R money miners gav Pat you're G to teach me something today what are we learning mining project Finance quick and quick snapshot of uh what it's all about Wicked I am your um student today and hopefully people listening can also be students but it's been a while since I've learned anything about project Finance very keen to learn with two experts who you know this is your BR and butter right you guys do this stuff all the time you advise companies to do properly um maybe I can learn a thing or two in the process so I'll um I'm I am your student okay fantastic well just by bit of background so this is something which we've um sort of presented to a few sort of uh I guess um groups uh CFA um we've also done some similar sort of stuff with CPA oim um and I guess for us it just kind of just made sense to there's there's plenty of project Finance pure project Finance but they're generally focused on infrastructure um but given where we are know Perth West Perth um you know basically the home of mining um there's probably not enough about mining project Finance um you have a few CFOs who learn about it on the job um but certainly you don't have um that that much out there in terms of material so hopefully today we'll be able to have a chat about M project finance a little bit boring we tried to make it a little bit more interesting by having um a very obviously fictitious case study involved right just changed the name of a company on an existing model did you well yeah well no not not quite but uh this is for educational purposes only so yeah well yeah consider me Keen to be educated I remember when I cut my teeth got thrown in the deep end with project Finance there were no that there was there there were no resources where I was working that could kind of help me sort of figure things out so I'm pretty yeah pretty pretty Keen for this product to be useful to other people too so this is the agenda so we'll we'll run through this um I won't read off but you know it's you know we'll Define what it is go through a few key ingredients a typical project Finance timeline um just to give you an idea of how long that process might take um some of the uh typical risk and mitigant that project financiers will look at um the due diligence that they will usually run through um a finance plan which is probably more on the um the borrower side so some of the the mining companies so this is how they'll actually approach it or how they should be approaching it uh Financial modeling and debt metrics of course very important to actually um figure out what exactly that structure should be uh some sample Clauses credit considerations and very importantly um how you actually come out with the Deb size is it just a thumb suck you just say this is what we want but you know or is there a bit more signs behind it uh then we've got a worked example as well so I always like the worked examples because I find it's just a bit more useful to apply the theory time uh definition um I won't go into this too much but it's generally just to pick out a few things it's uh you it's basically financing off the cash flows so it's not asset financing it is longterm so you're not talking about you know short-term working capital facilities or anything like that um and yeah it's not really leveraging off the balance sheet of the sponsors uh it is I guess the key thing which people like about the project Finance is it is non-recourse um meaning that the lenders only security is the the project and I guess the cash flows from that project um the but of course uh the sponsors need to put in a bit of hurt money so there's always a bit of equity they'll usually need to support any sort of cost overruns on a on a sort of prata basis as well that's project fing has always fascinated Me by that dynamic because yeah like it's it's expensive debt often times project Finance it's like it's not it's not cheap but that's because if the project doesn't work well how you what are you going to sell the project for afterwards so the lenders are taking on like significant risk and yeah absolutely and I guess the best that the um the the financiers can hope for is to get their money back and get pay their interest I guess upfront fees yeah uh so that's probably why you you do see the interest rate being a bit higher there's plenty of cases where get far less than 100 cents on the dollar back that's right it just makes it easier for the the next owner of the asset to make money right but if you want 100 cents on the dollar use use nor Capital yeah thanks here here's some of the characteristics um it's it's for project development it's it's generally you know project Finance is not so much for Acquisitions or anything like that or working capital it is to develop projects um you do get a fair bit of Leverage in resources the magic number seems to be 6040 um you can get higher but generally it's more for infrastructure type assets with greater certainty of cash flow uh longterm um you can go Project Life generally or a little bit less um you always usually have a bit of a tail there it's typically Reserve tail in mining um SPV is more that ring fencing non recourse we spoke about uh control policy um that's that's a pretty key thing with project Finance um not to say that the the companies can't actually pay any dividends but that you need to you know go through the cash flow waterfall satisfy all the conditions of the project financing and then you then you can pay out dividends uh and sometimes there's you know upside cash share so part you know part of that cash flow available for dividend distribution is is actually captured by you know the the finance year for early repayment um there's a lot of participants involved in a project financing there's multiple teams of lawyers technical consultants marketing consultants uh advisors like ourselves there quite a lot of people and I guess skipping to the end um all that sort of adds up the sponsors usually on the hook for the due diligence cost transaction costs uh so they're paying both their lawyers fees as well as the the lenders lawy fees um and allocated risk um that yeah actually it's they in Project Finance you kind of um yeah it's all about risk you know identifying risks and trying to mitigate those risks as best as you can right what are the advantages mate yeah so here here's just a slide um we're we're comparing project Finance with um Equity finance and traditional Deb facilities so by traditional debt facilities we're talking corporate facilities it might be a larger company which already has existing operations and cash flows so they they'll have a a corporate debt facility U and they can just sort of tap that um I mean some of your larger guides like say Evolution for example that have a have a corporate corporate facility assets multiple assets um so there's no not there's no recourse so and all the covenants are just on that corporate so they could actually tap that corporate facility and just use that to develop any of their projects that they wanted to um I guess um just running through like you know recourse sponsor is um project Finance is probably the only one with limited recourse all the other ones there's there's recourse um back to the sponsors um balance sheet impact project financing is off balance sheet uh due diligence because of that limited recourse um nature you're doing a lot more due diligence whereas um the lightest option is probably Equity Finance um if you can actually raise all your development Capital through Equity um you can do as much or as little due diligence as you as you want um and then on the corporate debt facility side um depending on the the size of that project relative to the portfolio of assets and how much cash flow you generating out of of it you you might actually need to do some due diligence on that new asset uh example of that is um probably early days of White Haven where Ms Creek actually comprised of