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By Tomek Ulatowski

This presentation discusses the necessary ingredients for the creation of an acceptable credit structure, i.e., the structure that enables the borrower to attract the funding from different groups of lenders. As the amount of debt in the capitalization of new projects increases, it becomes quite critical that the mining venture sponsors obtain funding in a manner which maximizes the project economics. Attention normally is focused on the inherent operating cost characteristics of a venture such as the cost of mining, milling, transportation, smelting, and refining. The projected costs are derived from lengthy feasibility studies often taking millions of dollars and years to prepare. For a variety of reasons as the amount of equity directly provided by the sponsors declines, the balance must be made up from external credit sources. As a result, once the project becomes operational, debt service requirements assume crucial importance. For most new ventures, in the early years of production, the total amount of periodic debt amortization charges together with the projected interest expenses equals or exceeds the total operating cost. Utmost care must be taken, therefore, to reducing these costs which will then increase the chances for the implementation of the project. Project sponsors must carefully evaluate different funding sources in terms of their potential economic impact and, concurrently, evaluate alternative credit structures in order to be able to attract the selected funding vehicles. In this presentation I will discuss credit sources in the order of their relative appeal; i.e., from the standpoint of maximizing rates of return to the project owners. The tenor of the credit, that is the period from signing a loan agreement to the time of last repayment under the loan agreement, is undoubtedly the most important variable in evaluating the attractiveness of debt sources. Therefore, I will begin by discussing debt sources with the longest maturities and will end with a description of credits with relatively shorter tenors. The availability of different funding possibilities will naturally depend on the geographic location of the proposed venture, the creditworthiness of the borrower and the sponsors, the project economics, and finally the actual liquidity conditions in the capital markets at the time that the funds are committed. U.S. LONG-TERM DEBT MARKET - PUBLIC OFFERINGS AND PRIVATE PLACEMENTS The long-lived nature of most mining projects dictates that the majority of the mine financing be raised from long-term sources. In today's world capital markets U.S. debt issues probably carry the longest maturities available. The maturities can range from 5 to 40 years. Various types of long-term corporate debt instruments can be differentiated from one another by their terms, seniority as to claims against the assets of the issuer, legal form, and whether issued privately or through a public offering. The terms of these debt issues vary widely. For example, the interest rate which is typically fixed at the time of issuance, is determined by the credit quality of the issuer, the maturity, the average life, the seniority of the debt, the quality of control covenants or type of assets pledged as security, and other exogenous factors such as: economic policy, general level of interest rates and cur-rent level of financing activity. The entire principal amount of the debt may be due and payable at maturity (known as a "bullet" maturity) or, more typically, through periodic repayments in equal or staggered amounts. Almost all such debt issues allow for prepayment at the option of the issuer, but require varying amounts of repayment penalties. Disbursements are made over a relatively short period after signing of the debt documentation which may not coincide with the actual funding needs of the project. Financial covenants can be quite stringent, covering areas such as the issuer's financial leverage, working capital, payment of dividends and other distributions, merger and acquisition activities, and limitations on the disposition of property. Long-term debt issues may also be distinguished by the seniority of their claims against

