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CHALLENGES OF FINANCING THE RESOURCES SECTOR: 2012 TO 2014“As Clouds Gather”10 October 2011
Mines and Money Conference “Challenges of Financing the Resources Sector”
CHALLENGES OF FINANCING THE RESOURCES SECTOR: 2012 TO 2014
Page 1
David LloydHead of Natural Resources
“Challenges of Financing the Resources Sector” 10 October 2011
Head of Natural ResourcesProject Finance
Fabian FuentesAssociate DirectorInfrastructure and
Natural ResourcesAdvisory
In October 2007…Before the Storm – Bank Capital Dominant
A. Banks (~75% of total capital)
B. Capital Markets
� Convertible Bonds (Sub debt)
� Bonds (Senior Debt)
C. Offtakers/Trading Companies
D. Equipment vendors, Royalty investors
E. Multilaterals, Bilaterals, Export Credit Agencies
F. Domestic Banks
Mines and Money Conference “Challenges of Financing the Resources Sector”
Page 2
, Export Credit Agencies
“Challenges of Financing the Resources Sector” 10 October 2011
2008-2010: The Perfect Credit Storm & The Aftermath
“Once in a century credit tsunami”– Alan Greenspan, October 2008
The Perfect Credit Storm (2008/09)
• Subprime Mortgages
• Leveraged Finance (“Cov Lite”)
• Credit Derivatives
• Lehman/AIG Exposure
• Real Estate exposure
• Economic Recession
• Sovereign Collapse:
Iceland/Hungary/Ukraine/Pakistan
Mines and Money Conference “Challenges of Financing the Resources Sector”
�Need for bank Recapitalisation
�Interbank funding freeze
2010: The Perfect Credit Storm & The Aftermath
October 2008
After the Storm (2009/10)
• Financial system starting to stabilise
(recapitalisations, government guarantees,,
Page 3
(recapitalisations, government guarantees,,
return to commercial banking )
• Improvement in bank operating profitability
(record levels, but pre-provision)
• Equity markets up ~60% (@ 80% pre GFC
level)
• Commodity prices rebound (+80-100%
trough to peak)
“Challenges of Financing the Resources Sector” 10 October 2011
trough to peak)
• Asset prices recovered (U.S. “Junk” Bonds
55% � 99%) (4/10)
• Global growth: -1%, 2009 � 5% 2010
R-evolution of Financial Markets
Bankers have been returning to the market although at lower levels than 2007...
Mines and Money Conference “Challenges of Financing the Resources Sector”
evolution of Financial Markets
Bankers have been returning to the market although at lower levels than 2007...
Page 4
“Challenges of Financing the Resources Sector” 10 October 2011
Sources: Bloomberg, Capital IQ, Thomson
Reuters Project Finance International
Yes, But Banks Only Part Way Through:
Issues 2011�2012Sovereign uncertainty and bank downgrades
Interbank market freeze
European
Bank
Problems
2011: Bailouts for Irish banks reach €100bn total
Aug 2011: Greece’s two largest lenders mergeProblems Aug 2011: Greece’s two largest lenders merge
Sept 2011: French banks downgraded/assets selldown
UBS US$2.3bn rogue trading loss/CEO resigns
Oct 2011: Franco-Belgian lender Dexia bailout
2011/12: Further recapitalisation of banks?
Known
‘Unknowns’
Continuing Euro sovereign uncertainty
• Greece misses 2011 deficit target
• ECB purchased €160b in sovereign bonds since May 2010
• Germany's 10 biggest banks may need €127bn for
total capital ratio to rise to 5% (DIW – 9/11)
• IMF report says EU banks need €200bn
Mines and Money Conference “Challenges of Financing the Resources Sector”
• IMF report says EU banks need €200bn
Sovereign debt downgrades of US, Japan, NZ, Greece, Italy,
Spain, Portugal, Ireland
Spillover Effects to Europe? Who is next? Break up of the
Euro?
