Newmont provides model for international mine financing

In October, 1990, Joseph Kowalik, a senior geologist with Newmont Gold (NYSE), visited the mammoth Murantau open-pit gold mine in this Central Asian republic and immediately recognized the potential represented by the huge stockpiles of non-mill-grade ore that had accumulated. Yet it was a full three years later before most of the required financing of US$135 million could be secured.

The financing, which is based on a 60:40 debt-to-equity ratio, was the first of its kind in the former Soviet Union, according to Newmont’s chief financial officer, Wayne Murdy, who met with The Northern Miner on a recent tour of the mine site.

In January, 1993, Newmont, together with its Uzbek-based partner, Zarafshan, approached the European Bank for Reconstruction and Development (EBRD) and Barclays Bank. It was EBRD’s first dealing with Uzbekistan.

In July, 1993, EBRD syndicated the loan, offering pieces of it to other banks. In all, 13 banks from the U.S., Great Britain, France, Germany, Austria and Switzerland took part, although EBRD took the greatest share.

At that point, the loan was to be for US$105 million, with EBRD assuming responsibility

for half and the other banks accounting for the remainder.

Owing to the fact that a mine financing of this nature had never before been attempted in the Commonwealth of Independent States, the individual banks chose to reduce their own risks by offering small amounts.

The overall loan of US$105 million was closed in November, 1993, one month after construction began. Political risk insurance was provided to Newmont by two entities, the Multilateral Investment Guarantee Agency and the Overseas Private Investment Corp.

In April, 1995, Newmont and its Uzbek partners again approached EBRD, for an additional US$30 million to cover cost overruns.

The initial capital cost had been US$150 million, but a 50% overrun boosted this to US$225 million. As a result, the amount of the loan was increased to US$135 million.

The extra costs were due to three factors:

* Local labor pools were unskilled in Western construction techniques, making it necessary to import a high number of expatriate workers.

* The availability of construction equipment in Uzbekistan was over-estimated and, consequently, more equipment had to be purchased from foreign suppliers and shipped into the site.

* Freight costs were found to be higher than expected (US$25 million, compared with the original estimate of US$16 million).

Despite these overruns, operating costs are still expected to total about US$150 per oz.