Jan 1, 1985

By Michael A. Gustafson, Fernando B. Sotelino

INTRODUCTION The degree of success of any new project will ultimately depend on two factors: (i) the underlying economic strength of the project; and (ii) how successfully the parties involved can coordinate their interests to establish a financing structure which indeed capitalizes on the project's inherent economic attractiveness. A project's underlying economic attractiveness is determined by its inherent comparative advantage in accessing the factors of production, combining these factors of production to create a product and marketing this product. Initially, the decision regarding whether to go ahead with the project - the go/no go decision - has to be based on its total ability to generate cash flow returns to project participants to compensate them for resources committed and risks undertaken. The extent to which project sponsors will actually benefit from the project's inherent economic attractiveness is fundamentally dependent on their ability to establish the long-term financing arrangement which best meets the objectives and constraints of each project participant and sources the most advantageous funding. The decision regarding the financing of the project, the "how-to-go" decision, is then an attempt to find the capital structure, consistent with market terms and conditions and sound financial management policies which will best: (i) match planned outflows with cash inflows; and (ii) maximize the return for project sponsors. This article makes use of a case study to illustrate the analytical process involved in dealing with the go/no go and the how-to-go decisions on a project. Though most commonly applied to project finance situations, the guideline described herein is equally applicable to other financing situations, such as leveraged buyouts and debt restructurings, where timely repayment of debt depends largely on the future cash flows to be generated by the entity being financed. Our case study is of a hypothetical expansion of an existing copper mining operation in Latin America. The company, Latin American Copper (LAC) currently has 147 million metric tons of proven sulphide ore reserves. The existing mine complex consists of an open pit mining operation and a conventional flotation plant with a processing capacity of 20,000 metric tons of ore per day. LAC sells copper concentrates primarily to Japanese custom smelters. The mine has been in operation for 5 years, fine copper production last year was 108,240 metric tons, and LAC currently has assets of $175 million and net worth of $135 million. Due to a recent increase in proven reserves, LAC is considering doubling the treatment capacity of its flotation plant to 40,000 tons per day, and expanding its mining capacity to meet the additional concentrator capacity (the "Project"). Project capital expenditures and incremental working capital have been estimated at approximately $210 million. The construction period is expected to cover one year, including a three-month start-up phase. The Project is to be funded by a combination of equity, senior debt, including both supplier credits and/or commercial bank term loans, and subordinated debt. LAC's shareholders are willing to commit a maximum of $50 million to the Project. A government development agency, which is also a minority shareholder, might be willing to lend approximately $40 million to LAC in the form of subordinated notes, depending on the ability of the Project to generate foreign exchange reserves. Commercial banks cannot be expected to offer loans with maturities longer than ten years. The Project is expected to increase the value of the firm because: (i) It will solidify the Company's position as a low-cost copper producer by taking advantage of economies of scale. As a result of the expansion, cash production costs are expected to decrease 7.0[c]/lb. and all-in costs 11.0[c]/lb; (ii) The potential earnings stream from the sulphide ore reserves will be realized

Jan 1, 1985

By John K. Hammes

INTRODUCTION This introductory paper presents a description and definition of what the finance function is and what it specifically means for the mining industry. In its simplest terms, finance is, "management of money matters". As an area within the discipline of business administration it draws heavily on the related fields of economics and accounting, and to a lesser extent on marketing and production. MINING FINANCE DEFINED In preparing to write about what finance means to the mining industry, I asked a number of mining people the question, "What does mining finance mean to you?" Most responded that mining finance was "How a company borrowed money for mine development", and perhaps half those questioned included "raising equity" in the definition. It is not surprising that the mining industry concept of finance is the providing of funds needed for the objectives of the business, for that was once a view shared by authorities in the field of business administration. Further, it is certainly the area where much of the emphasis has been placed in the past ten to fifteen years as the industry struggled with the development of more remote and more refractory or lower-grade orebodies while profitability and internal cash flow were below expectations. No wonder project finance became such a popular topic. Twenty years ago it is probable that the emphasis would have been on mine valuation, for that subject was the area of finance then most often examined in industry publications. Papers concerning the pros and cons of payback, internal rate of return, and discounted cash flow appeared regularly. Let's examine the following situations, each the result of a financial decision: - Funding the exploration program in a developing country was accomplished by buying the next six-months budget needs in local currency. One week later the currency devalued 30 percent. If the purchase had been delayed or the local currency borrowed short term, a substantial saving would have been made in funding the program. - A major mining company borrows heavily to finance both expansion of its primary mining business and its entry into several new industry segments. When markets for all of the commodities it produces turn down for a prolonged period, there is concern over the adequacy of cashflow to cover debt service in addition to other company needs. The company's financial officers, however, had arranged very large committed credit facilities from numerous financial institutions which assured the availability of funds for several years. This enabled the company to implement a strategy to conserve cash, sell assets and survive until conditions improved. Further, short term suppliers of credit also were comfortable with the assurance that longer term credit was there to support them. -A medium size mining company financed several mines independently with limited obligations on the part of the parent company. The company decided to refinance the operations under one agreement. More flexible terms, lower interest cost and a longer tenor financing were achieved in return for assuming the risk as a direct obligor. - The exploration and development group of a large mining company proposes to develop a new mine in a country in which the company does not presently operate. When the investment is rejected they are advised that one reason was that the reinvestment assumption inherent in the discounted

