alister mcconnell- resources & energy symposium 2012

Putting the B back in Bankable Feasibility Studies

(BFS)

May 2012

Presentation Outline

1. Executive Summary

2. The Good, the Bad & the Ugly

3. Extraordinary Project Growth

4. Massive Regional Infrastructure Constraints

5. Stretched Equity Markets

6. Constrained Debt Markets

7. The Good B in BFS

8. Questions

2

More than ever, it is critical to avoid squandering early seed capital in getting a

“good BFS” as well as tailoring its focus correctly for the relevant capital market.

1. Executive Summary Extraordinary Project Growth

• Unprecedented pipeline of new build projects, investment and non-investment grade

Massive Additional Regional Infrastructure Constraints

• Rail and port infrastructure in primary and secondary regions

Equity Markets Stretched

• ASX and TSX main sources of equity for emerging resource projects (AIM and others losing ground)

• IPOs and secondary issues decreased over the last 12 months and increasingly value dilutive

• Greenfield mine infrastructure equity increasingly in short supply

Debt Markets Constrained

• Local debt markets shrunk in Australia post-GFC (departure of most European Banks and limited entry from new Asian Banks, typically following sponsors)

• Local debt tenors do not match long life of mining and infrastructure assets

• US high yield market remains open for larger projects with longer tenor, although structures constrain future growth flexibility

3


The Myth

There is simply no such thing as a standard BFS document for Banks or Bond markets. Engineers have created good templates that are very complete, although full of form over substance.

Background of BFS complexity Fundamental design issues remain outstanding as project moves from PFS to

BFS.

Unclear views as to ultimate capital solution, relevant market & specific needs.

Downstream rail/port infrastructure solutions impacting upstream mine design issues not factored in.

The myth of what a “BFS” is regarding capital market needs.

Value add option analysis gets integrated into “BFS”.

4


The Good Bulk of projects financed up to 5 years ago were financed without “formal

BFS”.

Tens of billions of dollars in infrastructure development have been financed without “formal BFS”.

Lead banks often do not need “formal BFS” at all.

Domestic and lead commercial banks in Australia and Asia would have a capacity of $1-$2 billion, depending on location and project.

Many Asian and Indian commercial banks have no such concept in their home base and little such requirements.

Bank markets are very capable of committing capital earlier than often expected and deferring on some fairly material approval issues or value enhancement issues as conditions precedent to the funding allows earlier equity value uplift and focus on key issues.

Bond markets tend to be less flexible in this regard.

5

6


6

The Bad More recently, nervous new entrant banks, deep pocket sponsors and willing

engineering companies have expanded the width and breath of BFS beyond the actual requirement of capital markets.

Compounding this effect, extraordinary inflation in both size and construction costs of the projects in Australia has led to confusion regarding when a BFS is required:

Where the scale of the project is beyond domestic banking capacity:

• Export Credit Agencies;

• Chinese bank involvement; and

• Offshore bond markets as principal source of debt.

Where there might be a particularly novel or high processing risk.


The Ugly Waste of early seed capital;

Delays caused to critical path items; and

Distractions to management when there are often more critical and fundamental design and value add option analysis work to be done.

7

0

30

60

90

120

2002 2004 2006 2008 2010 2012Mining Non-mining

0

50

100

150

200

250

2002 2005 2008 2011

Minerals and energy processing Infrastructure

Minerals Energy


Australia is experiencing a structural change in the

resources and related infrastructure space with an

unprecedented number of projects in the pipeline

Source: RBA, BREE 8

Value of Advanced Projects (in 2011-12 A$) A$B Capital Expenditure Survey (nominal A$) A$B

Estimate

0

20

40

60

2004 2007 2010 2013 2016Capacity Exports

0

150

300

450

600


0

150

300

450

600

750



9

Iron Ore Coal LNG Mtpa Mtpa Mtpa

Committed Capacity

Committed Capacity

Committed Capacity

Source: RBA, ABS

Australian top 3 commodity exports are iron ore, coal and LNG.

Capacity has substantially increased since 2004 and it is expected to continue expanding at historic rates.

10


10

Historically the majority of this capacity has been investment grade, e.g.

BHP, Rio Tinto, international oil and gas companies.

Non-investment grade project growth has also been outstanding, as

demonstrated by a few key examples; Fortescue, Mt Gibson, etc.

The breakdown for non-investment grade capital expenditure over the

next few years is in the order of:

• 75% for iron ore; and

• 61% for coal.

The changing credit profiles for capacity and capex commitment towards non-

investment sponsors presents a new set of market challenges.

