Day 1 - Financing Mining Projects.pdf

0 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.

MINING

September 16, 2010

Vancouver, BC, Canada

Financing Mining ProjectsFinancing Mining Projects



IntroductionIntroduction

Facilitator:Facilitator:Peter Gray, Partner, KPMG NYCPeter Gray, Partner, KPMG NYC

Speakers:Speakers:Ron Thiessen, Chief Executive Officer, Hunter Ron Thiessen, Chief Executive Officer, Hunter DickinsonDickinsonTony Giardini, Chief Financial Officer, Ivanhoe MinesTony Giardini, Chief Financial Officer, Ivanhoe MinesDan Wilton, Managing Director, Head of Global Mining Dan Wilton, Managing Director, Head of Global Mining & Metals, National Bank Financial Inc.& Metals, National Bank Financial Inc.



An OveriewPeter Gray,

Partner,KPMG NYC

An OveriewPeter Gray,

Partner,KPMG NYC



Financing in MiningAdvising Through the CycleFinancing in MiningAdvising Through the Cycle

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 to substantially restructure the business model and operating model

I need to avoid insolvency

I need to make disposals

I need help getting through the bankruptcy process

I need to refinance

I need help with a transformational growth strategy

I want to make a series of acquisitions

I need more capital

I want to sell non-core assets

Growth

Recession

Time

Client issues

Value propositions

Financial & Business Due Diligence, M&A Tax, Valuation

Integration,Operational Due Diligence, Working Capital Mgmt

Restructuring, Lender Due Diligence, Debt Advisory

Corporate Finance, Sell Side Due Diligence, Carve Out / Vendor Assistance,Valuation Restructuring,

Fresh Start Accounting Assistance, Lender Due Diligence, Tax, Debt Advisory

Corporate Finance, Lender Due Diligence, Tax, Debt Advisory

Strategy Consulting, Performance & Technology

Financial & Business Due Diligence, Valuation, M&A Tax

Corporate Finance, IPO Assistance

Corporate Finance, Sell Side Due Diligence, Carve Out / Vendor Assistance,M&A Tax

I need a strategy for growth

StrategyConsulting



Financing Market TrendsCommercial Loan MaturitiesFinancing Market TrendsCommercial Loan Maturities

Corporate Debt MaturitiesCorporate Debt Maturities

Note: Maturities based on total offered amountSource: Cap IQ

0200,000

400,000600,000800,000

1,000,0001,200,0001,400,0001,600,000

1

9

9

0

1

9

9

1

1

9

9

2

1

9

9

3

1

9

9

4

1

9

9

5

1

9

9

6

1

9

9

7

1

9

9

8

1

9

9

9

2

0

0

0

2

0

0

1

2

0

0

2

2

0

0

3

2

0

0

4

2

0

0

5

2

0

0

6

2

0

0

7

2

0

0

8

2

0

0

9

2

0

1

0

2

0

1

1

2

0

1

2

2

0

1

3

2

0

1

4

2

0

1

5

2

0

1

6

2

0

1

7

2

0

1

8

2

0

1

9

2

0

2

0

$

M



0

20

40

60

80

100

120

1400

5

/

0

8

0

6

/

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8

0

7

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0

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o

f

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s

0

5

10

15

20

25

30Backlog Pricings Filings Withdrawn

Financing - Market Trends Significant IPO BacklogFinancing - Market Trends Significant IPO Backlog

PricingsPricings 44 44 22 11 00 00 11 00 00 11 11 22 33 22 00 33 66 1212 1010 44 44 66 1313 1212 88 00

FilingsFilings 1616 99 1010 66 33 00 33 33 22 00 00 11 00 33 66 99 99 1414 1313 1515 1010 1313 2323 2424 2020 66

WithdrawnWithdrawn 55 55 11 55 66 1212 88 1111 22 33 44 88 22 22 22 22 11 33 55 44 22 55 44 33 77 33

Source: William Blair Merger Tracker, June 2010


KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 6

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

Global PE Activity in Mining (2009-10)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 and 26 deals for $566 million in 2010 these include both pending and closed deals

Note: (1) Deals announced during the period; (2) Number of deals with disclosed valuesSource: (1) Capital IQ;(2) PWC Mining Deals Report, 2009 Annual Review

