Current Trends in Mining Finance
Carlos Urquiaga, MD, Structured Debt Metals & Mining
April 2013
Industry recognition for the strength of BNP Paribas’ business model
BNP Paribas was named
“
BANK OF THE YEAR
by International Financing
2012
Review (“IFR”)
It is no easy matter for a bank to deleverage,
strengthen
capital,
secure
access
to
alternative sources of funding and drive
strategic change. It is even harder to do so
without
losing
sight
of
the
underlying
business. But that is what BNP Paribas Group
Chief Executive Jean-Laurent Bonnafé and his
Board
achieved
in 2012.
 Executive
BNP Paribas’
expertise
in debt
capital markets IFR
was
”
further recognised in the awards. BNP Paribas won Euro
Bond House and EMEA Investment-Grade Corporate Bond
House.
 The IFR awards are a key industry benchmark of global
excellence and Bank of the Year is the top honour
awarded. IFR is Thomson Reuters’ leading financial
industry publication.
April 2013
2
Mineral Reserves
Increasing Reserves: higher metal prices allowed to reduce cut-off grade and re-classify
lower grade material to reserves
Copper global reserves and Price (1980 – 2011)
Gold Mine Reserve Replacement and Price (1993-2011)
• Gold producers demonstrated very strong reserve replacement performance during 2009-11 period:
•
High gold prices enabled many gold producers to favorably adjust the economic factors used to delineate
reserves, leading to a corresponding increase in reported reserves;
•
Some gold operations and projects are reporting significant increase in reserves but this is due to higher
prices rather than new discoveries;
• Copper producers increased mill ore reserves following investments in exploration and lowering of cut-off grades.
Leach ore reserves have proven more difficult to expand due to many leach reserves coming from small, high
grade deposits with a short exploration cycle;
April 2013
3
Declining Grades
Average grade, amongst the key predictors of operating costs, continues to drop.
Au Historical Grade (g/t) (2006 – 2020)
Cu Historical Grade (%) (1990 – 2025)
1.8
Gold Grade Au %
Copper Grade Cu %
1.8
1.6
1.4
1.2
1.6
1.4
1.2
1.0
1.0
0.8
0.8
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2020
Source Wood Mackenzie
1990
1995
2000
2005
2010
2015
2020
2025
Source: Wood Mackenzie
• Average gold and copper grades have been declining and this trend is expected to continue in the future;
• According to Wood Mackenzie’s research, average gold grade declined from 1.5 g/t in 2006 to 1.2 g/t in 2012
and expected to decline to 1.0 g/t in 2020. Average copper grade declined from 1.60% Cu in 1990 to 1.10% Cu in
2012 and expected to decline to 0.86% Cu in 2025;
April 2013
4
Higher costs to operate
• Capex much higher than in the past, mainly due to:
•
Cost inflation;
•
Significant infrastructure investments (port, rail, processing, water, power, etc);
•
Extended project development time;
• New technologies and improvements in processes allow the development of lower grade deposits but at a higher
upfront cost;
• Increase in Opex due to tight labor market, higher transportation, power, consumables, etc;
• Experienced staffing even harder to find from development, debugging and operating perspective;
• Greater socio-environmental approval and ongoing sustainability risks;
Primary copper industry – revenue, costs and margin ($/lb)
April 2013
5
Riskier frontiers
•
Existing well known mining jurisdictions experiencing more social opposition and unrest than ever;
•
Low risk countries tend to be higher cost and permitting is more difficult;
•
Countries where additional attractive geology exists are politically unstable or have no mining history/laws/etc;
•
A number of large projects are being delayed or put on hold. Chile’s Copper Commission (COCHILCO) estimated
that 11 mining copper and gold projects in Chile worth $39 billion were delayed or put on hold in 2012;
•
Resource nationalism;
Source: Wood Mackenzie
April 2013
6
So where M&A is heading in 2013 and forward?
It depends
 Senior Companies:
Senior companies continue divesting non-strategic assets for portfolio
management and re-allocation of capital;
 Medium Companies:
Major consolidation in the base metals space has already happened, very
few assets left available;
 Junior Companies:
Junior sponsors with advanced projects and lack of financial resources are
more willing to bring JV partners, merge or sell their projects;
 Resource Hungry:
Korea and China have significantly slowed down their acquisition spree,
focusing on involvement as JVs partners to secure off-take;
 Cash Rich:
BRIC-country companies into Latam, Africa, Russians diversifying
internationally;
 Gold Companies:
Using excess cash to execute diversification strategy given Au’s challenges,
a lot of activity is expected in the gold sector;
 Traders:
Opportunistically looking to buy assets to integrate them in their value chain;
 Alternative Investors:
PE investors as buyers/JV partners for funding are becoming more common,
sovereign wealth funds, hedge funds:
April 2013
7
Is Capital Raising supportive of mine financing?
• Equity financing was generally unavailable for junior
sponsors in 2012, but plenty of liquidity in bond and
bank loan markets for well structured transactions with
good underlying economics;
• New Basel III regulation is expected to continue to
shrink the number of bank lenders over the next 1-2
years, particularly demand for long-term bank lending
capacity;
• Green-field/construction risk in mining debt
transactions is started to be accepted by institutional
investors (primarily by TLB investors and some highyield bond investors start to consider it);
• Overall capital raising decreased in 2012:
disappearance of IPOs driven by lower equity
valuations and the slow down in projects coming to
markets (more projects being put on hold and
delayed, slower project development timeline,
environmental/social issues);
MINING ECM VOLUME SINCE 2008
$ BN
12
# Deals
80
11.8
8.8
9
60
5.7
6
40
4.4
3.6
3
20
0.1
0
2008
2009
Follow-on
2010
IPO
2011
2012
0
2013YTD
Total Number of Deals
Capital raising by asset class – proceeds (2007 – 2012)
• However, record low interest rates and strong appetite
from investors enabled mining companies to raise
$112.5 billion in bond markets (investment grade and
high-yield) in 2012 vs. $84 billion in 2011 based on
Ernst & Young estimates;
• Despite lower capital raising by mining companies in
2012, we expect a strong activity in bank loan, TLB,
bond markets and acquisition financing in 2013.
Source: Ernst and Young
April 2013
8
Mergers and Acquisitions 2012 Snap Shot
Commodity analysis
Value of deals by target commodity (%) (2012)
Volume of deals by target commodity (%) (2012)
Source: PWC
Source: PWC
Copper and gold dominated M&A activity in 2012, as miners took advantage of attractive valuations to fund future
growth.
April 2013
9