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Project FinancingBuilding Infrastructure

Key Idea

Projects with different risksare likely to possess differing debtcapacities with each project,therefore necessitating a separatefinancial structure.

Core Concepts

Projects with

different risksare likely to possess

differing debt capacitieswith each project, so need

separate financial structure

Key Attributes of Project Financing

Risks hedged to maximum possible extent Projects debt capacity fully utilized Financial obligations tailored to match

projects cash flows Lenders have limited recourse

Overview

Criteria for success Historical perspective Overview of structured financing

Obligations match projects cash flows Participants exit sequentially

Criteria for Success

Size doesnt matter Project financing works in many activities Community of interest is crucial Infrastructure is crucial

Distribution by Size

284

111

95

50

41

71

34

47

24

11

20

8

0 50 100 150 200 250 300

under $20 million

$20-40 million

$40-60 million

$60-80 million

$80-100 million

$100-150 million

$150-200 million

$200-300 million

$300-400 million

$400-500 million

$500-999 million

$1 billion or more

Median size: $40 million

Activities:Project Financings Announced Jan. 1, 1981 through Dec. 31, 1995

0

10

20

30

40

50

60

Project

Financings

Oil & Gas Development

Cogeneration Power

Real Estate Development

Plant Construction

Renewable Fuels Power

R&D Partnerships

Mining

Independent Power

Miscellaneous

Project Financings Announced Jan. 1, 1981 through Dec. 31, 1995

Electric Power Production

0%

20%

40%

60%

80%

100%

Cogeneration

Hydro

Geothermal

Solar

Smaller Corp

Fortune 500 Corp

Independent

Communities of Interest

Cogeneration power productionexample: Seadrift Plant Host site

greater the productivity & less waste backup power

Utility company higher employment activity in its region greater planning flexibility

Simplified resolution of financial distress


Communities of interest in manufacturingexample: BevPak Economies of scale Full utilization of capacity

Independence from specific brands Reduced liability exposure

Communities of InterestMining, oil and gasexample: Hibernia Field Pooled risks Growth opportunities

New deposits Transmission Refining

Stimulates regional economy


Research and Developmentexample: NaTec, Ltd. (Partnership of CRS

Sirrine & Industrial Resources, Inc.) Pooled expertise Reduced free-rider problem

Costs shared among beneficiaries More opportunities can be pursued

Nurturing the Community of Interest

The community of interest must beadequately reflected in contracts

Participants must have reasonableexpectation that there will be continuity inhonoring government commitments


Adequate supporting infrastructure must bealready in place Or provided within the community of interest


Governments must be willing to allowsignificant positive expected net presentvalue necessary to attract private sector participants

Stable Contracting Environment is Crucial

Expeditious enforcement of contracts Continuity of government participation

as new officials replace old ones as power bases shift

Environment reasonably free of politicalrisks

Geodesic Networks

Project financinginvolves network ofparticipants Community of interest Often global

Non-hierarchical,web-like structure

No central node Long history

Historical Examples

11th Century English mine Medieval trading networks Construction contractors in ancient Rome

Future Possibilities

Renewable Fuels Power Geothermal Ocean Thermal Layers

By-product is fresh water Tidal Hydrogen Conversion

The Physical Value Chain From a Global Perspective:

Basic Extraction

Distribution&Marketing

Fabrication

Refining

PhysicalPhysicalRealmRealm

Service

Value Added at Value Added at Each StepEach Step

Support Activities:Technology DevelopmentHuman Resources Development

GATHER AND APPLY IN THE PHYSICAL REALMSTORE AND TRANSFORM IN THE INFORMATION REALM

Infosphere GATHER

APPLY

PRESENT

DISTRIBUTE

SYNTHESIZE

SELECT

ORGANIZE

Virtual Value Chain & Information Operations

Background:

Structured Financing

Structured Financing:Obligations Match Cash Flows

Debt capacity fully utilized Loans staggered to match project timetable Lines of credit provide debt support prior to full establishment of

project cash flows Limited partners provide majority of equity General partner provides small portion of equity

During early years, debt service consumes most of theexpected cash flow Level of expected cash flow determines capacity for intermediate-

term loans Derivatives used to stabilize cash-flow match

Structured Financing:Cash Flow Distribution

Early years: Most of cash flows go to debt service Little to limited partners Small or none to general partner

Middle years (after debt substantially reduced): Specified percentage to limited partners Remainder to general partner

Late years (after debt paid & L.P.s receive specifiedreturn): Small or none to L.P.s Most to G.P.

Who gets paid?

Total Project Cash Flows

Am

ount

Lenders

1st H

urdl

e

2nd

Hur

dle

3rd

Hur

dle

Limited Partners

General Partner

Political Risk

Expropriation take property outright revise agreements

Blocked Funds

Exchange Risk

Lagged adjustments for inflation Unrealistic official rates Limits on removal of capital

Issues in Analyzing ForeignInvestments

Parent vs. Project Cash Flows tax regulations exchange controls

Three-Stage Approach subsidiarys standpoint parent company standpoint add indirect benefits & costs

Southport Minerals, Inc.

Case Study

Questions

Is infrastructure provided? Is there a viable community of interests? How thoroughly are risks covered? Is there profit potential for Southport

Minerals?

Which Approach? Approach 1. Discount at Southport Minerals cost of

capital, ignoring the financial arrangements (zeroNPV)

Approach 2. Discount at a premium above SouthportMinerals cost of capital, ignoring the financialarrangements (negative NPV)

Approach 3. Discount at Southport Indonesias cost ofcapital, considering the financial arrangements(expected NPV $58 million)

Approach 4. Discount dividends paid versus equityinvested at SIs cost of capital (expected NPV $10million)

Outcome

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

Debt

$0

$20

$40

$60

$80

$100

$120

$140

$ m

illi

on

s

year

Balance Sheet 1972-1987

Debt Net Worth

Outcome

-$10

$0

$10

$20

$30

$40

$50

$60

$ m

illi

on

s

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

year

Profit & Dividends 1972-1987

Profit Dividend

Through the 1990s

1988: Freeport Copper & Gold (FCX) takenpublic on the NYSE

1989: new project financing arranged forErstberg East deposit

1992, 1993, 1996, 2000: significant newdeposits of copper and gold discovered

Indonesia Today The world's largest archipelago, Indonesia achieved independence from the

Netherlands in 1949 Current issues include:

Alleviating widespread poverty Implementing IMF-mandated reforms of the banking sector Effecting a transition to a popularly-elected government after four decades of

authoritarianism Addressing charges of cronyism and corruption Holding the military and police accountable for human rights violations Resolving growing separatist pressures in Papua New Guinea

On 30 August 1999 a provincial referendum for independence wasoverwhelmingly approved by the people of Timor Concurrence followed by Indonesia's national legislature, and the name East Timor

was provisionally adopted On 20 May 2002, East Timor was internationally recognized as an independent

state.

Visit Website

http://www.fcx.com/

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