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 during 2009

Number of Deals < $250mn

23

10

0

6

12

18

24

30

2009 YTD 2010

N

u

m

b

e

r

o

f

D

e

a

l

s

Number of Deals from $250mn - $1bn

2

1

0

1

3

2009 YTD 2010

N

u

m

b

e

r

o

f

D

e

a

l

s 2

Number of Deals > $1bn

1

00

1

2

2009 YTD 2010

N

u

m

b

e

r

o

f

D

e

a

l

s

1,408

820137

1,048

172 394

16

10

25

9

1518

0

300

600

900

1,200

1,500

Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010

0

5

10

15

20

25

30

units

Deal value



Introducing Todays PanelistsIntroducing Todays Panelists

Tony Giardini

Chief Financial Officer

Dan Wilton

Managing Director, Head of Global Mining & Metals

Ronald Thiessen

Chief Executive Officer



Tony Giardini ,Chief Financial Officer,

Ivanhoe Mines

Tony Giardini ,Chief Financial Officer,

Ivanhoe Mines



OverviewOverview

Capital Markets Fundamentals Capital Markets Fundamentals Financing PhilosophyFinancing PhilosophySources of FinancingSources of FinancingDifferent stakeholdersDifferent stakeholdersTiming considerationsTiming considerations



Financing Philosophy(an example)Financing Philosophy(an example)

Maintain a strong balance sheetMaintain a strong balance sheetMaintain investment grade ratingsMaintain investment grade ratingsMaintain a strong standby facilityMaintain a strong standby facilityMinimize the after tax cost of debtMinimize the after tax cost of debtAvoid issuing shares unless the Company can Avoid issuing shares unless the Company can demonstrate a longdemonstrate a long--term need for equity capitalterm need for equity capitalUnsecured corporate debt Unsecured corporate debt Use project financing to mitigate political risk.Use project financing to mitigate political risk.Sustain dividends at 5 to 10% of operating cash flow Sustain dividends at 5 to 10% of operating cash flow Divest nonDivest non--core assetscore assets



Sell Non-Core

Assets

Manage Capex

SelectiveSaleCore

Assets

Cut Exploration

CutDividends

Issue Equity

IssueBonds

ManageWorkingCapital Easy

Hard

Sources of FinancingSources of Financing



Financing SourcesFinancing Sources

Equity IssueEquity IssueDebtDebt

Fixed Rate DebtFixed Rate DebtShort Term Debt (e.g. Commercial Paper)Short Term Debt (e.g. Commercial Paper)Project FinancingProject Financing

Hybrid Securities (e.g. Convertible Bonds)Hybrid Securities (e.g. Convertible Bonds)

12



Standard & Poor's Equity Score

Equity Pure Debt

Stock

Decreasing Economic Cost

Increasing Equity Content

ConvertibleHybrids

ConvertibleDebt

Long TermDebt

Short TermDebt

Mandatory and/or possible conversion

Possible conversion

No conversion

No conversion

100% 50% - 80% -50% -80% -100%

Financing SpectrumFinancing Spectrum



Type of Equity OfferingType of Equity Offering

Comparison of Bought versus Overnight Marketed OfferingsComparison of Bought versus Overnight Marketed OfferingsFactors to consider include whether investorsFactors to consider include whether investors are familiar with the Company. are familiar with the Company. In which case, a fully marketed transaction is not necessary. ThIn which case, a fully marketed transaction is not necessary. The Company can e Company can successfully proceed with an equity offering either on a bought successfully proceed with an equity offering either on a bought deal or an deal or an overnight marketed offering. overnight marketed offering. The following factors should be considered in determining the opThe following factors should be considered in determining the optimum offering timum offering strategy:strategy:

Low

Medium

High

BoughtDeal

Overnight Marketed

Time to Completion

Size of Deal

Market Risk

Cost of Deal

Access to U.S. Shareholders

Access to Global Shareholders

Nil



Rationale Considerations Rating Agency Impact New Debt Number of structuring

alternatives available to optimize cost vs. flexibility trade-off

Likely to be the cheapest source of financing vs. project level

Interest expense will be dilutive to CEPS until developments ramp-up

Absorbs debt capacity for external growth opportunities

Depending on issue size, may trigger negative consequences

Convertible Zero Coupon Floating rate

Reduced (or no) periodic cash drain on Company

No impact on CEPS dilution until conversion

If converted, equity issued at an attractive price given current stock momentum and conversion premiums available

If converted, dilution to shareholders

Will be treated as straight debt by agencies Depending on size,

may trigger ratings downgrade

Project Financing of New Development

Meaningful proceeds available given size and scale of projects

Principal payment grace period available until end of construction Interest payments made

from reserve fund deducted from gross proceeds

Only short-term funding available until construction is complete Loan will need to be

refinanced upon construction completion

Will likely need Company guarantee

Some or all debt may be treated as Company obligations even though non-recourse

Overview of Debt Financing AlternativesOverview of Debt Financing Alternatives



What is Project Finance?What is Project Finance?

