Miners who cannot 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 Non-Ferrous Metal Industry’s Foreign Engineering & Construction Co Ltd (NFC, 中國有色金屬) and South Korea’s POSCO Engineering & Construction Co Ltd 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 underutilization and keep the music going, Chinese companies are now aggressively targeting foreign markets.”
INFRASTRUCTURE
Infrastructure investment in China slowed last year 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 last year at 15.8 percent, according to official figures.
Canadian construction and engineering company SNC-Lavalin Group Inc is working with NFC 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.
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 US$88.6 billion last year, according to Thomson Reuters data. That is 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 US$579 million Sisson tungsten-molybdenum project in eastern Canada.
Another Canadian mine developer, Alderon Iron Ore Corp, which is struggling to find a strategic investor for its US$1.27 billion Kami iron ore project in Canada’s Labrador Trough, is talking to Chinese and South Korean EPC contractors about taking an equity stake, chairman Mark Morabito said.
OFFTAKE DEALS
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 the 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 US$10 billion project and helped bring in Korean export credit financing for it.
China’s SEPCO Electric Power Construction Corp (三東電力) signed a US$1.3 billion EPC framework deal with UK-based Oracle Coalfields PLC in 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, CEO and director of London-based QKR Corp, a private mining company backed by Qatari investors.
“It’s a financing option that is real but it’s limited,” he said.
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