11


Source: BREE


• WA Ports & Rail

• Pilbara – Expansion for incumbents

• Pilbara – Greenfields for entrants

• Midwest – Greenfields

• Yilgarn – Expansion

• Queensland Ports & Rail

• Bowen Basin – Expansion

• Surat Basin – Expansion & Greenfields

• Galilee Basin – Greenfields

12

Rail and port infrastructure in primary and secondary regions has been constrained for a number of years and is playing catch

up in key states, particularly for bulk commodities.

Key examples include:

• NSW Ports & Rail

• South & West Coalfields – Expansion

• Newcastle – Expansion

• South Australia Ports & Rail

• Olympic Dam – Expansion

• Other – Expansion & Mostly Greenfields

• Northern Territory

• Key continues to be link to the Adelaide – Darwin rail line

0

20

40

60

2009 2010 2011 2012 YTD

Australia/NZ Volume of Equity Issues

0

300

600

900

2009 2010 2011 2012 YTD

Global Volume of Equity Issues

5. Stretched Equity Markets Investors remain nervous about Europe and slow

US recovery.

Global equity financings are down over 35% from

post-GFC peaks.

Australian equities weak – in the year to May 2012:

• IPOs fell to 89 new issues from 143 in pcp;

• Secondary issues fell to 563 from 737 in pcp;

• Basic Materials fell to 359 ($2.99B) from 547 ($6.24B); and

• Basic Materials drop in the average deal size from $11.4m to $8.3m.

Cash holdings by Australian investors remain at

historically high levels.

13

Source: Bloomberg

US$B

US$B

Liquidity at current prices would be insufficient to meet demand for non-

investment grade miners or infrastructure related requirements.

6. Constrained Debt Markets Global project finance (PF) strongly recovered since the GFC, though stalled recently.

The withdrawal of most European banks who accounted for around 12% of the

Asia/Pacific project finance market in 2007, has contributed to this dynamic and enabled

existing lenders to be more selective.

Nevertheless, the Australian PF market remains strong ($10.5B 1H 2011) and the Asia-

Pacific PF market represents the highest proportion of the Global market (47%).

Australian PF loan volumes up 60% from 2010 to 2011 and expected to hold in 2012.

14

Source: Bloomberg, Project Finance

0

25

50

75

2005 2007 2009 2011Asia/Pacific & Japan Americas EMEA

Project Finance Regional Breakdown (1 Jan - 31 March) US$B

High-Yield markets, particularly the US, reopened post-GFC and remains open both for

investment and selected non-investment issuers.

US High Yield issues peaked during 2010 (864) following the GFC low point (191).

15

Whilst local debt markets have risen to the challenge, the capacity is still

insufficient to meet the demands of non-investment grade mining companies.

Source: Bloomberg, Project Finance

0

150

300

450

2005 2007 2009 2011

US$B US High Yield

YTD

6. Constrained Debt Markets


What is putting the real B for Bankable into BFS about?

What market will the project be financed in?

What size is the capital requirement?

What is initial likely financing structure?

Is there is a material processing risk?

What are the requirements of the technical work required for equity?

Are port/rail infrastructure logistics costs properly factored in?

16

17


17

Armed with the answers to these questions, management can then ascertain:

The “substance or B” required in addition to equity’s requirements for any BFS

to minimize equity spend pre finance.

The items that can be deferred as CPs to the financing, the value add and

process enhancement work that can be done post financing and financed from

debt (not equity).

The proper schedule to earliest financial close.

In the bulk commodities and related rail/port infrastructure, industrial and food

related sectors, there will be hundreds of billions of dollars invested in the next five

years that can be domestically financed without the requirement for a formal BFS.

8. Questions

18

Alister McConnell, Director Project & Structured Finance Origin Capital Group Email: [email protected]

Phone : +61 (0)2 8243 9622

Origin’s typical early stage involvement process to properly design the BFS includes:

Evaluation of options Approach potential

funders Negotiations and closing

• Set realistic commercial and financial objectives & financing structure/sources

• Set Prefeasibility and BFS work scope to properly fit capital markets & not over-engineer/overspend

• Select technical consultants to best fit above requirements

• Preliminary dialogue with banks, ECA’s & rating agencies to test structure

• Financial modelling testing all options

• Advise on any other likely due diligence requirements

• Prepare information memorandum, financial model and presentations for financiers/rating agencies

• Run related due diligence & BFS work process to fit funding option

• Prepare detailed term sheets & negotiate with financiers

• Develop cost-efficient hedging strategy

• Drive the issue & negotiation of financing

• Run competitive process to select banks/ECA’s/bond investors

• Negotiate final terms and conditions on an individual basis to maximise competitive tension and optimise commercial benefits to client

• Assist in evaluation of terms received and advise on financier selection

• Work with lawyers in finalising documentation

• Assist in finalising due diligence and satisfaction of CP’s to drawing

• Assist client’s interpretation of facility agreement after signing as required

alister mcconnell- resources & energy symposium 2012

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