Project Finance is:Project Finance is:Based on specific project without sponsorsBased on specific project without sponsors corporate guarantees corporate guarantees ((nonnon--recourserecourse or or limited recourselimited recourse finance)finance)Based on the future cash flow projected to be generated by the Based on the future cash flow projected to be generated by the project rather than the value of its assets or analysis of histoproject rather than the value of its assets or analysis of historical rical financial resultsfinancial resultsBased on interBased on inter--linked contract structures/secure cash flow that linked contract structures/secure cash flow that allows a balanced allocation of risk between the partiesallows a balanced allocation of risk between the parties

Basic requirements for Project Financing:Basic requirements for Project Financing:An independent economic unit with internally generated cash floAn independent economic unit with internally generated cash flowswsFinancially and commercially viable projectFinancially and commercially viable projectHighly predictable longHighly predictable long--term revenue streamterm revenue streamContained risk profileContained risk profile



Borrower Rationales For Using Project Finance Borrower Rationales For Using Project Finance

Risk limitation from the investorRisk limitation from the investors point of views point of viewNon recourse means that the investor does not guarantee the Non recourse means that the investor does not guarantee the repayment of the debt repayment of the debt risk is therefore limited to the amount of risk is therefore limited to the amount of equity investedequity investedIsolates specific risks from investorIsolates specific risks from investors balance sheets balance sheetThe company usually created in the form of a joint venture that The company usually created in the form of a joint venture that enables to spread risks by combining expertise (e.g. local + enables to spread risks by combining expertise (e.g. local + technical ; construction + operating ; operating + marketing)technical ; construction + operating ; operating + marketing)

Comprehensive security structure and relatively predictable cashComprehensive security structure and relatively predictable cashflows facilitate very long term finance, that is necessary if thflows facilitate very long term finance, that is necessary if the e assets have a high capital cost that cannot be recovered over assets have a high capital cost that cannot be recovered over short termshort term

Oil gas and minerals projects financings usually have shorter teOil gas and minerals projects financings usually have shorter terms rms (10(10--15 years) because the reserves extracted deplete more quickly15 years) because the reserves extracted deplete more quickly



Borrower Rationales For Using Project Finance Borrower Rationales For Using Project Finance

Long term finance fosters high leverage (debt / equity ratio)Long term finance fosters high leverage (debt / equity ratio)Minimizes investment from sponsorsMinimizes investment from sponsors own resourcesown resourcesImproves the return for the sponsors (debt cheaper than equity)Improves the return for the sponsors (debt cheaper than equity)

Project Finance contributes to increase an investorProject Finance contributes to increase an investors borrowing capacitys borrowing capacityNon recourse finance raised by a project company is not normallyNon recourse finance raised by a project company is not normally counted counted against the investoragainst the investors corporate credit liness corporate credit linesImproves the investorImproves the investors ability to undertake several major projects s ability to undertake several major projects simultaneouslysimultaneously

Enhances creditEnhances creditWhere the offtaker has a better credit standing than the equity Where the offtaker has a better credit standing than the equity investorinvestorMay allow debt to be raised for the project on better terms thanMay allow debt to be raised for the project on better terms than the the investor would be able to obtain from a corporate loaninvestor would be able to obtain from a corporate loan

Projects can be large in relation to small and medium sized corpProjects can be large in relation to small and medium sized corporatesoratesIncreases flow of inward investment into developing countriesIncreases flow of inward investment into developing countries



Contractual StructuresContractual Structures



Contractual StructureContractual Structure

Role of the contractual structureRole of the contractual structureCovers all aspects and phases of the project: Covers all aspects and phases of the project: Concession, Financing, Construction, OperationConcession, Financing, Construction, OperationDefines each stakeholder's role, responsibilities and Defines each stakeholder's role, responsibilities and liabilitiesliabilitiesDefines apportionment of risk between stakeholdersDefines apportionment of risk between stakeholdersForesees potential adverse events and prescribes Foresees potential adverse events and prescribes penalties and remedies in case of nonpenalties and remedies in case of non--performanceperformanceCreates the foundation upon which lenders can Creates the foundation upon which lenders can confidently advance funds to a confidently advance funds to a paper companypaper company



Key Financial RatiosKey Financial Ratios

Investors ReturnsInvestors ReturnsInternal Rate of Return on Equity invested (Internal Rate of Return on Equity invested (IRRIRR): average annual return received ): average annual return received from dividends over the life of the projectfrom dividends over the life of the projectPayback Year: year when equity invested is paid back by cumulatPayback Year: year when equity invested is paid back by cumulative dividend ive dividend distributions from the projectdistributions from the project