Yes, But Banks Only Part Way Through:
Page 5
selldown
160b in sovereign bonds since May 2010
127bn for banks'
“CDS numbers count against banking system”, Financial Times Oct. 4 2011
“Challenges of Financing the Resources Sector” 10 October 2011
of US, Japan, NZ, Greece, Italy,
Spillover Effects to Europe? Who is next? Break up of the
2012 to 2014: Uncertain Global Climate
• Financial system unstable – Euro and US banks (
• Extreme volatility in equity, commodity and currency markets (VIX up 160%)
• Sept 2011 - worst quarter for Equity markets since GFC (FTSE All
• Falls in commodity prices (Reuters-Jefferies CRB index down 11% for Q3)
• Economic growth – China in driving seat but can it contain inflation and boost domestic demand?
• Global growth: IMF reduces 2011/12 forecast to 4 percent (5% in 2010)
Mines and Money Conference “Challenges of Financing the Resources Sector”
2012 to 2014: Uncertain Global Climate
Euro and US banks (BofA, Citi, WF downgraded 9/11) in particular
in equity, commodity and currency markets (VIX up 160%)
worst quarter for Equity markets since GFC (FTSE All-World index down 18% for Q3)
Page 6
Jefferies CRB index down 11% for Q3)
China in driving seat but can it contain inflation and boost domestic demand?
Global growth: IMF reduces 2011/12 forecast to 4 percent (5% in 2010)
FTSE All World index -18% in Q3
Reuters-Jefferies CRB index -11% in Q3
“Challenges of Financing the Resources Sector” 10 October 2011
Reuters-Jefferies CRB index -11% in Q3
Chinese manufacturing activity slowed in
September (-1%) for the third month in a row.
India’s HSBC Markit Business
Activity Index (-7%)
2012 to 2014: Uncertain Climate –
� Challenging and deteriorating
� NAB + 4 other core Australian banks stable
� 12 – 15 Euro, Aussie, Asian + Euro banks still active (
20%)
� Increasing participation of Asian Banks in international � Increasing participation of Asian Banks in international
markets (Singapore, Thailand, Indonesia)
� Chinese/Indian Banks
� ECA involvement will increase
Transactions
• National/regional financing support
• Club loans + Larger ‘tickets” ($100m+)
Mines and Money Conference “Challenges of Financing the Resources Sector”
• Club loans + Larger ‘tickets” ($100m+)
• More equity, loan security, hedging
• Continued higher margins
• Alternative financing sources
Banks and Resources Finance
Page 7
15 Euro, Aussie, Asian + Euro banks still active (-
Increasing participation of Asian Banks in international
150
200
250
300
Bank CDS Spreads
Increasing participation of Asian Banks in international
-
50
100
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11
Australia Asian French, Uk, European Spanish
“Challenges of Financing the Resources Sector” 10 October 2011
“Financial Institutions stare into the abyss”, Financial TimesSeptember 22, 2011
As Clouds Gather: Who’s your Finance PartnerAustralian Banks
• Big 4 Australian banks among only 14 in the world rated “AA” by S&P
• Record operating earnings/strong Tier 1 capital (ratios between 9.4%
• Little/nil exposure to Euro sovereign/subprime/leveraged/credit derivatives• Little/nil exposure to Euro sovereign/subprime/leveraged/credit derivatives
• Balance sheet capacity/wholesale US$ funding?
International Banks traditionally but
• Partial Deglobalisation - banks focus limited capital on:
� “home” markets (e.g. Europe: RBS, HBOS,
� “core” clients – relationships are important to access credit
International projects: cross-border “orphans”? Multilaterals and
Mines and Money Conference “Challenges of Financing the Resources Sector”
International projects: cross-border “orphans”? Multilaterals and
How much will they lend?
• Limited underwriting, larger final holds ($100
As Clouds Gather: Who’s your Finance Partner
Big 4 Australian banks among only 14 in the world rated “AA” by S&P
Record operating earnings/strong Tier 1 capital (ratios between 9.4%-11.1%)
Little/nil exposure to Euro sovereign/subprime/leveraged/credit derivatives
Page 8
Little/nil exposure to Euro sovereign/subprime/leveraged/credit derivatives
Balance sheet capacity/wholesale US$ funding?