Jan 1, 1985

By Hans W. Schreiber

INTRODUCTION At the end of the day, the decision by the sponsor to proceed with a project and to seek financing, or the decision by the financier to grant financing are made on a judgmental basis. Cash flow projections, sensitivity and risk analysis, the innumerable ratios applied by the financier, the so-called feasibility study, etc. are all only tools, and the degree to which they affect decisions is as highly varied as are the personality differences and business conduct and outlooks of the persons who render the decision of "go or no-go". The independent consultant, then, is expected to provide an additional increment of credulity and/or reliability to the "tools" which others will use in reaching a decision; the consultant is really not in a position to directly recommend a "go or no-go". PROJECT FINANCE INGREDIENTS The project finance situation has basically three ingredients: - The project; - The inherent risks attendant with project failure; - The parties. The project, to be viable for financing, will have certain essential characteristics, namely: 1. Clear title or rights to the mineral; 2. Proven definition/establishment of mineral quantity; 3. Financial viability; 4. Physical access consistent with financial viability; 5. A market for the product at a price and for the quantity consistent with financial viability; 6. Transportation/shipping from the project facility to the market at a cost consistent with financial viability; 7. Availability and demonstrated expertise of the developer of the facility; 8. Demonstrated expertise of the operator of the facility; 9. Production processes do not involve unproven new technology; 10. Availability of management personnel; 11. The property and the facilities have value (and thus can be used as collateral); 12. Government approvals/support, as required, will have been obtained; 13. The political environment is essentially friendly and stable; 14. The owner(s) of the project have the financial, strength to make equity contributions consistent with total required investment capital and project risk; 15. Backing by credit support other than that of the financier (i.e. guarantees); The inherent risks of failure are (Nevitt, 2nd Edition); 1. Completion delays with consequent delays in the generation of revenue 2. Cost overruns 3. Technical failure 4. Financial failure of contractors 5. Government interference 6. Uninsured losses 7. Increased price or shortages of raw materials, supplies 8. Technical obsolescence 9. Loss of competitive position in the market place 10. Expropriation 11. Inadequate/poor management The parties directly or indirectly integral to the project financing are: - The mineral rights owner - The developer - The operator - The equity investor

Jan 1, 1985

By Robert B. Parsons

"This month, Tax Notes focuses on two features which can potentially ""dress up"" a new issue of common shares to make the shares more attractive to investors. Attaching warrants to a share issue is a relatively common practice, and recent years have seen an imaginative variety of different kinds of warrants, some of which can be subject to somewhat different tax treatment . A less common financing strategy which certainly deserves some consideration involves the possibility of utilizing ""Share Purchase Tax Credits "" in conjunction with a new share issue.IntroductionPrevious subjects covered in Tax Notes have dealt with flow-through shares and other tax angles which can make equity issues more appealing to potential investor s. Two other techniques which can add zest to a new stock issue involve the utilization of warrants and ""share purchase tax credits"" (or SPTCs). This article takes a brief look at the better known subject of warrants and the lesser known matter of SPTCs.Of course, this paper presents only a relatively general summary of the income tax implications of warrants and SPTCs, and is not intended to be a definitive commentary on all of the detailed and complex tax issues that might be relevant in the circumstances."

Jan 1, 1985

By John C. Robison

INTRODUCTION Sensitivity analysis is a means of gauging the impact of individual risks on a financing. Key risks can occur in three time periods: - Feasibility, engineering and construction phase; - Start up phase (usually through completion); - Operating phase (post completion). If a company has agreed to cover these risks prior to completion, then less attention will be paid to the sensitivity of the project in the first two time periods. Since the operating phase of the project generates cash for both operations and debt service and generally does not begin until two to six years after the loan is signed, it is wise to look at scenarios other than the projected "base-case" scenario in order to determine the project's capability to operate successfully under a broad range of probable future events. Lenders are compensated at a fixed spread over their borrowing base and generally are not compensated if the project is successful beyond expectation. They are also subject to the loss of principal plus funding costs if the project performs below expectation. Because of this, lenders establish sensitivities around the parameters of conservative projections developed in the project feasibility studies and the cash flows resulting from these projections. The initial cash flow projections should demonstrate the project's ability to meet cash costs, debt service requirements (principal and interest), and still have sufficient cushion to cover contingencies such as strikes, price fluctuations, force majeur situations, etc. (See Schreiber, Chapter 10). The selection of the level of sensitivity analysis to be performed is the result of both objective criteria, including probabilistic analysis applied to the technical parameters, and, of equal importance, subjective criteria applied by the analysts, especially with regard to the economic and financial parameters impacting the project cash flows. RISK SENSITIVITY Assumptions used in the cash flow projections should be realistic. Risks identified by the lenders should be identified and cash flows prepared to assess whether these project risks are acceptable. Typical project risks include the following (see also Chapter 9): - Sufficient reserves - quantity and quality - Product price - Production level - Operating costs - Availability of energy and supplies - Transportation and infrastructure requirements and costs - Interest rate - Completion risks - Tax level - Political risks - Cost over-run risks - Operator experience - Management - Technological risks - Environmental permits and risks - Foreign exchange risks - Insurance coverage - Equity of sponsors - Inflation rate - Capital expenditure during project life In order to see the effect on the cash flow projections, each risk should be analyzed for its impact on the cash flow generating capacity of the project. Sensitivities can be examined to see if the resultant cash flow projection will meet the lenders minimum credit standards. 1.Reserve Sensitivity In general, lenders will not assume the reserve risk. However, it should also be noted that lenders receive loan proposals in which reserves range anywhere from proven to possible. Sensitivities are not generally run for various reserve levels and reserve estimates are either considered acceptable or not acceptable by the lenders.

