Hard-Up Miners Prospecting in Asia for Financing
Vancouver/Melbourne. Miners who can’t get financing for new projects from banks or traditional equity investors because metals prices have collapsed are turning to an alternative source: the engineering and construction companies, many from China and South Korea, who actually build their mines.
Several North American and Australian miners are in talks with engineering, procurement and construction (EPC) companies to take equity stakes or bring along banking partners to provide debt funding in projects in return for the EPC group winning a contract.
China’s NFC and South Korea’s Posco Engineering & Construction are among the companies pursuing these deals as they look to make up for business lost because of slowing infrastructure growth at home.
“The domestic order books of Chinese construction and equipment companies have been falling for a year, actually quite dramatically,” said Ingo Hofmaier, director at Hannam & Partners, a London-based corporate finance advisory firm. “To avoid under-utilization and keep the music going, Chinese companies are now aggressively targeting foreign markets.”
Infrastructure investment in China slowed in 2014 as authorities try to re-engineer the growth model by reducing inefficient state spending and encouraging domestic consumption. Investment grew at its slowest pace in nearly 13 years between January and November 2014 at 15.8 percent, according to official figures.
Canadian construction and engineering company SNC-Lavalin Group is working with NFC, or China Nonferrous Metal Industry’s Foreign Engineering and Construction, for a contract to build the Hillside copper project for Rex Minerals in Australia. SNC and NFC are competing against South Korea’s Hyundai teamed with AMEC Foster Wheeler for the contract.
“There’s no doubt, financing will be part of that decision,” Rex Minerals executive director Steven Olsen said.
NFC and Hyundai declined to comment. Alternative forms of mine finance such as royalties, streaming and private equity, have blossomed in the past three years as metals prices fell and traditional banks and equity investors shied away from the sector.
Funds raised by the mining sector through traditional debt and equity issues slumped 26 percent year-on-year to $88.6 billion in 2014. That’s down 41 percent from 2011 when metal prices peaked.
“If we want to raise money in these markets we have to look at untraditional means,” said Christopher Zahovskis, chief executive of Northcliff Resources, a small Canadian-based mine developer that is in early talks with a Chinese EPC funder on its $579 million Sisson tungsten-molybdenum project in eastern Canada.
Another Canadian mine developer, Alderon Iron Ore, which is struggling to find a strategic investor for its $1.27 billion Kami iron ore project in Canada’s Labrador Trough, is talking to Chinese and Korean EPC contractors about taking an equity stake, chairman Mark Morabito said.
Prices for iron ore for delivery in China have tumbled from $187.18 a metric ton in February 2011 to $67.39 in January, according to the Steel Index. Copper is down about 44 percent from its 2011 peak. Tungsten is down about 36 percent since 2011, and molybdenum has lost about half its value since early 2011.
Though Asian companies have funded mining development projects in the past, the investment was usually tied to an offtake agreement. Offtake deals are arrangements where primarily smelters lock in a portion of the future output of a mine in exchange for upfront funding.
“It’s a two-way street,” said Marius van Tonder, managing director Australia at SNC. “Asians are looking to invest and secure resources. The client is looking for funding.”
Australia has offered rich pickings for Asian contractors.
South Korea’s Samsung C&T won the contract to build Australia’s biggest new iron ore mine, Roy Hill, after South Korean steel giant Posco, took a stake in the $10 billion project and helped bring in Korean export credit financing for it.
EPC groups providing equity finance are not seeking controlling stakes in projects and are likely to limit their involvement to between 10 percent and 30 percent, said Christopher Langdon, a partner at law firm McCarthy Tetrault in Toronto.
China’s Sepco Electric Power Construction signed a $1.3 billion EPC framework deal with UK-based Oracle Coalfields last September on a coal and power plant project in Pakistan that includes Sepco potentially taking a 10-percent equity stake in the operator of the power plant.
While providing another funding avenue for miners in bleak markets, EPC finance is not without risks and deals can be complex and time-consuming to put together as each transaction is different and may involve several parties.
“At the end of the day, it’s got to be on somebody’s balance sheet,” said Lloyd Pengilly, chief executive and director of London-based QKR, a private mining company backed by Qatari investors. “It’s a financing option that is real but it’s limited.”
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