banks focus limited capital on:
“home” markets (e.g. Europe: RBS, HBOS, Dexia, UniCredit, Natixis, SocGen, etc)
relationships are important to access credit
border “orphans”? Multilaterals and ECA’s
“Challenges of Financing the Resources Sector” 10 October 2011
border “orphans”? Multilaterals and ECA’s
Limited underwriting, larger final holds ($100-500m)� club loans prevail
As Clouds Gather: Loan Structure
More security
More equity, less debt/gearing (debt: EBITDA 9-11x
Credit Rules! – stronger risk controls:
Higher debt coverage ratios (LLCR, PLCR, DSCR)
Full subordination, if any mezzanine debt
More hedging: irs, fx and commodity (Banks: – risk, + earnings)
Basel III: higher bank capital and liquidity requirements
Mines and Money Conference “Challenges of Financing the Resources Sector”
11x � 3-5x)
Page 9
risk, + earnings)
Basel III: higher bank capital and liquidity requirements���� higher cost of funding
“Challenges of Financing the Resources Sector” 10 October 2011
As Clouds Gather: Margins and FeesHave declined substantially since March 2009, but will continue at historically high levels:
Driven by higher bank capital (5-7% � 9-11% Tier 1)
2007
IG ~50bpsHY ~ 200-
300bps
Mines and Money Conference “Challenges of Financing the Resources Sector”
Driven by higher bank capital (5-7% � 9-11% Tier 1)
Continued higher funding costs (deposit competition, interbank funding risk, Basel III capital
requirements)
Stronger credit risk/return calculations – lower risk, better pricing
Pressure to reduce balance sheet use / declining loan books
As Clouds Gather: Margins and FeesHave declined substantially since March 2009, but will continue at historically high levels:
Page 10
11% Tier 1)
Post GFC
IG ~100bpsHY ~ 400-
500bps
“Challenges of Financing the Resources Sector” 10 October 2011
11% Tier 1)
Continued higher funding costs (deposit competition, interbank funding risk, Basel III capital
lower risk, better pricing
Pressure to reduce balance sheet use / declining loan books
Sources: Bloomberg, Markit
Recent TransactionsMillennium Minerals Pty Ltd JUNIOR
A$25m Syndicated Loan Facility, A$10m Performance Bonding and A$10m Leasing Facility
Purpose: Development of Nullagine Gold Mine
Lenders: BNP Paribas, National Australia Bank Limited
Facility Type:Syndicated Loan Facility (A$25m) , Performance Bonding Facility (A$10m), Leasing Facility (A$10m), Gold Hedging
Tenor: 3 yearTenor: 3 year
OZ Minerals Group Treasury Pty Ltd MID TIER
Purpose: General corporate purposes
Lenders: National Australia Bank Limited, Westpac, ANZ, HSBC
Facility Type:Revolving Syndicated Loan Facility (US$180m) and Working Capital Facility (US$20m)
Debt Size: 1 year
3 year
US$20m
US$180m
US$180m Revolving Syndicated Loan Facility and US$20m Working Capital Facility
Wiggins Island Coal Export Terminal Pty Ltd LARGE
Mines and Money Conference “Challenges of Financing the Resources Sector”
Purpose: Project Finance
MLA:National Australia Bank Limited, ANZ, BoC, CDB, DBS, SMBC, KDB
Facility Type:US$2,850m Senior Secured Project Finance Facility, A$50m Working Capital Facility, A$150m Letter of Credit Facility
US$2,850m Senior Secured Project Finance Facility, A$50m Working Capital Facility, A$150m Letter of Credit Facility
JUNIOR
A$25m Syndicated Loan Facility, A$10m Performance Bonding and A$10m Leasing Facility
Key Transaction Highlights
• Millennium Minerals first bank debt facility
• Comprehensive project financing package plus gold hedging
Page 11
MID TIER
Key Transaction Highlights
• OZ Minerals’ first bank debt facility since the GFC
• NAB Facility Coordinator and Agent
• Reinforced NAB’s position as leading financier to the resource sector and #1 loan syndication bank in Australia
US$180m Revolving Syndicated Loan Facility and US$20m Working Capital Facility
LARGE
“Challenges of Financing the Resources Sector” 10 October 2011
Key Transaction Highlights
• Largest Australian greenfield Project Finance transaction for 2011
• NAB is a Mandated Lead Arranger and sole spot FX dealer for A$1.7761bn.