Jan 1, 1985

By B. W. Clyburn

"Coals from the Corporation's Lingan and No. 26 mines are classified as high-volatile A bituminous, with a very low inherent ash and containing all essential properties to provide metallurgical coal, with the exception of a high sulphur content. Only through proper cleaning at low specific gravity can the pyritic sulphur fraction of the coal be liberated to an extent where final sulphur meets coking standards. This first section of the paper deals with the operation of a Dutch State Mines heavy-media cyclone circuit to achieve an actual separation in the region of 1.30 specific gravity. A discussion of the parameter of control which must be applied along with an appraisal of the results obtained is included in the paper.Introduction Very high fluidity and unusually low ash are the outstanding characteristics of coal from Devco's mines in the Harbour seam of the Sydney coal field. However, sulphur content, mainly pyritic, ranges from 1 to 2.50Jo. To obtain the low and consistent sulphur level required in metallurgical coking coals, preparation at low specific gravity is required. Metallurgical coke is used as the fuel in an iron blast furnace. Its sulphur content largely determines the quantity of slag required to remove it and therefore influences furnace productivity and unit costs. Typical data on the various coal properties of importance in the production of coke are included in Table 1."

Jan 1, 1985

By K. A. Grace

"An ore is a rock regardless of its rarity or value."* The application of geology does not cease with the discovery and delineation of a mineral resource, but continues in the calculation of the economic parameters that determine reserves. Reserve determination, reduced to essentials, is the determination of the cost of production of a mineral commodity from a resource. This cost comprises mining, processing, waste disposal, reclamation and marketing costs. Geological input is vital in the calculation of the individual cost parameters from mining to reclamation, and even has some impact on marketing. Geology thus has a critical role in the determination of reserves.

Jan 1, 1985

By R. Drozd

"The Bui/moose Mine is in the northeast coal area of British Columbia, and less than $300 million was spent to bring this 2.3 million-tonnes-per-year metallurgical and thermal coal mine into production by November 1, 1983, one month ahead of schedule. The project is an unincorporated joint venture undertaking, with Teck-Bullmoose Coal Inc., a wholly-owned subsidiary of Teck Corporation, holding 51%, Lornex Mining Corporation holding 39%, and Nissho-lwai (Canada) Ltd. holding 10%. Bullmoose Operating Corporation will be the manager and operator of the project. This paper will broadly cover the history and exploration work on the property, the geology, open-pit mining plans and equipment, the preparation plant flowsheet from breaker station to clean coal silo, the 35 km highway truck haul, the railroad loadout system, manpower requirements, approvals and permits, and general financial arrangements. Introduction The Bullmoose Mine Project is located about 87 km by road south of Chetwynd, B.C. and consists of an open-pit coal mine, a plant facility in the Bullmoose Creek valley below the mine, and a separate rail loadout facility on the British Columbia Railway Branchline near the new town of Tumbler Ridge some 35 km by road to the east. The plant will be capable of producing a total of 2.3 million tonnes per year (mty) of washed metallurgical and thermal coal. Long-term metallurgical coal contracts for high-quality, medium-volatile, bituminous coal have been signed with nine Japanese buyers for 1.7 mty, and the balance of0.6 mty will be for thermal coal production. Plant construction began in the spring of 1982, and in May 1983, preproduction waste and overburden removal in the mine was started. The plant began tuning up in October and was fully operational by December 1983. Metallurgical coal began moving to the coast in unit trains during November, and first vessel loading at the Ridley Island port began in late December 1983."