Lenders RatiosLenders RatiosA monitoring tool for Senior LendersA monitoring tool for Senior LendersAlso determines cash flow to be distributed to the ShareholdersAlso determines cash flow to be distributed to the Shareholders after meeting all after meeting all obligationsobligationsPeriodic Debt Service Cover Ratio (Periodic Debt Service Cover Ratio (DSCRDSCR): assesses the level of cashflow ): assesses the level of cashflow available for debt service against the level of debt service payavailable for debt service against the level of debt service payable (interest and able (interest and principal repayments)principal repayments)

= Cash flow available for debt service= Cash flow available for debt servicedebt servicedebt service

Loan Life Cover Ratio (Loan Life Cover Ratio (LLCRLLCR): assesses the level of cash flow generated by the ): assesses the level of cash flow generated by the project over the life of the loan which would be available to reproject over the life of the loan which would be available to repay the loan principalpay the loan principal

= Net present value of future cashflow for debt service over lif= Net present value of future cashflow for debt service over life of the loane of the loandebt outstanding as at the calculation datedebt outstanding as at the calculation date



Project Finance: Key RisksProject Finance: Key Risks



Cost of Financing No Free LunchCost of Financing No Free Lunch

COUNTRY RISKCOUNTRY RISKPolitical riskPolitical riskForeign exchange convertibility Foreign exchange convertibility

PROJECT RISKPROJECT RISKCommercial RiskCommercial Risk

PricePrice

Operating RiskOperating RiskConstructionConstructionOperatingOperating

measured throughsovereign risk

Assessed throughcoverage, loan tenure, debt: equity, sponsor guarantees, sponsor track record

23



Mine Development ChallengesRon Thiessen ,

Chief Executive Officer,Hunter Dickinson

Mine Development ChallengesRon Thiessen ,

Chief Executive Officer,Hunter Dickinson



Mine Development ChallengesMine Development Challenges

Opportunities for value creation in the mining industry are at tOpportunities for value creation in the mining industry are at their highest during heir highest during the exploration and discovery phase the exploration and discovery phase following which come the challenges of dealing following which come the challenges of dealing with reality.with reality.

Source: DavidJ.Hall October18th 2006.



Financing Mining ProjectsDan Wilton ,

Managing Director, Head of Global Mining & Metals,

National Bank Financial Inc.

Financing Mining ProjectsDan Wilton ,

Managing Director, Head of Global Mining & Metals,

National Bank Financial Inc.


KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 27 2010 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with


Evolution of a Mining CompanyEvolution of a Mining Company

Seed Exploration Development Construction

SecureProject

Discovery ProductionDecision

Production

HigherRisk

LowerRisk

Production

Critical DecisionPoint



Financing AlternativesFinancing Alternatives

Seed Exploration Development Construction

Higher Risk Lower Risk

Higher Cost Equity

Royalty

Convertible Debt

Mezzanine Debt

Project Finance DebtLower Cost

Joint Venture

Production

High Yield Debt



Canadian Equity Market OverviewCanadian Equity Market Overview

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

$4.29 $4.38

$0.59

$4.10 $4.50

$2.15

$0.15$0.95

$4.54

$2.93

$7.39

$2.94$1.74

$2.71

$0.70

$0

$2

$4

$6

$8

Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210

Common Share Converts Flow Through Unit Special Warrant

Qtr to Date

New Issues History by Quarter ($ billions) (1)

2007$13.4Bn

2008$7.7Bn

2009$17.8Bn

YTD$5.1Bn

Continued strong equity markets supporting mining Continued strong equity markets supporting mining companies across the risk spectrumcompanies across the risk spectrum

2009 dominated by large cap financings2009 dominated by large cap financings




Recent Trends in Mining Capital MarketsRecent Trends in Mining Capital Markets

Increasing project sizes necessitates creative Increasing project sizes necessitates creative financing solutionsfinancing solutionsAlmost unlimited equity available for the right projectsAlmost unlimited equity available for the right projects

Osisko, Detour, AndeanOsisko, Detour, AndeanEquity markets willing to fund large asset acquisitionsEquity markets willing to fund large asset acquisitions

Torex, PrimeroTorex, PrimeroTraditional project debt capital is scarceTraditional project debt capital is scarceJV opportunities aboundJV opportunities abound

but be careful what you wish for!but be careful what you wish for!