• Fourteen banks plus five development/export credit agencies (ECA)
US$2,850m Senior Secured Project Finance Facility, A$50m Working Capital Facility, A$150m Letter of Credit Facility
Funding Competition
A look into the future
• Currently there are over 400 global Greenfield mining projects earmarked for
development by 2020 requiring up to US$500Bn of funding
• Australia accounts for more than a quarter of these developments with an
estimated funding requirement of $US145Bn
• The resources boom will place a significant strain on banks balance sheets with
80
100
120
Nu
mb
er
of
Pro
ject
s b
y R
egi
on
• The resources boom will place a significant strain on banks balance sheets with
projects forced to compete for funding.
• This competition for funding will be further exacerbated by the introduction of
Basel III as banks are forced to meet tougher capital adequacy requirements.
• Capital markets and Export Credit Agencies are likely to play a more
significant role in the financing of Australia’s resources sector though this will
still require intermediation from commercial and investment banks
• Sponsors will also seek to attract cheap Chinese financing on the back of
strategic investment by Chinese Sponsors or through significant offtake or
procurement contracts
Mines and Money Conference “Challenges of Financing the Resources Sector”
0
20
40
60
80
Arg
en
tin
a
Au
stra
lia
Bra
zil
Can
ada
Ch
ile
DR
Co
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Ind
on
esi
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Kaz
akh
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Me
xico
Mo
ngo
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Mo
zam
bi…
PN
G
Pe
ru
Ph
ilip
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s
Ru
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Sou
th …
USA
Oth
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Nu
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s b
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egi
on
Source: Brook Hunt
Page 12
Base Case Company Commodity Potential Start
Year
Production
(mtpa)
Solomon Fortescue Iron ore 2013 60
Roy Hill Hancock
Prospecting
Iron Ore 2014 55
Top Australian Projects
Prospecting
Wandoan
Project
Xstrata, Itochu,
Sumisho
Thermal Coal 2011 30
Alpha Coal
Project
Hancock
Prospecting
Thermal Coal 2014 30
Kevin’s Corner
Project
Hancock
Prospecting
Thermal Coal 2013 30
China First Coal
Project
Waratah Coal Thermal Coal 2014 30
West Pilbara
Project
Aquila
Resources
Iron Ore 2013 30
Eagle Downs
Project
Aquila
Resources, Vale
Coking Coal 2013 8
Belvedere
Project
Vale, Aquila &
AMCI
Coking Coal 2014 8
“Challenges of Financing the Resources Sector” 10 October 2011
Project AMCI
Wingellina Metals X Nickel 2014 NA
Barnes Hill Proto Resources Nickel 2013 NA
Karara Gindalbie Iron Ore 2011 NA
Marillana
Project
Brockman
Resources
Iron Ore 2010 NA
Washpool
Project
Aquila
Resources
Hard Coking
Coal
2012 NA
Project Timeline – Major Global Project PipelineA look into the future
•China First Coal
•Las Bamabas Copper
•Alpha Coal
•Roy Hill Iron Ore
•West Pilbara Iron ore
•Mbalam Iron Ore
•Rio Blanco Copper
•Esperanza Copper
•Panantza Copper
•Tampakan CopperEl
Pachon Copper
•Cerro Colorado Copper
•Quellaveco CopperWafi
Golpu Copper/Gold
$18.1Bn$37.4Bn$2.9Bn
Thermal Coal,
11%
Global growth projects by number
2011 2012 2013 2014 2015 2016
•Maules Creek (semi soft coal)
•Benga Thermal Coal
•Crosslands Iron Ore
•Cobre Panama CopperGrosvenor
Coking Coal
•Simandou Iron Ore
•Wandoan Coal
•Kevins Corner Coal
•Boikarabelo Thermal Coal
•Toromocho Copper
•Oyu Tolgoi Copper
$2.6Bn $33.3Bn$6.2Bn
Mines and Money Conference “Challenges of Financing the Resources Sector”
Coking Coal, 4%
Uranium, 3%
Gold, 33%
Nickel, 15%
Iron Ore, 9%
Copper, 25%
Source: Brook Hunt
Major Global Project Pipeline
Page 13
Panantza Copper
Tampakan CopperEl
Pachon Copper
Cerro Colorado Copper
Quellaveco CopperWafi-
Golpu Copper/Gold
•Donlin Creek Gold
•Pebble Copper•Resolution Copper
$14.7Bn $4.0Bn$18.1Bn
Commodity Metric Greenfield
Supply
Current
Supply
Greenfield as % of
current supply
Copper Kt 8978 20387 44%
2017 2018 2019 2020 2021
Cobre Panama CopperGrosvenor
•Frieda River Copper
•La Granja SxEw Copper
•No significant projects
currently planned
$6.0Bn
“Challenges of Financing the Resources Sector” 10 October 2011
Copper Kt 8978 20387 44%
Iron Ore Mt 649 1009 64%
Nickel Kt 1323 1559 85%
Gold Moz 27.5 130.9 21%
Coking Coal Mt 103 247 42%
Thermal Coal Mt 278 663 42%
ECA Financing
• In the current context ECA’s represent a significant potential source of liquidity for large
projects. ECA’s support is based on national economic interests and not on profitability
prospects
• ECA financing can provide a key financing bridge for large projects where bank funding may
not be sufficient.