Jan 1, 1985

INTRODUCTION Besides the European export credit agencies covered in Ted Rides' paper in this Chapter, other agencies are also active (see Appendix) but the most notable for mining projects are The Export-Import Bank of the United States ("US Exim") and the Export Development Corporation ("EDC") of Canada. Mexico's Fomex is basically a short-term trade-finance fund administered by the Central Bank. US Exim This independent agency can provide loans, guarantees, and insurance. Like all export-credit agencies, its mandate is to support the export of goods and services from the US as a means of competing against other countries' products. If a piece of mining equipment can only he made in the US, the US Exim may very well not provide any financial assistance. (It is important not to place the order for any item for which export credit is sought because, once ordered, the situation is no longer competitive in US Exim's eyes.) Direct Credits and financial guarantees ("buyer credits") are commonly in amounts greater than 85 million and for terms longer than six years. An example here is the $48.5 million provided to PT International Nickel Indonesia (see Robert de Gavre's paper in Chapter 12). US Exim usually requires a 15% downpayment and, therefore, finances up to 857 of the goods; less if the US content is lower. The dollar funding can he US prime, London Interbank Offered Rate (LIBOR), or other sources. Exim can fund in either or both of the following ways: 1. Under a US bank Letter of Credit ("L/C") 2. Reimbursement to the buyer/borrower via a US bank account. US Exim will, without charge, issue a preliminary commitment. It will, however, need to approve the various credit agreements and prefers to tie other parallel financings into one loan agreement. US Exim's total commitments are large, up to $5R billion in aggregate under various programs. US Exim has been the world's leader in medium-to long-term minerals project financings/ co-financings but suffers from (i) aggressive foreign export-credit competition whereby other nations mix in soft-loans or aid programs ("mixed credits") to increase the percentage financed and lower the interest margin and (ii) an imbalance in its own cost of funds. A common US Exim package would be as follows: 15% Banks under US Exim guarantee, floating rate over prime or LIBOR. 35% US Exim funding, fixed rate 35% Pefco funding, fixed rate 857 Drawn down pro-rata under US bank L/C 15% Cash down payment (may have been financed within a project/corporate credit) 100% Repayment usually begins six months after planned start-up in equal semi-annual instalments, with the banks usually paid out first, Pefco next, and US Exim last. Medium-term credits ("supplier credits") are issued for US equipment exports for terms up to five years, again for 85% of the equipment costs although the exporter is expected to bear at least 10% out of that 857 for its own risk. The buyer is required to be a first-class credit such as some governments or highly credit-worthy companies. Otherwise a bank L/C would be required. (This may be wrapped into an overall project-finance package for a minerals development. The project-finance banks provide an L/C to US Exim instead of funding that portion themselves.) US Exim guarantees 100% of the political risk and either 85% or 95% of the commercial risk for