a really large chunk of what their their overall value was um so that was probably more that's probably more project finan than corporate facility even when they started refinancing it out uh tax efficiency I'll skip over that's just a a debt you know deductible interest on debt sort of thing um risk distribution risk isolation um yeah that's yeah that's um also risk distribution it's it's shared between sponsors lenders because it is that non of course but um in terms of equity and and traditional debt there's there's no risk distribution isolation there we could there there are a lot of different kind of you know parties in contracts that it all come together what does that look like so some of these are are always um in in the sort of the mix uh some of these are subject to whether or not the um I guess the the borrower or the developers actually looking to Outsource some of the stuff I mean just picking out uh the power contracts accommodation catering uh sometimes they may want to do it themselves um but often they they don't they'll generally Outsource it and power contracts are a classic example where if they want to trim some of their capex they'll look to just turn that sort of capex requirement into like a Opex item um but some of these other ones like um in terms of all required permits the typical ones there are sort of inviro uh Native title land use sort of agreements um of these are things that are de risking the drisking the financing in various ways and kind of have to have have to just be in place in order for for the debt case to just yeah well well some of these things are are just standard for the project so I guess inviro um Native title they they're all standards they're not necessary some of the things which might be you know you might have a choice if you didn't take the finance up might be EPC contract um if the I guess if the owners team is pretty competent and they can sort of just run things on a um on an epcm kind of In-House epcm basis and they don't need to go down the EPC contract which is generally um you fixed price sort of but you know they charge a little bit more just because it covers a lot of those risks um but yeah that's that's one of those things which is um a preference for the financiers um and again some of this like operations maintenance that's probably more of a if if the owner team is is competent enough they might be able to do that inhouse otherwise they'll contract that out um off take agreements is it probably depends on the commodity um so gu Commodities like gold you wouldn't need an off take agreement unless you're you're talking like some sort of concentrate but if you're producing gold bars you wouldn't need a sort of off agreement um and insurance contracts is pretty common to to all the so all the projects all of these things well mostly think sort of form part of the CPS that actually go in place before you can down CPS um they'll review all this stuff um some of these should actually have what it called um I'm using the old terminology but it's like tripartitus so it basically gives um the borrowers step in rights if anything were to go wrong so EPC contract for example would generally be a site agreement there which allows so the borrowers or the representatives of the borrowers to actually step in and actually uh continue that contract if anything go wrong and similar these combination catering power that you generally have stepping rights through structure and participants uh yeah this is just a general flow chart of of what it might look like I won't going through this tooo much but I might just um explain I guess the structure of the lenders so that light blue um those light blue blocks y uh MLA manade lead Rangers um they're typically the banks or the finances which will get together actually structure up the deal and do the negotiations um they may or may not underwrite as well so they might say say it's a billion dollar uh debt piece they may say we come in and underwrite the full billion dollars they might only hold 100 million each um but then what they do is they make money off selling that down once it's all structured up so they um sell it down to what are called participant Banks participant banks are basically um yeah they they don't really have necessarily have the that s in-house capability to structure up or maybe they didn't win the Mandate so they just come in for a piece at the end they form part of The Syndicate yeah does the the mlaas are they usually also part of the ultimate Syndicate themselves or do they well generally yes yeah they generally have to put up some balance sheet not just underwrite um because they also get a fee on on the other part too yeah they they basically skim a little bit off the off the top when they sld down yeah yeah yeah now the the the other term for the partipants which is not so flattering as as stuffy um but that's not necessarily fair but um yeah but they're just coming in to to make up the numbers I guess to provide that liquidity yeah I've never seen the word sponsors used on the kind of equity piece of it before that's but that's like a it's like a US word but it's also just a project Finance word too yeah so yeah we we use that as well yeah I've never really thought about it it's just one of those things where you think okay just just what it is yeah yeah well also you know I've never done too much on the project Finance side so the only time I've seen sponsor is when I'm looking at like spacks you know Steer away from that different yeah um so ofak is probably a good one to just have a chat about because um some of the non non-exchange traded Commodities um I guess even nickel these days um you if if you're if you're if you're guess your your project developer has such a low market cap um that even if you are able to get the debt you're not able to raise the the equity um sometimes your off-takers can come in as that strategic partner um where they can actually make an investment into the project directly maybe at the project level they can provide prepays for example and that all sort of comes in and sort of reduces the the amount of equity that you might need to otherwise raise um yeah yeah that the offer can be pretty Dynamic and pop pop up in a lot of different parts right like the commodity Traders so desperate for life of mine oft that they'll yeah they do a whole bunch of funky things oh yeah absolutely so there's generally pretty pretty aggressive but I guess if they do it on a but what you'll typically find is if they do it on a sort of prepaid basis they they they're usually limited by a certain Camp so there seems to be a sweet spot there where it's it might be 50 us or something um but and if it is a prepaid they can usually only provide that funding call it 6 months to a year in advance Max um which means that if you need the money sooner than that that that's not the money which gets drawn yeah yeah um and and oft like there are so many different types of off-take contracts but the like what type of off takes sort of you know necessary to be in place for the for the banks to be comfortable they they need like Flor price things like that depends commodity like bankable um and and this is this and this is pretty hard for some of the the I guess some of the developers sometimes right um just because it's not Market um because in in an ideal world uh a project financer would want a um I guess a life of loan um off take um sort of creditworthy counterparty uh fixed price so you've got got that price certainty um fixed volume so you know exactly what you're selling and I guess fixed term right um so ideally that's kind of what the the perfect oft take would be um now sometimes the finances will be a bit more pragmatic and they'll say okay well as long as you you can tell me that you've got it sold and I've got line of sight in terms of how you price it and what price you actually get um I'll accept that because the