A Source of Liquidity
• Current market trends show that large ECA involvement is being driven off equity investments,
offtake agreements and procurement
• Most banks have the ability to hold larger participations when covered by ECA’s
ECA Financing comes in two main forms, tied (direct) and untied (indirect)
• ‘Tied’ ECA financing is conditional to the procurement of equipment and materials from the
ECAs home country
• ‘Untied’ ECA financing is not conditional on procurement of equipment and materials, untied
financing is conducive to
– Strategic interest has been indentified and the project has been indentified as a ‘national
interest’
– Helping secure access to stable supplies of energy and mineral resources
– Promoting ECA s home country business activities
Mines and Money Conference “Challenges of Financing the Resources Sector”
– Promoting ECA s home country business activities
Page 14
In the current context ECA’s represent a significant potential source of liquidity for large
projects. ECA’s support is based on national economic interests and not on profitability
ECA financing can provide a key financing bridge for large projects where bank funding may
Case Study – Pluto LNG Project
• JBIC approved loans in co-financing with private
financial institutions in the aggregate amount of
US$1.3bn for the Pluto LNG Project in 2008, out of
which JNIC’s direct loan amounted to US$1bn
• Project undertaken jointly by Japanese electricity Current market trends show that large ECA involvement is being driven off equity investments,
Most banks have the ability to hold larger participations when covered by ECA’s
‘Tied’ ECA financing is conditional to the procurement of equipment and materials from the
‘Untied’ ECA financing is not conditional on procurement of equipment and materials, untied
Strategic interest has been indentified and the project has been indentified as a ‘national
Helping secure access to stable supplies of energy and mineral resources
• Project undertaken jointly by Japanese electricity
and gas companies and Woodside Petroleum for
the development of this US$10bn LNG project in
north western Australia
• LNG produced under this project will be exported
to Japan over 15 years
Likely ECAs Involvement in Australia
• ECA’s have a strong appetite for Australian
resource projects. This is primarily driven by the
high level of direct and indirect interests which
can be sourced from any one project.
– Roy Hill Iron Ore Project
“Challenges of Financing the Resources Sector” 10 October 2011
– Ichthys LNG
– Jack Hills Iron Ore Project
– Collie Urea Fertiliser Plant
– AP LNG
– Wheatstone
ECA Financing What volume of funding can be sourced from ECAs? Tied V Untied
• As a general rule, for Tied financing an ECA will lend up to 85% of the eligible foreign content (equipment and services), af
down-payment (as per OECD rules)
– Plus additional eligible local content
– Plus up to 100% of the interest during construction period
– Plus up to 100% of the ECA insurance premium/guarantee fee
Japan
ECA � J-BIC which acts as the direct lender
� NEXI only provides insurance
� K-EXIM which acts as the direct lender
� KEIC
Eligibility Criteria � Not conditional on procurement of
equipment & materials from Japan. J-BIC
invests heavily into projects that secure
the supply of natural resources
� No clear guidelines but NEXI usually
require min DSCR 1.25x
� K-EXIM require at least 5%
AND some offtake
� KEIC requires a
AND offtake or EPC
Amount Covered Guidelines � J-BIC maximum commitment is 70% of
total debt, however J-BIC is not
committal on maximum debt until late in
� K-EXIM will finance a maximum 50% of
total debt
� KEIC will cover up
Plus up to 100% of the ECA insurance premium/guarantee fee
• Due to the more subjective eligibility criteria for untied ECA financing terms are more discretionary.
