corporate with vast

resources - Vale) vs. Junior mining

Large promoters

Don’t generally require Project Finance (perhaps some structuring)

Large enough to influence government policy

Can start production without full financing in place

Ability to also ‘subsidise” the required infrastructure (i.e. rail & road link)

Can take a longer term view on returns / viability

Junior miners

Focused on ensuring that share price ‘creeps steadily up”

Although portion equity financed – requires project finance debt to fully

unlock opportunity

Always considering the large sale to Mining Major (short term decisions)

Cannot assist in any major infrastructure funding


POLICTICAL RISK INSURANCE FOR MOZ

Mozal project opened up Moz as a investment destination for large

mega projects – however most investors still require political risk

Key coal resources and links to ports

South African Export Credit

Insurance supporting SA

contractors – 1.5% annualised

costs including Commercial cover

Mozal – R2.1bn exposure

Non Mozal R1.6bn

Tenors limited to 12 years and

large existing exposure in Moz

Tete

Hwange

Limpopo

ECIC (4 active projects)

Provides political risk insurance

cover for long term (15 to 20 yrs)

Pricing 1 to 1.5% sector dependent

Provides “inherent” credit risk

cover if counterparty is Moz Govt /

Sovereign or sub sovereign

MIGA (10 active projects)

R2.1bn exposure


AGENDA

ABOUT CRESCO



MINIMIZING RISK



RISKS ANALYSIS OF YOUR MINING PROJECTS

Each of the key project risks need to be mitigated – 3 key risks of

particular focus to satisfy debt & equity funders

WITHIN THE

PROMOTERS

CONTROL

OUTSIDE THE

PROMOTERS

CONTROL

WITHIN THE

FINANCIER’S CONTROL

1.Operating: Technical

2.Operating: Cost

3.Operating:

Management

4.Sponsor/Participant

5.Engineering

6.Completion

1. Resource Profile

2.Market

3.Infrastructure

4.Environmental

5.Political

6.Force Majeure

7.Foreign Exchange

1.Syndication

2.Interest / Funding

3.Legal

Set out below are the key risks that we experienced to be difficult to mitigate



The commodity boom / resource grab has seen many “one” man

bands now developing projects – but needing assistance



/ construction

Fund

raising

Bankable

Feasibility

Pre-

Feasibility Concept

Fin

an

cia

l C

lose

Financial

Completion

Technical

Completion


Financial Investors

• Entrenching rights earlier than later

• Very beneficial as provides fund to do correct work

• Promoters battle with “huge” loss in equity

Engineering companies as Investors

• Engineering companies entrench use of own services by taking equity stakes

• Many companies are seeking equity upside – not just services

• Problems with related party transactions – i.e. Equity participant, basic

engineering, EPC contractor, O&M contractor



Many promoters / contractors under estimate how much is needed to

complete a “pure” project financing – limited recourse



/ construction

Fund

raising

Bankable

Feasibility

Pre-

Feasibility Concept

Fin

an

cia

l C

lose

Financial

Completion

Technical

Completion


Funding terms

• High gearing levels previously experienced no longer available

• Loan tenors linked to 75% of resource life

Funding issues

• Moz Commercial banks have limited capacity and risk profile for funding

• South African banks are taking up difference but country limits for Moz

• Development finance institutions are plugging the gaps / focus on infrastructure

• DFIs can offer both equity and debt + many infrastructure funds seeking equity


RISKS ANALYSIS OF INFRASTRUCTURE PROJECTS

Infrastructure is harder to finance requiring large amounts, long term

off takes / market support linked to long term finance

WITHIN THE

PROMOTERS

CONTROL

OUTSIDE THE

PROMOTERS

CONTROL

WITHIN THE

FINANCIER’S CONTROL

1.Operating: Technical

2.Operating: Cost

3.Operating:

Management

4.Sponsor/Participant

5.Engineering

6.Completion

1. Supply

2.Market / Traffic

3.Infrastructure

4.Environmental

5.Political

6.Force Majeure

7.Foreign Exchange

1.Syndication

2.Interest / Funding

3.Legal

Set out below are the key risks that we experienced to be difficult to mitigate


EXPERIENCE IN THE INFRASTRUCTURE SECTOR

Infrastructure promoters generally more Govt focused and

supported by contractors “keen” to sell construction services



/ construction

Fund

raising

Bankable

Feasibility

Pre-

Feasibility Concept

Fin

an

cia

l C

lose

Financial

Completion

Technical

Completion


Financial Investors

• Long term returns on infrastructure generally not high enough to satisfy

investors (whilst considering Moz country risk, local currency)

• Generally projects require at least 40 to 50% equity returns

• Institutional investors not yet making large investments in Moz infrastructure

Engineering companies as Investors

• Many Engineering companies preparing feasibilities @ risk

• South African contractors are well set up to unlock this sector

• Generally will sell out at financial close


EXPERIENCE IN THE INFRASTRUCTURE SECTOR

Infrastructure financing is more difficult then mining due to loan

tenors required - whilst trying to limit interest rate pricing



/ construction

Fund

raising

Bankable

Feasibility

Pre-

Feasibility Concept

Fin

an

cia

l C

lose

Financial

Completion

Technical

Completion


Funding terms

• Projects require long term tenors (over 10 years with > 2 years construction)

• Need to leverage off lower US linked interest rates

Funding issues

• Moz Commercial banks have limited capacity and risk profile for funding

• Hard to fund in US currency whilst off take in local currency

• Always the same usual suspects being involved (limited personnel capacity)


AGENDA

ABOUT CRESCO



MINIMIZING RISK




Some key “stability” considerations to ensure an improved

investment climate for attracting further investment in SADC

Positive Stability considerations

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

Negative Considerations

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


CONTACT US

CRESCO offers both services per deliverables, usually on a time &

materials basis, to arranging mandates on a fixed fee basis

Directors contacts Focus area

Robert Futter, Director Projects /

Financial /

Francois Viljoen Energy Focus

[email protected]

[email protected]

+27 (0) 83 704 0335

Office details

Manhattan office Park

16 Pieter Street

Unit 6 South

Ground floor

Centurion

Johannesburg

South Africa

186

+27 (0) 12 665 2612

+27 (0) 12 665 3837

mailto:[email protected]

mailto:[email protected]


© 2006 Electric Power Research Institute, Inc. All rights reserved.

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Rob Futter, CRESCO Project Finance (Pty) Ltd - Mining and Infrastructure - Risks and Financing Considerations