Project financing is never an easy process. When assessing debt, corporate equity and/or project equity, there are always competing interests aiming to maximise their return and lower risk. Often, each of the financing options wants to have the other parts settled before committing to their part of the deal.
For traditional commodities such as gold and copper, which are publicly traded with transparent pricing, debt is often provided by banks. However, for other commodities that are often traded direct to downstream processors or end users, the path is far more complicated.
In today’s article, we look at why some projects find it hard to attract financing despite excellent economics.
Traditional banks feel more comfortable providing debt to transparently traded commodities as there is a market for the product globally. If a customer defaults on a shipment, there are numerous other customers that can step in and buy it.
However, for many commodities such as lithium, rare earths, graphite and mineral sands, if a sale falls through (for whatever reason), it can sometimes be much harder to find an alternative buyer. It is for this reason that traditional banks often shy away from financing these types of projects.
Banks wish to do business on a relatively low risk basis. Bank terms sheets often require hedging (ie forward sales at a set price) and cash sweeps (where surplus cash can be used by the bank to reduce debt) to be put in place. They’re also comfortable financing projects that have a ten year life, however having an extended debt profile can prove to be too risky for some banks.
Exotic commodities, for want of a better term, often find financing more challenging as the quality of the customer or end user becomes a major factor. Lenders want to see that the buyer has the credibility and balance sheet to continue funding the purchases. Whilst end users a comfortable entering into offtake arrangements for periods of three to five years, this is often not sufficient time to cover the payback period of the debt. This increases the risk profile for the banks, often to unacceptable levels.
This then introduces alternative types of funding into the mix in order for these projects to get away.
Royalty financing was popular in the 1990s as it provided cash upfront without a defined repayment schedule. Instead, the royalty provider was entitled to a share of the revenue or cash flow produced from the operation for the life of the project. Where a project had a finite life, this was often advantageous to the miner, however if exploration was successful, it could sometimes mean paying significantly more than was borrowed.
We have also seen traders and downstream processors providing prepayments for offtake in order to assist with financing of the project, however we are now seeing end users fully committing to debt and equity packages primarily in order to secure offtake for periods of up to a decade (or more).
Alternatively, we have seen many companies seeking a cornerstone or strategic investor at both the corporate and project level. Even though the company is forsaking some equity in the project, the presence of a large cornerstone investor (particularly if it is a well credentialed one) will often have a positive impact on the share price that outweighs the loss of equity.
More recently, Governments have become an often valuable source of funds for project financing. Government assistance can be in the form of grants, deferred or forgiven taxes or attractive debt packages. Government funding of projects is more about securing local jobs and manufacturing as well as political manoeuvring to ensure that one country (ie China) doesn’t dominate production.
In 2022, the Australian Federal Government provided Iluka Resources with A$1.25 billion in funding for the development of the Eneabba Rare Earths Refinery. With China dominating rare earth production, this was seen as a strategic investment that would allow a range of operators to access and refine ore there.
It is not just Governments emerging into the project financing space, with infrastructure funds seeing long life projects developed by majors as relatively safe investments.
Last month, Mineral Resources announced the sale of 49% of the Onslow Haul Road to Morgan Stanley Infrastructure Partners (MSIP) for A$1.3 billion. MSIP will receive $3.94 per tonne of ore transported on the road up to 40Mtpa (or A$157.5 million per annum) with the agreement in place for at least 30 years before being reset at a reduced rate. Whilst it appears on paper to be a cash cow for MSIP, for MinRes it provides significant non-dilutive funding for project development.
Interestingly, we are starting to see more transferability and replaceability of funding as the project evolves.
For example, when Liontown Resources was seeking financing for its Kathleen Valley Lithium Project in WA, it entered into offtake and debt arrangements with Tesla, Ford and LG. It then progressed to a Decision to Mine, even though it had not secured all of the funding required for the project development. Subsequent to the development commencing (and prior to first production, it has now replaced the Ford debt package with an alternative debt financing facility from LG.
Whatever the sources of financing, it will continue to be a complex process for all involved. Lenders, investors and offtake parties will continue to argue for a bigger and better piece of the pie, all the while wanting everyone else to commit first. As the saying goes, its much easier to raise the last dollar than the first.
White Noise communications is provided a fee for service working with companies which may have exposure to commodities or securities mentioned in these articles. All articles are the opinion of the author and are not endorsed by, or written in collaboration with, our clients.
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