Key Lessons LearnedKey Lessons Learned

Focus on your Focus on your projectproject, not your , not your share priceshare priceUnderUnder--promisepromise and and OverOver--deliverdeliverRaise capital Raise capital when it is availablewhen it is availableKeep it Keep it simplesimpleKeep a Keep a conservativeconservative capital structurecapital structureCommunity/Government relations is a Community/Government relations is a strategic strategic functionfunctionDonDont be afraid to t be afraid to share informationshare informationThink and act Think and act BIGBIG



QuestionsQuestions



QuestionsQuestions

What challenges do mining companies face in What challenges do mining companies face in financing or refinancing or re--financing their maturing debt in todayfinancing their maturing debt in todays s economy?economy?



QuestionsQuestions

Where will the equity come from for mining and how Where will the equity come from for mining and how do mining companies balance the risk/return equation do mining companies balance the risk/return equation for shareholders?for shareholders?



QuestionsQuestions

What is the present and future for Project Finance in What is the present and future for Project Finance in Mining?Mining?



QuestionsQuestions

What role do Multilateral Agencies play in Mining What role do Multilateral Agencies play in Mining Finance Finance are they competitors or complementary to are they competitors or complementary to Mining Banks?Mining Banks?



QuestionsQuestions

We have continued to see the emergence of Sovereign We have continued to see the emergence of Sovereign Wealth Funds and Private Equity as part of the Wealth Funds and Private Equity as part of the funding/finance mix in mining. What are the funding/finance mix in mining. What are the implications for mining companies? For Bankimplications for mining companies? For Banks?s?



QuestionsQuestions

Regionally Latin America and Australia continued in Regionally Latin America and Australia continued in 2009/10 to be the major destinations for exploration 2009/10 to be the major destinations for exploration spend. Where (and why) will companies spend their spend. Where (and why) will companies spend their exploration and development dollars in the future? exploration and development dollars in the future? What is the prospect for developing and financing What is the prospect for developing and financing major projects in Asia and Africa?major projects in Asia and Africa?



QuestionsQuestions

Political Risk and expropriation are often held up as Political Risk and expropriation are often held up as primary risks of Developing or Emerging Markets. primary risks of Developing or Emerging Markets. What in your experience have proven to be the most What in your experience have proven to be the most significant risks and challenges in developing or significant risks and challenges in developing or financing projects in emerging countries?financing projects in emerging countries?



QuestionsQuestions

The Fraser Institute Survey places Russia and Brazil The Fraser Institute Survey places Russia and Brazil as among the higher ranking countries from a as among the higher ranking countries from a composite Policy and Mineral perspective. China and composite Policy and Mineral perspective. China and much of Africa trail in many measures. What needs to much of Africa trail in many measures. What needs to happen politically or from a risk perspective to happen politically or from a risk perspective to improve the attractiveness of China and Africa as improve the attractiveness of China and Africa as Mining investment drivers?Mining investment drivers?



QuestionsQuestions

Cash is king Cash is king is it cheaper to buy than build?is it cheaper to buy than build?Joint Ventures and EarnJoint Ventures and Earn--inins s friend or foe?friend or foe?



Financing Mining ProjectsFinancing Mining Projects

Audience questionsAudience questions





Financing ServicesAdvising through the cycleFinancing ServicesAdvising through the cycle

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 to substantially restructure the business model and operating model

I need to avoid insolvency

I need to make disposals

I need help getting through the bankruptcy process

I need to refinance

I need help with a transformational growth strategy

I want to make a series of acquisitions

I need more capital

I want to sell non-core assets

Growth

Recession

Time

Client issues

Value propositions

Financial & Business Due Diligence, M&A Tax, Valuation

Integration,Operational Due Diligence, Working Capital Mgmt

Restructuring, Lender Due Diligence, Debt Advisory

Corporate Finance, Sell Side Due Diligence, Carve Out / Vendor Assistance,Valuation Restructuring,

Fresh Start Accounting Assistance, Lender Due Diligence, Tax, Debt Advisory

Corporate Finance, Lender Due Diligence, Tax, Debt Advisory

Strategy Consulting,Performance & Technology

Financial & Business Due Diligence, Valuation, M&A Tax

Corporate Finance, IPO Assistance

Corporate Finance, Sell Side Due Diligence, Carve Out / Vendor Assistance,M&A Tax

KEY:Mature T&R OfferingsDeveloping T&R OfferingsNot a current T&R OfferingNon-T&R KPMG Offerings

I need a strategy for growth

StrategyConsulting

Documents

Day 1 - Financing Mining Projects.pdf