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Current Trends in Mining Finance Carlos Urquiaga, MD, Structured Debt Metals & Mining April 2013.

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Presentation on theme: "Current Trends in Mining Finance Carlos Urquiaga, MD, Structured Debt Metals & Mining April 2013."— Presentation transcript:

1 Current Trends in Mining Finance Carlos Urquiaga, MD, Structured Debt Metals & Mining April 2013

2 2 ” 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 Executive Board achieved in IFR  BNP Paribas’ expertise in debt capital markets 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. BNP Paribas was named BANK OF THE YEAR 2012 by International Financing Review (“IFR”) “ Industry recognition for the strength of BNP Paribas’ business model 2 April 2013

3 3 Copper global reserves and Price (1980 – 2011) Gold Mine Reserve Replacement and Price ( ) Mineral Reserves Increasing Reserves: higher metal prices allowed to reduce cut-off grade and re-classify lower grade material to reserves Gold producers demonstrated very strong reserve replacement performance during 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;

4 4 April 2013 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) 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 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;

5 5 April 2013 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)

6 6 April 2013 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

7 7 April 2013 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:  Alternative Investors: Opportunistically looking to buy assets to integrate them in their value chain; PE investors as buyers/JV partners for funding are becoming more common, sovereign wealth funds, hedge funds:

8 8 April 2013 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 high- yield 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); 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 MINING ECM VOLUME SINCE 2008 Capital raising by asset class – proceeds (2007 – 2012) Source: Ernst and Young

9 9 April 2013 Mergers and Acquisitions 2012 Snap Shot Value of deals by target commodity (%) (2012) Volume of deals by target commodity (%) (2012) Commodity analysis Copper and gold dominated M&A activity in 2012, as miners took advantage of attractive valuations to fund future growth. Source: PWC


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