Who Says There’s A Credit Freeze For Miners?

The shell shock from the financial crisis has many miners thinking debt financing is a shattered dream. But at least one banker says that may not be the case.

“We see miners come back from Canada saying the debt markets are closed, but we’re doing business, so we want to correct that impression,” says George Rogers, who heads up the commodity and resource finance team at Investec Bank’s London office.

Last year, banks big and small cut back lending while the financial crisis was at its peak but with the much-vaunted green shoots of renewal beginning to appear, banks like Investec are looking for lending opportunities.

And because the Canadian finance world is dominated by the six big Canadian banks, which generally provide debt financing only to larger miners, Investec is only too happy to step up and fund smaller players.

“Debt financing for mid-tiers and juniors has been done in London anyway,” he says. “Although we’re based in London, 90 per cent of our clients are Canadian.”

Not that things are just as they were before the crisis struck. Rogers admits that the size of financings has shrunk.

“The levels of debt we hold are the same, but before, we’d confidently underwrite much larger transactions in the $100-to $200- million bracket. We are less able to do that now.”

That’s because Investec holds no more than $30 million of any one transaction — so if a deal is above that threshold, it brings in other banks. In the current environment, however, it is tougher to discern what another bank’s appetite for financing might be.

Another change is the bank’s risk tolerance — where Investec once provided financing for greenfield projects, the bank is now only looking at producing mines.

The lesson from the last cycle, Rogers says, was that massive cost inflation in the industry combined with scarcity of labour and resources resulted in major cost and time overruns. That left projects susceptible to failure once commodity prices headed south and financing dried up.

For Investec to finance a greenfield project now, Rogers says, the company would have to have a strong sponsor.

Another area where the bank has tightened its lending restrictions is with regards to political risk.

“Our perception is that political risk has risen lately,” he says. “It’s likely the delayed effect of a number of governments who saw what was going on in the commodity boom and decided to get a better share. By the time they put their new tax structures in place, metal prices went off the cliff.”

Rogers says Investec considers lending in South America to be higher risk and also noted a reduced appetite for investing in parts of the Democratic Republic of the Congo.

While the cost of debt for companies will vary according to specifics of a given project, Rogers says the current range is between 3% for the highest-quality projects to 15%.

“That’s a much wider range than we’ve ever seen before,” he says. “In the past, we would have a range of 90 to 350 basis points.”

While he does anticipate that range to narrow as the economy improves and banks become less fretful about lending, he says miners won’t see the same low rates that were available two or three years ago for the average project.

In part, that is because the banks’ own cost of funding is higher. The uncertainty created by the financial crisis means that inter-bank lending is no longer based on LIBOR (the inter-bank lending rate), but on LIBOR plus a given margin agreed upon by the two parties.

The situation has some in the European investment community arguing that LIBOR has become irrelevant, Rogers says.

Of course Investec wouldn’t be in a position to provide debt financing if it didn’t fare better than most during the financial crisis.

The bank didn’t have to write off any bad debt in its mining division — a success that Rogers chalks up to a strong specialized team.

“The loans we were making were ones that we considered carefully,” he says. “If mining non-specialists are dipping in and out of the mining sector, they will get their fingers burned. . . but if you specialize in that field, you chose the right projects to lend to.”

Investec’s team is made up of mining engineers, and lawyers and financiers that have specialized in the mining industry, while Rogers is a credit financier with 22 years’ experience in the mining sector.