LAC president outlines recent changes in project financing

The topic of project financing and its changing nature during the past 20 years was touched on by the president of LAC Minerals (TSE), Peter Allen, in a recent speech to a precious metals seminar in New York City organized by Goldman Sachs. “There was a much greater emphasis on debt during the 1970s and much more emphasis on debt and innovative equity financing in the 1980s,” Allen said, adding that a number of lessons were learned.

Extreme care, he said, must be taken in calculating minable reserves during the feasibility process.

The company must be in a position to pre-finance the project, he said, explaining that the company must be strong enough financially to permit it to put project financing in place later.

And a company must be ready to take advantage of short-term “windows” in the market to raise equity, he said.

“In a sense, project financing of mining projects is a bit of an oxymoron. Project financing was originally conceived as a method of financing stand-alone projects where the certainty of the level of revenue was quite high,” Allen said.

“In the absence of long-term hedging, we know this is often not realistic in the mining industry. A number of North American project financings have run into difficulty. In addition, in the past, banks were implicitly asked to bear country risk on foreign project financings.

“These factors, combined with some degree of commodity risk, create quite a high risk situation. Banks have finally figured out they are taking equity risks for debt rate returns in project financing.

“I believe banks will be less inclined to pursue project financings in the future, particularly given their own problems with less developed countries, real estate and leveraged buyout loans.

“The banks will be more inclined to lend to the corporate entity against its balance sheet. Frankly, we’d rather have it this way, in most cases. The premium paid for project financing is usually not justified. However, it does tend to give some protection against country risk.

“Going into the ’90s, new project development will be affected by environmental requirements and their costs. Human contact with undesirable metals will come under intense and increasing scrutiny in the various forms in which its occurs: air, water, waste and chemical.

“I think this will be the most critical area of concern for miners. After that, landscape and wildlife considerations along with concern for the biosphere will become more important in all countries.

“Social and environmental costs are becoming more uniform as quite disparate societies mature because of communications, education and technology transfers. Trans-shipment of concentrates to foreign smelters will become more difficult as countries around the world will not wish to import other countries’ environmental problems.

“Naturally, these considerations will impact our decision-making. We ideally want to mine relatively clean, marketable products without undue process complications. If a project does not meet these environmental criteria, it may from now on be too costly to consider.”