the cost of production is low enough you've got enough buffer on the margin that I'm comfortable that even if price is dipped I've still still producing enough cash flow there to to pay back yeah so there there's that and then of course um but yeah off of takers I think a lot of a lot of companies out there these days probably should be looking at strategic partners because strategic partner is a the project sell down some extent yeah project they can either go in at the list level project level um but they usually would inject you look to them to inject um I guess an investment which which might not mirror the the I guess the share price of the market the the market cap um I mean Sheffield is a classic example of that Sheffield was probably dead in the order until they were able to sort of bring on yanel who actually acquired half of the project um paid effectively equivalent of their market cap at the time for half the projects and that half the that injection effectively met most of their Equity requirement for their development MH um because you you have you have companies out there which might be 50 mil market cap talking up Billion Dollar projects they need they need 40% Equity that's 400 so you're looking at what eight times if you get pump it up to 100 that's four times yeah I I don't you can't that yeah yeah you just don't see four times market cap raisings ever I think yeah yeah yeah ever yeah yeah and the advisor just sort of are very important that's the critical part of the question I'm surprised we did we bold that yeah they just like yeah like intermediate a lot of things where yeah yeah no to to be honest I mean depending on the the commodity depending on the projects some some Commodities some projects are a little bit easier than than others um so say gold for example gold is pretty well banked and um the the traditional Banks can still fund it there's plenty of management teams CFOs out there who have that experience as well um so that you know that's probably a case where you might not need advisors or the advisors provide a lighter touch um but then if you're talking say rare earth or some of these non-exchange Trad Commodities that's probably where um probably do need a bit more help because not every CFO especially if they're classically trained from order background would have that experience with um raising capital for development and this brings us to our obviously fictitious uh case study us yeah education or or do send later yeah we would mind um yeah so we've just come up with a a case study uh fiberian minerals um Tim Thanos is the MD Tim is um based in West Perth goo by training worked for BHP riotinto um strong experience in Discovery and development of mining projects in places like Zamunda and other similar jurisdictions to wakanda um they've ipoed um they raised 5 million they spent that money in the grounds they and um because wakandas recently opened up for foreign investments U borrowed their mining code from wa everyone does everyone does yeah it's you know go go for the best um and you know vibranium is it's on Trend right it's a it's a critical energy material so very much on Trend I've heard of it um yeah critical mineral yeah so yeah so I'm surprised like the US and places like that don't have it on on the list I mean I would have thought it'd be up there with at adamantium and commodities like that I would have thought yeah yeah um but you know vi vi has very strong relations um with the governmental and tribal leaders including I guess the current black panther but uh yeah very very good uh very good story here um they need some help to to finance their project I'm guessing yeah i' I'd say so but um yeah we're more than happy to help right so um and here look this is probably no um this this is probably prettyy familiar to a lot of your your sort of viewers it's on the logo that's right so I won't explain it too much but um there's so much in this one picture this is like 90% of what you got to know about mining one picture that's right that's right and I guess skipping ahead right I mean everyone gets excited about about the discovery but skipping ahead to how do you actually fund it um right you you're basically when you're looking to raise the the development Equity you're pretty much right at that sort of the the Valley of Death the orphan period um so when you need your share price to pump up and and market cap to go up then raise it's actually going the other way um because during that period you you the company's doing their scoping studies the pre feasibility studies your your bankable feasibility studies and it's around that sort of finishing the PFS you know started on the DFS um BFS is when they start the funding piece on the debt um and at the same time they're having raise money to actually fund all these feasibilities as well as the the development sort of equity um in the moment you put capex out there in the market in in your in your stud scoping study of PFS or DFS yeah the market just thinks oh they come raise oh funding it harder yeah or yeah I mean that that's the that's the surprising thing it doesn't matter how good your IR or your MPV is um yeah that would just zero in on the the capex number then yeah so uh obviously fictitious case versus Lono uh so they've tracked pretty pretty closely they very successful in finding a highgrade VI vibranium deposit which they've called Panthers CLA deposit um they've completed their PFS and they're six months through doing a DFS so this is the perfect time to actually start looking at um um how do you how do you actually fund this now uh Tim Thanos um being a being a Joo by training coming from a big big company he's never really had to actually worry about how projects get funded uh so he's come to us for a bit of advice as to what is Project finance and how does it apply to his company and his project I'm interested I like the share price go straight up I've got a bit too excited early on and then they come back to earth but it's still still a financeable project it's it's hold on the market lies [Laughter] it uh here's a here's a fairly sort of uh typical sort of indicative project I mean I've I've um taken some Liberties here um I've had the sort of um that process with the you know sounding of the banks Eis all that sort of stuff um running front running that before the GU the DFS has been complete yeah um which in the background your the background the bank interest based off the PFS numbers a little yeah that's right and and maybe some early sort of completed Works um in the DFS yeah which um some of the duude diligence providers like specifically more the technical right you always have to get the technical done but the technical advisors might they might start looking at maybe the M plan's done or or maybe something some aspect of it done so they'll start looking at that uh so this is kind of running in parallel um that might not always happen but in in this example we've got that running in parallel yeah so that you've kind of lining up everything so that um so that by the time you finish your DFS um you you pretty much got I guess those those approvals those credit approvals in place and then the company can actually go go forward with a so FID yeah so final investment decision um which might be subject to that Equity raising yeah that's often there's a lot of different strategies with how companies will actually you know time releasing these things but some sometimes you do see they want to drop the DFS and announce FID simultaneously as doing the big rise but the only way you can do that is if you've got the the banks there for it like saying subject to the r big information drop big Capital raise and then the projects Hony Dori kind of like the financing is there from that point but yeah I mean you you see why they do that right I mean just before we're talking about well whenever they drop a feasibility study um does doesn't