Jan 1, 1985

By Robert Gillham, Victoria Yablonsky, Grover R. Castle

INTRODUCTION The commercial paper market, unique to the United States, is a direct exchange of funds between high-grade borrowers and large lenders; because it eliminates both the bank's role as middleman and also some significant transaction costs, commercial paper is the lowest cost short term instrument in the world. For this reason, virtually all borrowers would like to enter the market, but only issuers with the highest rating from Moody's and Standard & Poor can attract purchasers at the best rates. COMMERCIAL PAPER The commercial paper market, in existence for over 100 years, has traditionally been used for short-term financings, with most paper maturing within 30-45 days. Under the U. S. Securities Act of 1933, (section 3(a)3) industrial paper can avoid registration only if it matures within 270 days and is used for current transactions. It was first used to finance the short-term seasonal working capital needs of manufacturing companies. Since World War II, commercial paper use has grown steadily, serving in the 1950's as the market in which finance companies financed the explosion in consumer credit purchases of heavy consumer durables. LETTER OF CREDIT BACKING As far as is known, the use of letters of credit to support energy-related commercial paper began about 13 years ago with an arrangement to finance the nuclear fuel for Con Edison's Indian Point 3 Plant. Goldman, Sachs was the architect of this financing and Chemical Bank provided the letter of credit support. After an early burst of interest, this type of financing wobbled severely in the difficult credit markets of the mid-seventies before regaining serious momentum in 1976 and 1977. A mining project would not normally qualify as a borrower in the commercial paper market because of its credit standing and because its large capital needs require long term financing. However, lately, commercial paper has begun to take the place of a bank term loan in limited recourse project financings. L/C backed commercial paper took this new and startling turn in 1982 when it was used as part of the $700 million financing for the development of the Newlands-Collinsville coal mines of Mount Isa Mines Ltd. in Australia. This was the first use of L/C backed commercial paper in a long-term limited recourse project financing. First Boston acted as financial advisor and, again, Chemical Bank provided sole letter of credit support of $155 million. The $785 million BHP financing for the acquisition of the Queensland (Australia) coal assets of Utah International from General Electric Company followed the next year; there we acted with two other Front Banks to provide $270 million of L/C support. These two important transactions indicate that not only has commercial paper become an integral part of a long-term financing package, but also that it is no longer the exclusive domain of the best known U. S. companies. Lesser-rated companies and a multitude of foreign borrowers have gained access to this "exclusive club." How has this become possible? OPERATION OF AN L/C An instrument of the commercial banks, the "direct pay" letter of credit, has enabled lesser-rated companies to issue commercial paper in their own names. The letter of credit allows the issuer to substitute the credit rating of the supporting bank for its own. The L/C in effect allows a lesser-rated company to rent the bank's credit rating. This upgrading is possible because the bank is unconditionally obliged to pay the note-holders at maturity and then turn to the Issuer for reimbursement. The Issuer commonly "rolls over" a new short-term issue and reimburses the supporting bank from the sale of the new issue until cash flows from the project allow the borrower to reduce the level of paper outstanding. The commitment for an L/C facility, up to 12 years in the case of the Broken Hill transaction, governs the life of the commercial paper tranche of the financing. The term of the L/C commitment thus has the power to extend the ordinary 30-45

Jan 1, 1985

By Christian F. Baiz

INTRODUCTION Industrial minerals can have similar financing requirements to those needs of metaliferrous and coal mining projects. One of the outstanding differences is the understanding of the many different markets that these industrial minerals represent. There are in excess of 30 principal industrial minerals ranging in terms of annual production from the largest quantity such as sand and gravel, to possibly the smallest quantity of production of a legitimate industrial mineral which may be defined as industrial and rough gem diamond. (See Tables 1 and 2) Project finance techniques, analytical methods, and information requirements are covered elsewhere in this Chapter and Chapter 10. Some comments on equity finance aspects follow. EQUITY AMOUNT The amount of equity in a financing transaction provides a cushion to the lender in case the project runs into trouble. Generally speaking, the greater the amount of risk in a project, the more equity a lender will require. The amount of cash equity in a project financing transaction is between 25 and 40 percent. The amount of leverage (debt/equity) is negotiable based on such factors as the strength and extent of the sponsor's undertakings, of the project's economics, and the term of a strong sales contract. Naturally, a borrower seeks to obtain d loan with as little equity required as can be negotiated. Zero percent equity is usually associated with a take-or-pay contract (a hell-or-high- water unconditional commitment under which the purchaser must pay for the commodity as though it were shipped regardless of whether it is actually mined or shipped) with a financially strong corporate entity i.e., the parent company or an end user. As a take-or-pay contract is tantamount to a guarantee of payment, the banker views the credit basis of the loan as being other than the borrower's mining operation and therefore will analyze the creditworthiness of the institution purchasing the commodity on the basis of its corporate balance sheet. Do not confuse a take-or-pay contract with a take-if- tendered or take-and-pay contract. Another means in the United States of obtaining zero percent equity is the carved out production payment financing, typical of coal mine financing. This involves the sale, or conveyance, by the owner of the mineral property of a production payment to a nominally capitalized company. The nominally capitalized company is formed solely to buy the production payment and usually borrows 100 percent of the purchase price from a lender. Equity amounts of 10 to 20 percent generally are found in transactions which employ techniques such as an advance sale or a subordinated lease/loan. These agreements are viewed as quasi equity by most banks for several reasons. First, the proceeds represent a cash infusion early in the project's life - usually prior to the bank lending any funds. Thus, the repayment schedule is "behind" that of the bank debt. In the case of an advance sale, repayment is in the form of a long-term supply contract with favorable terms, usually priced close to the mining operation's costs. There is also usually a requirement that all costs of the project be paid for by the loan or equity, often making the sponsors financially responsible for any cost overruns. Cost overruns are a major risk in any project, large or small, and are often due to unforeseen factors such as wildcat strikes, a piece of faulty equipment, or any event which delays completion, e.g., remote location, weather, etc.. . The question of how overruns are covered can be negotiated. For example, in addition to the original debt/equity ratio of the project, there can also be a cost overrun ratio that will

