IN 2019, FINANCIAL CLOSE WAS ACHIEVED ON ONE OF THE LARGEST GREENFIELD MINING PROJECT FINANCINGS IN AFRICAN HISTORY, THE $1.4 BILLION GUINEA ALUMINA CORPORATION (GAC) PROJECT.
WE EXAMINE HERE THE PROJECT AND IT'S FINANCING AND WHAT LESSONS CAN BE LEARNED FROM IT ABOUT FUTURE PROJECT FINANCE OPPORTUNITIES IN BOTH AFRICA AND BEYOND.
The Republic of Guinea, on African's western coast, is home to the world's largest deposits of high-quality bauxite, which is refined into alumina, which is in turn used as feedstock for the production of aluminium. Guinea is also therefore a key part of the global supply chain for aluminium production and several mines have sprung up to develop north-western Guinea's bauxite reserves.
Emirates Global Aluminium (EGA)'s GAC Project is an opencast bauxite mine about 100km inland from the coast of northwest Guinea. Bauxite is transported to the coast along a pre-existing railway line, operated by CBG. Rail capacity rights on the line are shared with other mine projects, subject to a multi-party agreement whose implementation is monitored by ANAIM, a state-owned infrastructure regulatory authority, and are guaranteed by the Guinean Government. To accommodate users' future capacity requirements, railway capacity is being expanded.
Once the bauxite reaches the coast, it is delivered onto barges arranged by EGA which is then transport to an anchor point offshore, where it is transhipped onto oceangoing vessels and exported.
A key objective for the GAC Project was the vertical integration of EGA's aluminium production business. EGA recently completed construction of a new alumina refinery at Al Taweelah in the UAE and has extensive aluminium smelting operations in the UAE. A second phase envisages the construction of an alumina refinery in country.
FINANCING OF THE PROJECT
By the time of financial close, EGA had already invested significant equity capital. The financing, which will partly be used to refinance the up-front investment, involved facilities totalling $750 million contributed by IFC, AfDB, EDC, two European DFIs and an international consortium of commercial banks, including UAE banks. IFC provided a total loan facility of $330 million to the project, including the commercial banks' syndicated debt. MIGA committed political risk guarantees of up to $129 million to the same commercial lenders. The loans had a tenor of between 12 and 14 years.
The revenues of the Project are derived from a long-term offtake agreement between EGA and GAC, pursuant to which EGA agrees to purchase a minimum annual quantity of bauxite sufficient to generate cash flow for debt service and operational expenses. The offtake agreement reflects a balance of operational flexibility while managing the risk to lenders associated with operational issues and fluctuations in bauxite quality and quantity.
The Project was a major achievement for Guinea, representing a substantial foreign direct investment that is expected to significantly boost the economy and generate an annual average of $50 million in government revenues. From a sustainability perspective, the project complied with IFC's Performance Standards and the African Development Bank's Integrated Safeguards Systems.
It also involved IFC working with GAC to implement a $4.4 million advisory services program to increase its social and economic development interventions and enhance benefits to host communities. It is also contributing $28 million to promote biodiversity within Guinea's Moyen Baffing National Park.
WHY AREN'T MORE AFRICAN MINES PROJECT FINANCED?
Project financing greenfield mining megaprojects in Africa is still uncommon. To date, the largest African project to have been financed on a limited recourse basis had a debt component of $170 million and although there have been larger mining "megaproject" financings in other geographies, such as the $4.2 billion Oyu Tolgoi brownfield copper and gold mine project in Mongolia, the fact that the mine and port elements of the GAC Project were entirely greenfield made it one of the most ambitious to have reached financial close.
So why isn't project financing used more frequently in the mining sector in Africa? At first glance, it would seem to address many of the investment challenges that new mining projects face—increases rates of return, spreads operational and market risks, brings aboard financial investors capable of managing political risk, and provides liquidity with long tenors from various sources.
A key underlying reason is that mining projects are perceived to be more risky than the industrial projects that traditionally attract limited recourse investment, and in different ways. Mining projects involve risk at every stage, from the availability of the resource (anticipated quantities and quality may not be guaranteed), the technical (and sometimes political) challenges of extraction and transportation, and instability of price and volume in the end consumer markets.