matter what the MPV or the IR looks like they just zero in on the on the capital right and they think oh geez there's a there's a raise coming on so if you can actually line everything up so that you're dropping it and doing the rise at the same time then you kind of front run that a little bit but it's it's pretty hard to do though yeah and then we've just got um this uh construction we just assume you know 18 months construction period here I think um and then up to project completion so project completion um there's a few Concepts in Project Finance where um you have practical completion which is where everything's constructed and then you have your ramp up um and project completion is a is a concept where you've you've constructed everything and you're actually you've turned it on and you're actually processing everything to the I guess to the name plate capacity for a certain period of time and then the banks will say or the it the independent technical expert will actually tick that off the banks and then you get to steady say operations and then you look to refinance your very restrictive um project Finance facility this is in an Ideal World you get to steady state in ide World matter matter of time though hopefully hopefully matter so this is um just just to run through this quickly these some of the unique characteristics and risk stats um that banks will typically look at um they'll get the it to to look at and app Pine on as well um and the the reports that I I often like to see is uh that the traffic they use a traffic light system so you've got you know basically green green yellow red uh green is good yellow so that's low risk um yellow medium risk and red is you kind of want to avoid red Red's bad um in this case you you look at Reserve risks um Reserve is pretty straightforward is they they kind of want to see it drilled out they want to see everything and sort of measur indicators they just want to know it's in the grounds um yeah so that's like you know drill spacing confidence and all that stuff yeah so you you you typically look for a jaw compliant um serve report yeah for that um Capital cost overruns uh so typically what you'd see is that um the sponsors themselves will have some sort of contingency in their numbers I hope they have some usually they use the magic 10% to contingency but what the banks will also do is they'll actually add on um they'll typically look for cost overun as well so if you think about the contingency is for Equity so they'll say building some concy for the equity the banks will typically build in some additional contingency for themselves as well and they they call that cost over it and and that that's an extra facility that can be drawn down potentially if if costs blow outu yeah that's right so that that's usually a contingent what's called contingent but more often than not you see it you see it tapped right and then if it does get tapped what happens is you um it gets it gets paid in order of in in in priority M so what they'll do is if you ever see a cost over facility tapped um and it's a and it's a typical cost over facility they'll just sweep out until that gets paid out so you won't see any dividends going out or anything like that they'll just keep basically any surplus cash they'll just use that to pay down the cost over facility once until it's paid out mhm um construction Capital cost completion risks I think we need to run through that operating risk don't need to Market risk uh oh that's just commodity price risk um and you can kind of mitigate that with I guess a bankable off take um contractual risks is pretty self-explanatory Force maure are those those um risk outside of control so that's War um you know if the if the government does anything repatriation or anything like that um environmental and social risk uh it's pretty straightforward political risk straightforward funding risks gu we're talking about it currenc currency inconvertibility um on the funding risk thing like you talked about the yeah the the bank will often have the cost of their own facility and you hope the sponsors have some contingency in their numbers but you know I feel like more than 50% of the time single asset developer going through you know construction or ramp up there's there's an extra raise that comes after the fully funded money as yeah so harder than you think so so I mean that's that's right I mean so that that's what the cost over is meant designed to kind of prevent but so the extra raise kind of comes after blowing through the 10% contingency and then typically what is another 10% cost overun facility as well um so you pretty much you know day one you're fully funded for the 10% plus 10% but if you blow through that that's when you need to that's when the banks would typically look to the to the to the sponsor to actually fund any cost overrun in in equity 100% Equity from that point on and the banks like they're going to probably be pretty encouraging of putting more more equity in there because it you know that that makes their um repayment of their cash flows a lot more secure if it's Equity that's topping up the the things in that pH absolutely but the the but the other way to look at it is that um it doesn't actually change your cash flow right because the the this the S you kind of getting because they're going to get paid back from the cash flow and if it takes you more cash PEX funding to get to the same cash flow you pretty much at the same same position yeah unless it's money that's trying to like going in after sort of sun cost fallacy and the mine actually isn't going to work in which case yeah the bank's going to be wanting the equity money to go in there and try and solve the problems rather than increasing their maximum downside but no you you no that that's that's exactly right right because um the the yeah when when banks have a ton of money and lot of skin in the game then they they're very much incentivized to to you know for that project to work for sure uh due diligence yeah so the this is some of the typical due I mean uh technical legal are probably the key ones uh financial model um sometimes you have a model audit sometimes you don't um normally have your accounting tax fitting into the the model order as well environmental social kind of gets um tied in with technical um even if it's someone else sort of providing like a specialist environment enir sort of consultant providing that insurance is always there um the the market is again comes down to the commodity um if if it's gold then you probably don't need a market report or diligence like that you can probably rely on either the the house view of the financiers or you use consensus economics or some sort of um you know publicly available sort of information but you know if it's Minal Sands or rare earth or a commodity where the Market's a lot more opaque um then you'd always have the market sort of due diligence done and that market due diligence can sometimes also include the off offers themselves the customers yeah you what I always kind of take a bit of an issue with is like sometimes it's called like an independent technical expert or or a um yeah independent Market you know report or something like that but the person paying for it is the company trying to get their project developed yeah and it's their advisers that are intermediating with those independent organizations they they seem to always say the right things in them you know just a frustration of mine yeah I think sometimes it's it's just that's just a coincidence I think no no they they are meant to be independent I mean regardless of the sponsors actually Pi picking up the the have for the the um advisers they are meant to be independent and they'll they'll check that and the banks often get their own independent view on on these things rather than just relying on you know the the independent materials provided in the sponsor data room yeah so typically