Analysis: Hard up miners turn to Asian contractors to help fund projects

Northcliff Resources

19/02/2015 06:00

By Nicole Mordant and Sonali Paul 
    VANCOUVER/MELBOURNE, Feb 19 (Reuters) - Miners who can't get 
financing for new projects from banks or traditional equity 
investors because metals prices have collapsed are turning to an 
alternative source: the engineering and construction companies, 
many from China and South Korea, who actually build their mines. 
    Several North American and Australian miners are in talks 
with engineering, procurement and construction (EPC) companies 
to take equity stakes or bring along banking partners to provide 
debt funding in projects in return for the EPC group winning a 
contract. 
    China's NFC  000758.SZ  and South Korea's POSCO Engineering 
& Construction Co Ltd are among the companies pursuing these 
deals as they look to make up for business lost because of 
slowing infrastructure growth at home. 
    "The domestic order books of Chinese construction and 
equipment companies have been falling for a year, actually quite 
dramatically," said Ingo Hofmaier, director at Hannam & 
Partners, a London-based corporate finance advisory firm. "To 
avoid underutilization and keep the music going, Chinese 
companies are now aggressively targeting foreign markets."  
    Infrastructure investment in China slowed in 2014 as 
authorities try to re-engineer the growth model by reducing 
inefficient state spending and encouraging domestic consumption. 
Investment grew at its slowest pace in nearly 13 years between 
January and November 2014 at 15.8 percent, according to official 
figures. 
   Canadian construction and engineering company SNC-Lavalin 
Group Inc.  SNC.TO  is working with NFC, or China Nonferrous 
Metal Industry's Foreign Engineering and Construction Co, for a 
contract to build the Hillside copper project for Rex Minerals 
 RXM.AX  in Australia. SNC and NFC are competing against South 
Korea's Hyundai teamed with AMEC Foster Wheeler  AMFW.L  for the 
contract. 
    "There's no doubt, financing will be part of that decision," 
Rex Minerals executive director Steven Olsen told Reuters.  
    NFC and Hyundai declined to comment. 
        
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    ALTERNATIVE FINANCE  
    Alternative forms of mine finance such as royalties, 
streaming and private equity, have blossomed in the past three 
years as metals prices fell and traditional banks and equity 
investors shied away from the sector.  ID:nL6N0UT26F  
    Funds raised by the mining sector through traditional debt 
and equity issues slumped 26 percent year-on-year to $88.6 
billion in 2014, according to Thomson Reuters data. That's down 
41 percent from 2011 when metal prices peaked.         
    "If we want to raise money in these markets we have to look 
at untraditional means," said Christopher Zahovskis, Chief 
Executive of Northcliff Resources  NCF.TO , a small 
Canadian-based mine developer that is in early talks with 
a Chinese EPC funder on its $579 million Sisson 
tungsten-molybdenum project in eastern Canada. 
    Another Canadian mine developer, Alderon Iron Ore Corp 
 ADV.TO , which is struggling to find a strategic investor for 
its $1.27 billion Kami iron ore project in Canada's Labrador 
Trough, is talking to Chinese and Korean EPC contractors about 
taking an equity stake, chairman Mark Morabito said. 
    Prices for iron ore for delivery in China have tumbled from 
$187.18 a metric ton in February 2011 to $67.39 in January, 
according to the Steel Index. Copper is down about 44 percent 
from its 2011 peak. Tungsten is down about 36 percent since 
2011, and molybdenum has lost about half its value since early 
2011. 
    Though Asian companies have funded mining development 
projects in the past, the investment was usually tied to an 
offtake agreement. Offtake deals are arrangements where 
primarily smelters lock in a portion of the future output of a 
mine in exchange for upfront funding. 
     "It's a two-way street," said Marius van Tonder, managing 
director Australia at SNC. "Asians are looking to invest and 
secure resources. The client is looking for the funding." 
    Australia has offered rich pickings for Asian contractors. 
    South Korea's Samsung C&T won the contract to build 
Australia's biggest new iron ore mine, Roy Hill, after South 
Korean steel giant POSCO  005490.KS , took a stake in the $10 
billion project and helped bring in Korean export credit 
financing for it. 
    EPC groups providing equity finance are not seeking 
controlling stakes in projects and are likely to limit their 
involvement to between 10 percent and 30 percent, said 
Christopher Langdon, a partner at law firm McCarthy Tetrault in 
Toronto. 
    China's SEPCO Electric Power Construction Corp signed a $1.3 
billion EPC framework deal with U.K.-based Oracle Coalfields Plc 
 ORCP.L  last September on a coal and power plant project in 
Pakistan that includes SEPCO potentially taking a 10-percent 
equity stake in the operator of the power plant. 
    While providing another funding avenue for miners in bleak 
markets, EPC finance is not without risks and deals can be 
complex and time-consuming to put together as each transaction 
is different and may involve several parties. 
    "At the end of the day, it's got to be on somebody's balance 
sheet," said Lloyd Pengilly, CEO and director of London-based 
QKR Corp, a private mining company backed by Qatari investors. 
    "It's a financing option that is real but it's limited." 
 
 
     
     
 
 (Additional reporting by Joyce Lee in Seoul, Silvia Antonioli 
in London, and by the Shanghai newsroom. Editing by John 
Pickering) 
 ((nicole.mordant@thomsonreuters.com; +1-604-664-7315; Reuters 
Messaging: nicole.mordant.thomsonreuters.com@reuters.net)) 
 
Keywords: MINING FINANCING/