Mines and Money Conference “Challenges of Financing the Resources Sector”
committal on maximum debt until late in
the process
� NEXI will provide insurance cover for
97.% of commercial risk and 100%
political risk
� KEIC will cover up
political risk
Recent Deals � J-BIC: Pluto LNG Project - Direct loan of
US$1bn
� J-BIC: PNG LNG Project - Direct loan of
US$1.8bn
� K-EXIM: Yemen
US$240m
� K-EXIM and KEIC: Ambatovy Nickel: Direct
loan of US$455m and US$195 political
risk guarantee
Page 15
What volume of funding can be sourced from ECAs? Tied V Untied
As a general rule, for Tied financing an ECA will lend up to 85% of the eligible foreign content (equipment and services), after payment of 15% minimum
Korea China
EXIM which acts as the direct lender
KEIC only provides insurance
� China ExIm which acts as the direct
lender
� Sinosure only provides insurance
EXIM require at least 5% ownership
AND some offtake
KEIC requires at least 10% ownership
AND offtake or EPC
� Eligibility criteria is more subjective,
heavy emphasis on “national interests”. A
combination of ownership and offtake is
helpful, but either can be sufficient
EXIM will finance a maximum 50% of
total debt
KEIC will cover up to 100% of total
� Chinese banks keep their lending
guidelines private
Due to the more subjective eligibility criteria for untied ECA financing terms are more discretionary.
“Challenges of Financing the Resources Sector” 10 October 2011
KEIC will cover up to 100% of total
political risk
EXIM: Yemen LNG - Direct loan of
US$240m
EXIM and KEIC: Ambatovy Nickel: Direct
loan of US$455m and US$195 political
risk guarantee
� Lahore transport Company: Direct loan of
US$1.7bn
Capital Markets Considerations
• Scale of upcoming funding requirements and
Basel III pressures on international banks will
likely increase participation and competitiveness
of capital markets alternatives
• However, key markets are only selectively open
to offshore project finance or non-investment
Capital markets are strong supplementary funding sources as competition for funding and market volatility increase
2.00
2.50
3.00
3.50
4.00
4.50 US Treasury Yields (%)
to offshore project finance or non-investment
grade issuers
• In the US markets, strong inverse correlation
between US Treasury yields and credit spreads
– The boxes highlight periods of rapid change
in US Treasury yields and indicate when
Treasury yields fall, credit spreads generally
increase and vice versa, especially at ~3%
– Demonstrates investors’ strong liquidity and
preference for minimum coupons above 4%
US Private Placement Market
— Potential to offer debt with long tenors and competitive pricing at smaller volumes
Australian Corporate Bond Market
— Undersupply of non-financial names in bank and sovereign dominated market
Source: Bloomberg, Private Placement Monitor
2.00
Dec-09 Apr-10 Jul-10 Oct10 year UST Yield
100
150
200
250
300
350
Dec-09 Apr-10 Jul-10 Oct-
NAIC2 10 year Spread History (bps)
NAIC2 10 yr Low
Mines and Money Conference “Challenges of Financing the Resources Sector”
RMB “Dim Sum” Bond Market
— Typically short dated market
— Use of funds is limited by PBOC exchange controls
smaller volumes
US 144A / Reg S Markets
— Largest and most liquid capital market
— Greater opportunity for lower pricing due to diverse / deep investor base
Hybrid / Convertible Bond Market
— Global market returning with strong Resources activity given development of commodity prices and suitability for growth companies looking to diversify funding sources
Euro / Sterling Markets
— Ability to fund for very long tenors but more accessible for higher rated issuers
market
Page 16
Capital markets are strong supplementary funding sources as competition for funding and market volatility increase
• Timing of entry is a key consideration especially in
current volatile market conditions
• Pricing volatility in recent uncertain times is
demonstrated in example below – reinforces the
benefits of early engagement, paving the way for
timing / funding flexibility
Centennial Coal Melbourne Airport
Date Oct-11 June-11
Volume US$225m US$600m
Tenor (yrs) 10, 12, 15 10,12,15
Rating NAIC-2 NAIC-1