what they'll do well yeah what the the the lenders will do is that if if they involved early enough they're the ones who actually select the inde advisor um the costs are paid by the but the costs are paid by the the sponsor yeah um I mean if if it's already been done they'll they'll still need to check that it's verified but Reliance all the all the legal Reliance sort of stuff is actually to the banks anyway yeah but I yeah I get what you're saying yeah and then quota principles uh this is pretty key especially amongst Banks um this is to I guess the environmental and social side of things um so any Consultants will be very much aware of this and they'll tailor their um report to to actually make sure they meet this risk framework as far as environmental and social goals all right so where do we sit with the Panthers claw project well it looks like in our case study the DFS or defendant feasibility study is going pretty well um timos say negotia and offtake agreement was shielded which some of you may know ex American extra governmental agency um and it's uh it's an agreement that's negotiated so that any purchase of vibranium um at Panther's Claw is is done at a minimum fixed price and price participation linked to market prices so pretty much uh perfect according to to your uh very bankable yeah very bankable that's right so guaranteed minimum Revenue stream for project production um and US Government counterparty which is pretty much ideal um so so it looks like things are going pretty well um so looks like there's a a like expansion of um vibranium resource um looks like U there there may be AIT better um flow sheet and metal yield um and the design of the Min and infrastructure is underway so there's there's quite a lot of progress made in um as well as in getting the necessary approvals from Manda all systems go system the Project's going to be a winner with these economics um so yeah so so things things are progressing pretty well um what what you see there is a typical sort of breakdown of chapters from a DFS um but also you know components of the project that need to be really covered off um some of the key highlights and you geology resources and reserves um decent amount of drilling done um and expansion of reserves um things like um working through uh the mine plan um metalurgy and mineral processing infrastructure is is being designed the side infrastructure is being um designed and it's it's um 50% complete um approvals are going pretty well um there's been quite a lot of strong engagement with wakanda um lots of stakeholder engagement which you need for some of these countries and what's um even better is that the economic analysis is shaping up pretty well they look good mate look look like good metrics there you know who would have thought a niche commodity couldn't be financed just looks like it's looking good oh only only if it's backed by the US government I've forgot what what MPV what discount rate do you use I know this is a of a b a sticking point for you right I've got another sticking point on this slide okay okay we'll go one yeah 8% real like everyone plays these stupid games but like the banks are going to be wanting more than 8% on it's more it's more to it's more for the investors to line up with and compare with other projects right well well that's the thing like we call it sort of Market discount rate right because um you know and this is I guess this is a fundamental issue in in mining is that if you like your investors won't necessarily reward you for publishing something that's too conservative as well right and so this is unfortunately this is like the game that happens in in mining um so um but I mean from a um from a sort of debt perspective they really just care about the cash flows that are likely from the project so npvr are all this stuff is more Equity marketing right yeah and then payback period is the other one that often shits me because like like if you're actually thinking about payback from the case like from The Case of the bank it's when did debt debt get drawn down but no one ever measures it from that point in time they always measure it from production start which by the way often times they've started mining before that as well you know there's like this lag anyway everyone chooses the lowest possible like period to measure payback period repayment from but I often think you should measure it for when you drew down the debt like yeah yeah just just add the construction period and and then when you drew down the yeah you know no that's that but that's I guess a um that's for that's for the market participants or investors to you know have a bit to think about as well right yeah yeah IR 50% Happy Days yeah yeah well well that's that's only the first step right because actually we we need to really understand what um what the cash flows look like for the lenders which is what's important here in this session so so we've we've looked at the project and we looked at some of the indicative economics well what's next right well we have to pull together a a funding plan or a financing plan and what do we have to do well we have to usually start with the funding requirements so that's just not not just the total Capital required for the project which includes construction costs pre-production operational costs contingency reserves um it also has to include financing cost and generally I think it also includes cost overrun for terms of the funding structure as well um so then um what do we do then we look at the sources of funds which is equity and debt um and those can come in a number of different forms from um from Equity to quasi Equity to to you know the variance of that and then to debt uh and then then we have to structure the um the the capital structure and allocate equity and debt to make sure that there's capital structure that that gets you the returns that shareholders need actually just on this I mean we all have our bug Bears right and then I guess one in mind is that a lot of these um mining companies when they present these feasibility studies they only present the the capex and they say oh this is the capex amount but when you when you start going through the financing plan there's always the plus plus right there's there's the the cost overrun there's the working capital which you need there's capitalized interest there's all these other business pieces which they which could easily add another 20% to your total development cost what what you care about is like What's the total funding required to positive cash flows when you can actually start paying your debt down right and then yeah that's often a fair bit more than the pre-production capital the other thing on that that bugs me is often times like they highlight low like pre-production Capital but they've staged the capex and they assume stage two of the capex happens from future like positive cash flows of the project and they're doing some halfast stage one case operating cash flow in in the sources and uses that's that bugs me yeah big time it never comes or it it does but eventually right but then because of the timing lag you still having to source that capital from somewhere else yeah so the next concept is really the cash flow waterfall um and what that is is it's really just the the Project's cash flows and what's um it sort of defines a priority of payments and to to who that needs to get paid in what order uh and how project accounts need to be to set up and so you can see in this in this image we've got a net operating cash flow net investing cash flow and then funding sources which gets you to your cash flow available for Debt Service which is pretty much the critical line that the lenders will look at cfads cads that's cads the old acronym um and so that's that's R foruse to determine what principal and interest payments can can really that that lenders can be repaid out of um and then to to that then you have