Issue link: https://digital.shearman.com/i/1205013
WHY AREN'T MORE AFRICAN MINES PROJECT FINANCED? Project financing greenfield mining megaprojects in Africa is still uncommon. To date, the largest African project to have been financed on a limited recourse basis had a debt component of $170 million and although there have been larger mining "megaproject" financings in other geographies, such as the $4.2 billion Oyu Tolgoi brownfield copper and gold mine project in Mongolia, the fact that the mine and port elements of the GAC Project were entirely greenfield made it one of the most ambitious to have reached financial close. So why isn't project financing used more frequently in the mining sector in Africa? At first glance, it would seem to address many of the investment challenges that new mining projects face—increases rates of return, spreads operational and market risks, brings aboard financial investors capable of managing political risk, and provides liquidity with long tenors from various sources. A key underlying reason is that mining projects are perceived to be more risky than the industrial projects that traditionally attract limited recourse investment, and in different ways. Mining projects involve risk at every stage, from the availability of the resource (anticipated quantities and quality may not be guaranteed), the technical (and sometimes political) challenges of extraction and transportation, and instability of price and volume in the end consumer markets. Accordingly, equity investors are often reluctant to invest before the funding of all remaining capex, including delays and overruns, are locked in. Lenders, who will not share in any potential profits of a project, have an even lower appetite for risk and may be reluctant to fund a project that has not already been shown to have the confidence of a meaningful pre-financing investment from its sponsor. In any event, lenders will require completion guarantees and bankable arrangements for offtake or marketing of the products, all of which are uncomfortable for many sponsors to underwrite years in advance. Sponsors and lenders are therefore looking for each other to make the first financial commitment. Another reason why project financing has not been a preferred funding option for mining megaprojects is that most of these projects are undertaken by multinational or other large mining companies who can mobilize capital at low cost and on a covenant-light basis from many sources. They also tend to balance development, operating and market risks across a portfolio of assets producing different commodities in multiple geographies with variable risk-reward profiles. This natural hedge removes much of the impetus for structuring each project to be as risk-free as possible, allows for a scale of economy in developing and financing costs, and maintains flexibility to acquire or dispose of assets as market conditions dictate. The bigger mining companies have also reduced their usage of financing and insurance structures to manage political risk, relying instead on their knowledge of particular jurisdictions and simply avoiding those where they cannot get comfortable. However, EGA—which has a long history of project financing—recognized that the GAC Project was suitable for limited-recourse structuring. It was not a commodity-based financial trading play or portfolio addition and EGA was motivated by a vertical integration strategy to complement existing investments such as the refining and smelting operations in the UAE. Also, whereas other projects might struggle with financing new infrastructure to make the project technically feasible, EGA would be able to share existing rail infrastructure. From the Project's inception, all the contractual documentation between EGA, the Guinean Government and other local stakeholders had been developed to be bankable. The lenders could appreciate the level of Government support provided and the key project documents did not require material adjustment in order to accommodate the requirements of lenders. Finally, the Project's lenders themselves were strongly mandated to support the financing, with IFC and AfDB focused on the economic development benefits of the Project as well as its environmental and social credentials and commitments. 5