Pricing (bps) T+270-305 T+150-180
Coupon 4.47, 4.62, 4.82% 4.47, 4.57, 4.77%
Market USPP USPP
timing / funding flexibility
US Private Placement Market
Potential to offer debt with long tenors and competitive pricing at smaller volumes
Source: NAB Private Placements
Source: Bloomberg, Private Placement Monitor
Oct-10 Jan-11 May-11 Aug-1110 year UST Yield
-10 Jan-11 May-11 Aug-11
NAIC2 10 yr High
• Australian issuers generally access offshore markets
“Challenges of Financing the Resources Sector” 10 October 2011
RMB “Dim Sum” Bond Market
Typically short dated market
Use of funds is limited by PBOC exchange controls
smaller volumes
S Markets
Largest and most liquid capital market
Greater opportunity for lower pricing due to diverse / deep investor base
• Australian issuers generally access offshore markets
following operational commencement to refinance
earlier project financing or fund further expansion:
– FMG US$2.04b 7% Senior Notes (2010)
– Mirabela Nickel US$395m 8¾% Senior Notes (2011)
– Consolidated Minerals US%405m 8 7/8% Senior
Secured Notes (2011)
Capital Markets ConsiderationsCurrent volatile market conditions limit the availability of capital markets that can be efficiently accessed by Australian
Resources issuers
US 144A Australian Corporate Bond
Ratings Rating required but open to
both investment grade and high
yield credits
Investment grade rating
required
• The maturity of the project will be a key factor in determining which capital market is most appropriate for the Issuer
both investment grade and high
yield credits
required
Capacity (New Issue) ≥US$250m A$200 – A$300m
Tenor Up to 30 years 3 – 10 years
Advantages • Deepest and most liquid
market with large volume and
tenor available
• Pricing highly competitive
• Strong demand for
financial names
• Competitive funding for 5
10 year maturities
Investor Base Qualified Institutional Buyers
(QIBs) accounting for ~90% of
the US institutional buyers;
includes all USPP investors
Well educated investor base
comprising of insurance and
superannuation funds
Timeline Up to 8 weeks to establish an 8 – 10 weeks
Mines and Money Conference “Challenges of Financing the Resources Sector”
Timeline Up to 8 weeks to establish an
inaugural program
8 – 10 weeks
Covenant Profile Standard bond undertakings
with no maintenance financial
covenants
Standard bond undertakings
but may require some financial
covenants
Ongoing Issuance Strong capacity to support
ongoing issuance; 6 months
wait is recommended
Support for ≥A$500m
Project Suitability Brownfield Brownfield
Page 17
Current volatile market conditions limit the availability of capital markets that can be efficiently accessed by Australian
Australian Corporate Bond US Private Placement Hybrids / Convertible Bond
Investment grade rating No ratings required but
investment grade credit metrics
desired
No ratings required
The maturity of the project will be a key factor in determining which capital market is most appropriate for the Issuer
investment grade credit metrics
desired
US$50 – US$1,000m Up to US$200m
Up to 30 years Typically 5 years
Strong demand for non-
Competitive funding for 5 –
10 year maturities
• Pricing highly competitive
• Provides access to US
investors, who are ‘passive’
• Flexible structure (size, tenor,
timing, etc.)
• Dilution delayed and occurs
up to 30% above the current
share price
• Cost effective debt due to the
value of the imbedded call
option
Well educated investor base
of insurance and
superannuation funds
~40 key investors comprising
of insurance companies and
pension funds who generally
‘take and hold’
Asian and European based
specialised funds, but in
particular out of Singapore and
Hong Kong
6 – 8 weeks 4 – 6 weeks
“Challenges of Financing the Resources Sector” 10 October 2011
6 – 8 weeks 4 – 6 weeks
Standard bond undertakings
may require some financial
Covenants similar to bank debt
covenants, maintenance in
nature
No financial covenants,
negative pledge and listing
documentation requirements
Support for ≥A$500m Support for ≥US$1bn Total size generally limited to
15 – 20% of market cap
Greenfield Greenfield
Alternative Funding Sources
An expanded role for EFIC?
