Financing of start-up mining projects 'Do's and Dont's of early stage mining financing' Moscow, 23 June 2011

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1 Financing of start-up mining projects 'Do's and Dont's of early stage mining financing' Moscow, 23 June 2011

2 Agenda 1. A debt provider s view on early mining projects 2. How to get to financial close 3. Financing instruments

3 Challenges in financing early mining projects Selection of the right projects Foreign answers to the equity question? Dealing with political risks

4 A banker s views on a mining project differs significantly from an asset owner or an equity investor 4

5 Go s and No-Go s from a banker s position Criteria Go No go Cash-flows Risk Asset value Profitability (Partly) producing assets Long-term offtakes Significant size of the mine (n years operation and x free cash flow per year) License without issues or non-strategic minerals Transparent shareholding and project structure Reputable sponsor sharing risk by investing own funds as equity Best practice advise on technical, legal, tax and financial issues Political capital Western reserve audit Access to well-developed infrastructure Experienced management team Low production costs Significant up-front cash-outs High production costs Unmitigated environmental issues Negative track record around previous investors Pending licensing issues Poor financial controls Open license issues PwC Russia

Mining asset owners in Russia need to anticipate a cautious approach from foreign investors Mining projects in Russia are often associated with higher risks and higher costs.

Projects in Russia are often considered after applying a discount to the value.

6 Mining asset owners in Russia need to anticipate a cautious approach from foreign investors Mining projects in Russia are often associated with higher risks and higher costs. Since investors operate globally, a good mining project in Russia is not automatically a good investment opportunity. Projects in Russia are often considered after applying a discount to the value. Regular pre-occupations in the Western investor community No international best practice in mine construction and operations Weak transparency Thread of Political influence Risks on safe exit Strong arguments for the mining sector in Russia Abundant availability of all mineral resources Good geological knowledge base Stable political system PwC Russia 6

7 Dealing with political risk The question of the value of political capital is in the centre of early mining project investments Having a good mining asset is not sufficient to convince an early stage mining investor as foreign investors are very sensitive to political risks in Russia Good connections to the administration are vital for the successful project implementation We recommend Western investors to check the strength of the connections in site visits or early stage communications Ultimately, Western capital will always look for the skin in the game of the owners Maximising the value of political capital can be achieved by investing own funds 7

8 How to get to financial close A value driven funding cycle Obstacles to get started

9 Value-driven funding cycle for early mining opportunities 1 Project initiator s capital ( fight fund ) Project preparation and initial financial and technical advise 2a 2b Seed capital Bridge debt License fee, feasibility study, mine development plan, legal, tax and financial advice to achieve bankability 3 Project equity 4 Debt Project CAPEX and working capital PwC Russia 9

10 Before the funding can start, many issues need to be properly sorted out Exploration need to support investment case Results of geological analysis need to be on time to enable investment decisions Control the local management and operations team A case to present to investors Funding needs should be underpinned by proper financial model and reasonable assumptions from the beginning Early site visits by technical advisors proved to be helpful Identifying and dealing with interested seed capital investors Appropriate fronting of an investment opportunity Securing confidentiality of information Adjusting values and the parties expectations Setting up workable investment structures PwC Russia 10

11 Debt financing for Debt options for mining projects International project finance State Guarantees 11

12 Available debt options for bankable mining projects Mezzanine Bonds Debt Senior Loan + no/subordinated securities lower capital costs than equity long-term maturity no sharing of control high flexibility Long term Strong market appetite Local currency (RUR) No sharing of control Potentially long term Open for project finance structures Combination with government guarantees (decree 1016, ECAs) No sharing of control capital market requirements limited availability Cost and time Capital market requirements Strict covenants Thin local banking market Covenants Collateral requirements

13 Raising debt under a project finance scheme High-end financial solution for greenfield mining projects globally Key feature of project financing: debt is repaid out of project cash-flows with no or limited recourse of lenders to shareholders We sense some appetite from Western commercial banks with $ million being a good ticket size Agency lenders usually ready to complement and enhance credit (IFC, EBRD, Export Credit Agencies, Political Risk Insurers) Examples in Russia: Kupol, Julietta (both pre crisis), Kimkhan (Chinese money) 13

14 1016 Government decree Key legislation requirements Project requirements: Conformity with the Key work streams of the Government of the Russian Federation for the period up to 2012 (Government decree #1663-p as of ); Priority of the project for the State; Total project costs amount to at least 5 bln. RUR. The total project costs include all the costs associated with the development of the project starting from the construction stage to commissioning and start of operations including the financing costs and the fees of the advisers; At least 15% of the total project costs must be financed by the project sponsors; Total amount of state support to the project shall not exceed 75% of the total project costs; The state guarantee shall not cover more than 50% of total costs of the project. The project needs to be reviewed by a qualified financial adviser with a report on the project risks to be submitted together with the project application.

15 1016 Government decree How PwC can help Reviewing the feasibility study and assistance in its update Generally for a mining project the ministries require that there are sufficient studies in place to justify the resource base, extraction schedule, CAPEX, OPEX and prices. We have an experienced team of professionals that can assess the adequacy of the studies in place, analyze possible improvement areas and suggest changes/modifications aimed at making the project bank-able and acceptable to the ministries Updating the project business plan and financial model Developing a financial strategy Assessing the project risks and developing a report to be submitted to the ministries A mining project is highly dependent on the CAPEX amount, energy and transportation costs. For a variety of projects we have designed business plans and financial models reflecting in detail the key elements of the projects making it possible to have a motivated opinion on the project economics. In addition our team has experienced staff with relevant expertise that can make an independent market assessment of the project to increase its bank-ability. The ministries require that the applicants have an elaborated financial strategy in place. In this respect given our experience in mining business and projects we can advise you on the best applicable financing structure that could (preliminary) include a mix of the following instruments: a bond issue performed by the project SPV, EC A-covered debt, debt provided by Russian banks and international finance. In addition (in case needed) we can also structure the equity side of the project by introducing and assisting in the engagement of an equity partner. As a qualified financial adviser PwC team will concentrate its efforts on the description and analysis of the risks associated with the project as well as provide an adequate reflection of the risk mitigants already in place and/or that can be put in place to completely eliminate the risks or put them down to a tolerable level. This will allow to present a complex picture of the project and the realistic level of the project risks.

16 Thank you for your attention

17 Disclaimer This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwC Russia, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PwC Russia. All rights reserved. Not for further distribution without the permission of PwC Russia. "PwC Russia" refers to PwCIL member-firms operating in Russia. "PwC" is the brand under which member firms of PricewaterhouseCoopers International Limited (PwCIL) operate and provide services. Together, these firms form the PwC network. Each firm in the network is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way.

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