Accordingly, equity investors are often reluctant to invest before the funding of all remaining capex, including delays and overruns, are locked in. Lenders, who will not share in any potential profits of a project, have an even lower appetite for risk and may be reluctant to fund a project that has not already been shown to have the confidence of a meaningful pre-financing investment from its sponsor. In any event, lenders will require completion guarantees and bankable arrangements for offtake or marketing of the products, all of which are uncomfortable for many sponsors to underwrite years in advance. Sponsors and lenders are therefore looking for each other to make the first financial commitment.
Another reason why project financing has not been a preferred funding option for mining megaprojects is that most of these projects are undertaken by multinational or other large mining companies who can mobilize capital at low cost and on a covenant-light basis from many sources. They also tend to balance development, operating and market risks across a portfolio of assets producing different commodities in multiple geographies with variable risk-reward profiles. This natural hedge removes much of the impetus for structuring each project to be as risk-free as possible, allows for a scale of economy in developing and financing costs, and maintains flexibility to acquire or dispose of assets as market conditions dictate. The bigger mining companies have also reduced their usage of financing and insurance structures to manage political risk, relying instead on their knowledge of particular jurisdictions and simply avoiding those where they cannot get comfortable.
However, EGA—which has a long history of project financing—recognized that the GAC Project was suitable for limited-recourse structuring. It was not a commodity-based financial trading play or portfolio addition and EGA was motivated by a vertical integration strategy to complement existing investments such as the refining and smelting operations in the UAE. Also, whereas other projects might struggle with financing new infrastructure to make the project technically feasible, EGA would be able to share existing rail infrastructure.
From the Project's inception, all the contractual documentation between EGA, the Guinean Government and other local stakeholders had been developed to be bankable. The lenders could appreciate the level of Government support provided and the key project documents did not require material adjustment in order to accommodate the requirements of lenders.
Finally, the Project's lenders themselves were strongly mandated to support the financing, with IFC and AfDB focused on the economic development benefits of the Project as well as its environmental and social credentials and commitments.
LESSONS FOR OTHER MINE PROJECT FINANCING?
The successful financing of the GAC Project is a reminder that, in an industry where novel financing structures such as royalty financing and streaming are increasingly favoured, large-scale, multi-sourced "traditional" project financing can still be the right approach for certain mining projects in Africa.
This is particularly the case for projects where:
- there is a well-proven mineral resource that has a history of being successfully extracted and marketed;
- there is a robust offtake or marketing arrangement in place, backed by solid credit;
- key infrastructure downstream of the mine is already developed, or is straightforward to develop or expand, without the need for significant, risky new-build work;
- the sponsor is willing and able to start investing before the project financing closes, and to guarantee debt until satisfaction of operational reliability tests;
- the sponsor does not need flexibility to dispose of the asset free of financing covenants; and
- the business is able to accept the usual level of lenderdriven operational oversight that project financing demands.
It also shows that it is possible to successfully project finance a large development that relies on shared infrastructure (in this case, a railway operated by another mining company). In fact, this can be an advantage, if the alternative is to build costly standalone greenfield infrastructure.
This lesson may be transferable to projects in other developing countries where there are not multiple routes to market. The key is that strong relationships of mutual co-operation are built and maintained among the users and operators of the shared facilities, and that the host government is also dedicated—both contractually and politically—to the success of the structure.
It also highlights the importance of demonstrating a real commitment to environmental and social sustainability. This not only helps with attracting support from multilateral agencies, but also with relationships between the project and the political and social stakeholders in the host country. The sustainability credentials of a mining project need to be front and centre of the financing strategy, not merely a budget line item.
The GAC Project proves that there is real appetite in the debt financing market for African mining projects that have a sound, strategic business case, are well structured and are strongly supported by all stakeholders. The fact that lenders with very different mandates (multilateral development, export credit, and commercial) were able to join together shows the possibility of closing very high value transactions in this sector despite the relative infrequency with which it has occurred to date.
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