EFIC
• Established to support Australian export trade by providing insurance
• Does not fund directly but through the provision of guarantees• Does not fund directly but through the provision of guarantees
• EFIC’s obligations are guaranteed by the Commonwealth
guarantee
• EFIC’s role is to complement, not complete with, private financiers
Challenges
• Potential candidates for EFIC support must be able to demonstrate
demonstrate ahead of time
• Funding capacity for an individual transaction must not exceed
results in a ceiling of c. A$175M for an individual project
• Maximum funding capacity falls well short of international ECAs
Mines and Money Conference “Challenges of Financing the Resources Sector”
• Maximum funding capacity falls well short of international ECAs
projects across Australia (e.g. Roy Hill, Icthys, APLNG etc)
• At present, the only alternative for large projects to seek
ministerial approval and is reserved only for Projects that serve
• The uncertainty, long lead time and politics surrounding applications
therefore unlikely source of funding for large scale projects
Page 18
insurance and finance
guaranteesguarantees
making it simple for financial institutions to lend against the
financiers and insurers
demonstrate a genuine ‘market gap’ – this can be difficult to
exceed 25% of the assets on commercial account – this currently
ECAs and below the potential demand for major resource and LNG
“Challenges of Financing the Resources Sector” 10 October 2011
ECAs and below the potential demand for major resource and LNG
seek funding through the National Interest Account. This requires
serve the ‘national interest’
applications for ‘national interest’ status makes this an unreliable and
Alternative Funding Sources
Problem
• Commercially viable mines unable to access markets due to lack of infrastructure
and/or capacity constraints (Port Hedland, Dalrymple Bay etc)
• Private sector solution typically requires a ‘joint funding’ approach by common
Easing the Infrastructure bottleneck – Asking the hard questions
• Private sector solution typically requires a ‘joint funding’ approach by common
users (e.g. Wiggins Island)
• Difficult to achieve in practice with commercial disputes resulting in protracted
delays and even forfeiture of developments (e.g. Oakajee Port)
• Junior miners left stranded or forced to sell material stakes in order to progress
development (e.g. Magnetite mines in SA)
Who Should Pay?
1. Private Sector Infrastructure Investors?
– Will require many users with sufficient credit quality / credit support
– Financiers will require certainty of revenues to ensure infrastructure
can be serviced (i.e. mandatory hedging , offtake contracts)
– Long proven mines lives required to fund long term infrastructure charges
Mines and Money Conference “Challenges of Financing the Resources Sector”
– Long proven mines lives required to fund long term infrastructure charges
(Greenfield mines will be challenging)
2. The Public Sector?
– Public Infrastructure funding is now largely channeled through
Business Australia Fund (BAF). To date focus has been on roads and
transport with commodity based infrastructure missing out
– For BAF to be a meaning part of the solution, federal funding will need
increase combined with a shift in focus towards commodity infrastructure
Alternative Funding SourcesPage 19
infrastructure
common
Infrastructure Projects receiving BAF support
Project StateBAF Funding
(A$M)
Regional Rail Link VIC 3,200
Hunter Expressway NSW 1,500common
protracted
progress
support
infrastructure costs
charges
Hunter Expressway NSW 1,500
Ipswich Motorway QLD 884
Pacific Highway – Kempsey Bypass NSW 618
Gold Coast Rapid Transit QLD 365
Gawler Rail Modernisation SA 293
Noarlung to Seaford Rail Extension SA 291
Melbourne Metro 1 VIC 40
Total 7,191
Source: Department of Infrastructure and Transport
Other Potential Candidates ?
� Oakajee Port
� Point Anketell Port & Rail
“Challenges of Financing the Resources Sector” 10 October 2011
charges
through the
and public
need to
infrastructure
Point Anketell Port & Rail
� Port Bonython, Sheep Hill, Point Lowly
� Hunter Valley Rail Network
� Galilee Basin to Abbot Point Rail Project
� Pilbara / Port Hedland Accommodation Projects
� Port of Portland – Green Triangle Region