to fund uh and draw from Reserve accounts um and then finally at at the bottom of the the waterfall you get um distributions Equity holders and hopefully it comes this is this is I can see these lines in an XL model yeah project Finance XL model I remember C fads made like yeah love it some flashbacks flashback nightmares nightmares yeah sculpting d d we're going to get to that aren't we yeah yeah that's right at the good stuff's coming so there's a bunch of uh different concepts that we'll just cover over the next few slides I mean the the first one is that you know you definitely need a model uh obvious obviously uh you know from a reputable uh you know consultant potentially do you know one GI I don't know um may want to look in the logo name model um but but really uh what it is it's it's just really um a a spreadsheet based um framework um an analytical framework that allows the the key parameters of the project to be understood um and allows the lenders to to use something to analyze the quantifiable risks of the transaction and a lot of times they call it the base case financial model or bcfm in a lot of agreements um and so what what is it you know you you have a a spreadsheet which really just has things like financial statements cash flows um key ratios especially debt ratios that are needed um and then obviously you know ability to play with assumptions and scenarios and different sort of sensitivities that will look at and and the sensitivity is interesting because the the lenders will often I'll Chuck in their conservative price deck in there and things like that to make sure they've got you know sufficient coverage on those ratios don't they that that's right now I think that that we'll cover that in in a little bit but um that's essentially a lot of where it starts right to understand what what you can do to to size debt in the project um so then um moving to some of the key definitions I think we've already covered cash cash flow available for Debt Service cads um but um you can see that there's an example of how it's defined in a facility agreement um and other key Concepts is the debt repayment profile that you're likely to be able to um to set up with lenders uh and and it really depends on the borrowers requirements you know cash flows DCR and other ratios obviously borrowers prefer longer tener lenders prefer shorter tener um with ammortization and so um it sort of depends on the the facility type that you're looking at um but essentially um the key considerations for debt is that it's got to align with cfads um and potentially um with things like mine plan and and so on so typically um in a lot of mining project Finance you'd get a lot of sculpted type facilities um in other sort of um Industries maybe you get more credit foncier um and uh potentially even like um some form of um bullet type structure as well or um uh partial amortization with a bullet other key Concepts The Debt Service cover ratio which is um which really just uh measures the um cash flow available to pay the the debt obligations so you can see that there's a typical facility agreement definition there um but cads is really um sorry The Debt Service cover ratio is really your cads divided by Debt Service which includes your principal repayment interest um now all the definitions are usually um and the timing of when you measure that is subject to terms in the facility agreements uh typically you'd have dscr tested on a quarterly basis and cads and Debt Service calculated based on looking back you know 3 6 or 12 months and and how you calculate it gotcha so if you if you're building your project Finance model it's like you got you build them with monthly or quarterly sales um well more typically monthly but uh but you could also entally do quarterly as well I mean yeah I mean you probably wouldn't carry monthly all the way through if it's a long-term project right because monthly for a 20e project that's a lot of months um so what I've typically seen is you you have monthly for the construction period plus a little tail so you see that see that level of detail there but then you probably flip over to cly after that yep though though the issue is when you actually get operations and you actually have to do it month by month as well s that's when you need a new model model answer model answer oh I like the interpretation so if the dscr is greater than one the project is able to service the debt with a with a buffer if it equals one it's it's perfectly well not perfect and but less than one it can't service the debt so there's not enough there's not enough cfads available in order to actually pay what is required contractually on the interest and the and the principal for payments yeah that that's right it just says how how much coverage do you have of C fads over over what you need to pay so um so that's the purpose of of this ratio obviously the the lenders would want quite a lot a lot more buffer than one yeah um and um you know depending on who they are depends on how much of a buffer um but then that's that's really part of the game and part of the you know the advisor engagement so the other project Finance ratio is um that's quite typical it's a loone life cover ratio and so it it it measures the cash flow available to pay the debt over the life of the loan um and this one is a little bit more mathematical it's um you calculate the npv of the uh cads over the loan tener divided by the outstanding loan balance at each point where you test it and so what what it is it's it's really looking at the um uh the npv using a discount rate which is um the weight at average of the interest rate for um for the facilities so um use that and say okay well what's the the value of the C fads um and how do that how does that compare um sorry what's the value of the C fads over the loan life and then how does that compare it against what you actually owe um and is there enough s of sort of coverage there gotcha is the project actually capable producing enough C fads to yeah to basically pay off the balance of debt yeah and then similarly you have a project life cover ratio um and it's really um just another um ratio to look at U the the overall life of the project and how the uh MPV of C fads Compares against the loan balance but obviously llcr or lone life cover ratio is a little bit more um tighter than the Project Life ratio and finally the uh the other um ratio here is um Reserve tail ratio which really looks at the um mineral reserves remaining at a calculation date to the total Reserve inventory so it's just really how much reserves you have left um and usually you have to get over a certain threshold in every um calculation date to to make sure that there's enough reserves left for for the project to sort of continue to pay debt um so there's some sort of typical requirements from um some term sheets and loan documents put up on the screen I guess you typically you'd see a dscr um from a covenant perspective around sort of 1.2 1.25 or so um loan life coverage ratio is sort of 1.3 .35 um and Project Life 1.5 or so um I mean these are just examples but you know sort of around that that sort of range reserved tail ratio 20 30% um and then you usually have some form of um requirement around minimum cash balances um and so on so so there's there'll be a bunch of different requirements um in loan documents it it's actually a lot more um yeah lenient than I thought on some of those CS like Reserve tail greater than 20% I feel like so many times you know they start Mining and all of a sudden the reconciliation to reserves the grade is off by more than 20% So 20% is probably on the lower end I mean typically i' I've seen probably more like probably close to the 30 25 30% Reserve Tales probably yeah more than Norm I think probably took the favorable version yeah yeah so and and what I've also seen is they they'll have the reserve tail and they also have a minimum um sort