SCM Minera Lumina Copper Chile achieved the eagerly awaited financial close of the Chile-based Caserones copper mine project in August 2011. The project represents the first mining project in Chile, and the first copper mine globally, in which all of the sponsors, offtakers and supporting financial institutions are based in Japan. The financing is also notable in that it dovetailed the financial backing of three prominent Japanese government financial institutions, which co-operated to provide direct senior loans with extended political risk insurance and subordinated debt guarantees.

Following the signing of the financing documentation, the sponsors of the project, JX Nippon Mining & Metals Corporation , Mitsui Mining and Smelting Co Ltd and Mitsui & Co Ltd, promptly satisfied the conditions to the first drawing of a US$1.1bn senior limited recourse financing and a US$300m subordinated loan financing. The project represents a continuation of the successful forays by Japan's governmental financial institutions in working together with the commercial bank market to support leading Japanese companies in securing a long-term and stable supply of strategically important natural resources.

The Caserones project is a large tonnage copper/molybdenum deposit located in the Municipal District of Tierra Amarilla, Province of Copiapó Region III (Atacama Region), Republic of Chile. The mine has proven, probable ore reserves and inferred ore resources of 1,343m/t, with an estimated mine life of 28 years. This translates into a 150,000 tonnes' annual average output of copper concentrate during its first 10 years of full operation, which is expected to meet approximately 11% of Japan's annual demand for copper concentrate. The mine is also expected to generate an annual average of 3,000t of molybdenum.

The enhanced levels of domestic Japanese cooperation among sponsors, lenders and governmental financial institutions seen in the Caserones project is likely to be replicated in the face of the well documented challenges to the long-term debt funding of the project finance market in 2012 and beyond. Natural resource transactions, including rare earth metals projects, the nuclear industry and the intercity rail sector are likely to continue to be the early adopters of a focus of Japanese consortia supported by Japanbased financial institutions at all levels in the capital structure.

The Caserones deposit was discovered in the 1980s and is located approximately 160km southeast of the city of Copiapó at altitudes between 4,200m and 4,600m above sea level. The deposit will be mined with conventional, largescale open-pit mining techniques and conventional processing technology. The sulphide ore will be hauled by truck to a primary crusher and treated in the concentrator plant into copper concentrates and molybdenum concentrates.

The oxide, mixed and low-grade sulphide ore will be hauled by truck to the dump leaching pad and will be leached by means of an acid solution to generate a solution containing dissolved copper, which will be recovered and produce copper cathodes at an SX-EW plant.

Two distinct production methods of concentration and leaching will be employed, each of which produces copper concentrate and copper cathode respectively from ores with different characteristics. The resulting concentrates and cathodes will be hauled by truck to the shipping and/or commercialisation point. Commencement of production is scheduled in early 2013 for refined copper and in the fourth quarter of 2013 for copper and molybdenum concentrate.

Project background

SCM Minera Lumina Copper Chile (MLCC) is the single purpose owner/operator of the mine and the borrower of the financing. MLCC is jointly owned by JX Nippon Mining & Metals Corporation, Mitsui Mining and Smelting Co Ltd and Mitsui & Co Ltd through intermediary companies.

JX Nippon Mining and Metals and Mitsui Mining and Smelting Co Ltd own their interests through their joint venture, Pan-Pacific Copper Co Ltd. PPC is the largest copper smelting company in Japan and operates the Japanese industry's largest facility, the Saganoseki Smelter & Refinery.

Japan no longer has operating copper mines and PPC (and all other smelters) therefore relies on imports for all of its copper concentrate needs. Major global mining companies have consolidated their market shares by M&A activity, and obvious opportunities to acquire minority ownership interests in a large-scale mining project have decreased. Loss of diversity of supply, lack of opportunity to take ownership positions combined with increased competition from other buyers continue to fuel the debate about resource insecurity.

The global demand for copper, which was just short of 11 Mmt/pa in 1990, now rests at around 18 Mmt/pa. The drivers of demand have not, surprisingly, shifted from the industrialised economies to the growing economies of countries such as China, India and Indonesia.

In the more competitive global market for copper concentrates, Japanese smelters' bargaining power with mining companies has been curtailed. It has become increasingly difficult for companies to achieve their base level returns when hostage to purchasing copper concentrates predominantly or solely from third parties.

In order to further develop its smelting business, PPC has announced that it plans to increase its ownership of mining sources to supplement its copper concentrate imports from the mines in Chile in which PPC parent companies already have equity interests. For PPC, the goal of the Caserones project is to develop the deposit in order to supply the majority of the copper concentrate output to PPC and its subsidiary smelters.

For both the project sponsors and the financial institutions that are supporting them, Chile continues to be viewed as a stable investment environment. It is the top copper producing country in the world and leads the ranks in copper reserves, copper production, and copper and metal exports to Japan.

Over the past 20 years or so, it has attracted a large number of mining investments by major multinationals including BHP Billiton, Anglo American, Xstrata, Antofagasta, Freeport McMoRan, Barrick Gold, Teck Cominco, and Rio Tinto. Japanese investors value its long track record of foreign direct investment and wellestablished copper mining industry under both private and state ownership and over the last 12 months a number of Japanese companies, among them Mitsubishi Corporation and Sumitomo Corporation, have committed to further major investment in the copper section in Chile.

Financing

Financing for the Caserones project consisted of a combination of senior debt and subordinated debt provided by Japanese government and commercial financial institutions, and substantial equity commitments from the sponsors. The US$1.1bn senior facility consisted of a US$770m term loan from Japan Bank for International Cooperation (JBIC) and a US$330m term loan consisting of loans of US$90m from each of Bank of Tokyo-Mitsubishi UFJ Ltd (BTMU), Mizuho Corporate Bank Ltd (Mizuho), Sumitomo Mitsui Banking Corporation (SMBC) and US$60m from Hongkong and Shanghai Banking Corporation Limited ( HSBC ), Tokyo branch.

The senior loans from the commercial banks are backed by insurance from Nippon Export and Investment Insurance (NEXI) covering 100% of political risk in Chile and 97.5% of commercial risk (15 years).

The financing benefits from traditional completion support during the construction phase, moving to a full limited-recourse financing upon achievement of the completion testing regime. The security package includes a pledge of shares in MLCC, and collateral over key project documents, permits and approvals, project assets, accounts and proceeds of insurance policies. The sponsors, shareholders, senior lenders and MLCC also entered into an agreement to oblige the sponsors and shareholders to continue to hold a certain percentage of the shares and MLCC, respectively, solidifying their commitment to the project for the duration of the loan.

The subordinated loan facility is a US$300m loan provided by commercial lenders BTMU, Mizuho, SMBC, Chuo Mitsui Trust and Banking Co Ltd and Sumitomo Trust & Banking Co Ltd to a financing vehicle, Caserones Finance Netherlands BV (Finance SPV), held by Mitsui & Co Ltd with 25% and PPC with 75%. The funding of the finance SPV on-lends funds by a loan to MLCC subordinated to the senior facility. Lenders of the loans to the Finance SPV benefit from a guarantee by Japan Oil Gas and Metals National Corporation (JOGMEC) with recoveries capped at 90%, and limited sponsor support. _

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