of time period as well so you especially if if you're looking at compressed and you've got a reserve tail which only comes in that last 6 months it gets really tight you don't really have much rle room so sometimes it's a reserve tail plus A Mir amount of time tail kind of thing so then when when things um when things kick off you've ramped up um and uh your grace period finishes um usually you'd have to then start um looking at testing against Covenant um and so that this is It's the credit monitoring part where at each calculation date you have to um submit project documents financial statements things like annual budgets compliance certificates that where you basically prove out these ratios um and then um you have to make sure that there's no breaches in some of the financial covenants there's anything to add to that no I think starting off the the most common thing is the the the monthly sort of construction reports that's what everyone sort of focuses on and then the um yeah the the compliance certificates in terms of the the compliance with the ratios that usually comes later yeah I guess there's a whole journey of um reporting requirements as you go over time um and then um a lot of compliance requirements to um line up with what the facility agreements say that you you need to comply with all of these like parameters you need to you know be compliant with in order to maintain your sort of you know credit case in a lot of ways why would anyone find their project with debt oh that's right they need it that's right that's that's the reason why yeah there there's a lot of stuff in here so which is why it's important to actually have a think through not just say okay I'll sign up to anything just to get the get the money right because a lot of the times um this credit monitoring can be pretty honorous um if you end up having to hire you know a few more people just to get stay on top of this um this these reporting information undertakings it's it's not fun so it's always good to actually have a Clos look at this stuff at the start yeah and so if if there's things like a breach um lenders have a number of different rights um and this this slides really out outlines um what the different things could be um but it can range quite a lot um so I don't know if there's um situations that you can think of that but um oh every every project I makes me makes makes it sound like I'm a bad project financer right but every project I've been involved in has always required some sort of waiver because it's taken longer or they need you know it's it's cost more or something something always happens with project home it's it's very rare that you would actually have a project basically get get done on time on budget with no problems it's quite rare and I guess project financiers understand that right so they'll always be a little more accommoda in terms of waivers and how how should like I interpret a lot of the you know the um the covenants and and things like that in these facilities because you know he's getting a waiver sort of straightforward or does the the lender often want something in in exchange for you know waving waving something else you know depends depends on the on the um depends on the lender um typically you would see like a waiver waiver fee or something like that um some of some of the say naughty bonds they they'll generally you know require a fee to actually provide sort of waivers and things like that um but you know the the thing to keep in mind is that you know at this point the finan has got a fair bit of money out the door um to you so that they'll be pretty much incentivized provide the way they're not going to want to blow things up no no finan well most financiers don't really want the keys to the project yeah yeah I do want to see more loan to own sort of you you probably all right and uh and I guess to to your point Trev there's um lenders do a whole heap of sensitivity analyses downside scenarios um break even analyses so they do look at it um from a number of different perspectives more on the downside I look at things like um low prices low recoveries lower ramp up and all these sort of things things that they need to run using the model um so this this uh next step is uh debt sizing so I mean we've looked at the the project um what do we have to do now well we've got to um do a bit of a debt size to figure out what the right level of debt that the project can take on and so debt sizing is is that that process looking at the different Financial metrics and the ability to service that debt over time so there's quite a lot of considerations when you do a debt sizing I guess um you start with saying okay what's the funding requirement that you need um do we have things like a um terms like a grace period involved uh what's the the tener um that we're likely to be able to get um what's a payment frequency what are the financing fees look like um and then we look at okay well what are the what are the lenders likely to be running in terms of a price deck and um capex parameters um and um you know CAPIC sort of and OPC sort of scenarios that run uh in the model um and what are the likely Covenant that where we need to comply with and so we look at all these together to figure out well what's the debt capacity of the project that we're going to need uh that we're going that it's going to be able to support so obviously this something that an adviser can help help a bit more on to understand because it's it's not not that simple sometimes do do you think like is there is there a right answer to that question is you know there's there probably not but it's you know like some sometimes the the big impediment to the project actually getting financed is just the the to the the capex the funding requirement right so the the answer to the question is as much debt as possible please because I'm going to struggle to raise the equity in order to meet the entire you know make the whole thing work but then sometimes that's over impeding the project with too much debt um yeah as well yeah if it's if it's too structured and um Debt Service is such a large percentage of of your cads um yeah it it's just sort of it really kind of not not a lot of stuff needs to go wrong before you're not able to repay your debt so I think that there so there's there's a reason why you wouldn't take on that much much debt but then like I say if if you can't raise the you know raise the rest of it in in equity and the only way you can actually get a project up is is through more debt if you can get more debt at a high gearing then that's you know a lot of management teams will probably take that risk because it means the project go goes ahead versus it is it doesn't M so you you can you can understand that there's a human nature incentive aspect there which you can kind of understand so we're going to use this um the Panthers CLA project and do a bit of a worked example to figure out what the debt capacity of this particular project is um so this example we've got um capex about 200 mil a life of mine about 18 years an annual production in uh fortunately in troy ounces um of 18,000 ounces per uh per year and um so the advisers think that we're likely to be able to get debt terms that look like their 5-year uh tener with interest rate of about 8% 1 and a half% commitment fee and 2% upfront oh don't I um it and the target debt metrics are going to be um like a lenders price deck of about $6,000 um an ounce um like um a target dscr of um 1.9 uh and 60% gearing so so um looking at this what do we do well firstly um we we figure out what the funding requirement is um and then based on the target gearing ratio we calculate the debt and Equity value value uh we figure out what the funding sources and uses are calculate the cads um sculpt the debt repayments so that their principal repayments are um are repaid according to a Target dscr to sort of optimize the um debt service coverage ratios um against the covenants uh and then you sort of test and optimize for the financial covenants and then you sort of repeat that process because it's actually iterative process because your funding requirements is affected by your uh level of debt that you actually support report and so it's um usually done by a macro or sort of VBA macro um or code um to iterate to get to an outcome so I won't go through every every line here but um this provides some of some of the assumptions that are used to um in this example um to look at um to look at the the Deb sizing of this project so um we' usually have a number of different assumptions around cash flows around Opex um around um the things like working capital requirements and then this is all in in the model and then you use it to to sort of size your Deb and so just taking the this uh taking this worked example pretty simply um we figured out what the upfront debt Equity funding is based on the total funding requirement so you start with a funding requirement um consists of in this pretty simple example you just have capex in and conr ruction and financing fees um and then you figure out your uh your debt Equity breakdown um we start with saying okay we we want a 60 um 40 um split and so we then um uh and then we we then set up the cash flow waterfall um and that cash flow waterfall consists of um operating cash flow um investing cash flow draw Downs which gets you to cads and then you have your debt service here which is principal interest um and then finally you have cash flow available for sh shareholders I love your um your little button there that you've got on the the the funding button to iteratively solve and it copies and paste itely to sculpt properly that's right that's right and so it's nice when it's done for you can see the value of that yeah you're so generous so we will be I think we'll be ruting a a sort of mini example model for this as well um so then then we have a a um debt repayment profile that fits with um a Target Debt Service cover ratio um you have principal repayments that sit in line with that and that's what we call sort of sculpting the debt um then yeah then after that um you look at whether or not overall um you comply with covenants now um I mean reality what you do there's there's covenants for um Debt Service cover ratio loan life cover ratios potentially like um here uh Project Life cover ratio and minimum cash balances uh what you usually do is um you have to you have to do your debt sizing based on all of these sort of constraints and you're effectively trying to maximize your debt within all the constraints that you put over it but we've just got a fairly simplified example here um so then you you you produce a numbers you look at the um the numbers against the uh or the ratios against the different Covenants um and then you just um make sure that you're you're in compliance this is it's actually yeah it's a very neat way of breaking it all out having your covenants at the bottom there and then yeah checking comp you've got you bu you building the checks okay okay okay very just very impressed with this [Laughter] model then um then after that um what we're trying to do is maximize the uh the the debt amount right um so this this sort of gives a bit of a feel for how um Debt Service cover ratios and so on so the minimum levels um change with different levels of gearing um you can see there in this this particular example um you still don't Bridge Covenant um when you get the Fairly high levels of gearing but in practice you know there's a sort of limit that you'll be able to get from lenders um and so we we sort of usually use a rule of thumb of about 60% or so um which which generally I guess includes cost overuns um all the the add-ons that yeah some sometimes you can creep a little bit higher with the cost overrun um because I guess that's if that's truly contingent and your your base case assumes that um or shows that you don't actually need to tap that cost overun uh sometimes you might be a to crep up at 65% or something like that but often then it's not truly 65% because there's going to be another Equity race too so yeah so what what happens with the cost overun is the the equity that you put in actually covers actually includes the pr portion of the cost overun already gotcha yeah so like I said you'd have to blow through your contingency your cost over and then you need to do the the rescue rise if you need mhm and then F finally in this step uh you just look at your sources and uses of funds um obviously sources and uses should be equal um if if it's not then uh then you haven't done it right that's a nug nugget of gold right there and look so so that's a pretty really really simple sort of example um and if anyone sort of interested then we can um we can do a separate session on it and step it out in a lot more detail um but as part of this I think we're we'll be Distributing a model that um that shows how you can sort of um that you can sort of play with and um um and run your own sort of numbers to see how it goes that's such a handy tool like a very very handy thing yeah every everyone working in this industry building project Finance models will be very grateful now uh now they actually get the debt that's a that's a different might have a nice model but you that's good that's good that's okay yeah yeah oh they could have a crack it crack it you know on their own you know there's one dead adviser once told me it's not rocket [Laughter] science the worst part is uh if they've come too late for advice right that's they've done too much and gone too far um but in this case um they've obviously taken uh you know taken the advisor's advice early uh and gone on the journey um with um you know a bit more uh with with a bit more of a positive outcome um so look after you know we've we've done the debt sizing then we've done done the work to raise the debt um it looks like um an equity injection of um about 86.5 in this example is required um based on the market cap of um Vibe um and so that Vibe was able to successfully raise the um 86.5 um and managed to get about 130 in dead so things went really quite well um construction went pretty well but then um to your point Trav obviously TR cost came came out more than expected uhoh um but luckily the EPC contract with stock Industries allowed them to push some of those cost overruns to stockk good thing he's a multi- multi-billionaire it's important to have reput all contractor yeah yeah that's right um I was going to plug one then but I thought i' been night oh you you can you can add it later yeah that's so so despite need needing a waiver to extend the completion test period by another 3 months they were still able to me meet the completion test achieve project completion uh and now in a steady state of production so MD Tim Thanos is very happy this this doesn't make sense to me they did a rescue raise at a higher share price that never happens well well supported Mark loves the story Lily luckily uh the vibranium price was going up at the point R Rising tide rising tide right lucky to you know get on the right platter of the cycle it doesn't matter how bad things get sometimes that's right well happy days for the for vibranium minerals shareholders have just with some great debt advice and modeling and structuring they've gotten the project away and shareholders reaping the benefit of it even though they were hiccups yeah and that's that's the ideal [Laughter] story awesome that just bloody brilliant guys um yeah thank you so much for that I I um yeah it's it's it's such a useful thing to you know go through this exercise and hopefully hopefully you know anyone tuning in or watching this is gets value out of it and uses the resources and tools and um if they've got questions I'm sure they can reach out to both of you too absolutely no no problems at allop us a line that's true [Laughter]