Jan 1, 1985

By Keith L. Harris

Economic activity in the United States picked up in the third quarter, according to the latest estimate released by the Department of Commerce. Real gross national product (GNP)--the Nation's output of goods and services--grew at a seasonally adjusted annual rate of 4.3%, or $17.6 billion, compared with a rate of 1.9% for the second quarter of 1985 and 1.6% for the third quarter of 1984 (table 1). The 4.3% rate is one percentage point above the preliminary estimate reported in the August/September issue of Minerals and Materials. Most of the upward revision was due to the change in business inventories and Government purchases, while the figure for net exports was revised downward substantially. The 4.3% growth bettered by 1.5% the average rate of growth in GNP from 1974 through 1984 and was 1.1 % above that of the period from 1975 through 1984 and 0.7% above that of 1980 through 1984. Of importance to the minerals industry was the $14.4-billion growth in personal consumption expenditures, $10.2 billion of which was for durable goods (especially domestically produced automobiles) and the growing residential investment. The net export deficit continued to grow, however, and investment in nonresidential structures, producers' durable equipment, and business inventories declined. Prices, as measured by the GNP fixed-weighted price index, increased at an annual rate of 3.1% in the third quarter, compared with 3.9% in the second quarter. The slower rate of inflation resulted mainly from a decline in energy prices, following second-quarter increases. Fourth-Quarter Prognosis Many of the economic data available for October and November indicate that the economy is growing modestly and will continue to grow over the next 3 to 6 months. The composite index of leading indicators, designed to predict economic activity within 3 to 6 months, rose 0.3% in October, the sixth consecutive monthly advance, according to the Department of Commerce. Six of the 11 available leading indicators were positive: Stock market prices rose, as did sensitive material prices, credit outstanding, and manufacturers' new orders for consumer goods and materials; initial claims for unemployment insurance decreased, and firms were getting slower delivery of goods. Four of the indicators were negative: Business formations, homebuilding permits, contracts and orders for plant and equipment, and money supply all declined. The average hours worked per week, already at a high level, remained unchanged.

Jan 1, 1985

By D. G. Collins

As part of its effort to develop ways to maximize resource recovery, the Bureau of Mines investigated the extraction of vanadium from Western phosphate beneficiation tailings with H2S04 and/or H3P04. Dissolution of the vanadium was accomplished by digesting a mixture of acid and a 50-pet-solids, tailings-water slurry. In the most effective method investigated, vanadium and phosphorus were leached by digesting the slurry at a constant boiling temperature (1000-1100 C) in a stirred reactor. In batch tests, maximum vanadium dissolution was 95 pet. In continuous-circuit tests designed to further evaluate vanadium dissolution at con-stant boiling temperature in a continuously stirred reactor, vanadium dissolution ranged from 70 to 85 pet. An economic evaluation of the process demonstrated that H2S04 consumption is the major cost factor. Based on the value of the vanadium product with no allowance for a phos-phate product, the cost of producing the V205 is more than twice its value. The potential for profit would depend upon the value of the phosphate fertilizer produced from the impure H3P04 remaining after vanadium extraction.

Jan 1, 1985

By C. Richard Tinsley

INTRODUCTION The economic analysis (Chapter 3), the engineering studies (Chapter 10), the credit structure (and the consequential funding sources) - Chapter 11, and the overall feasibility structure for any venture are all directed to determining one major decision element: How much and how certain is the reward for taking these risks? Risk assessment is a surprisingly weak area of analysis and is usually addressed in a checklist fashion. It is much preferable to deal within a risk system so that the inevitable tradeoffs among risks are correctly made. DEFINITION The first step toward risk definition must be to ascertain all of the risks to which a project or a company is exposed; otherwise one will remain ignorant of the possibility of a financially crippling loss until it occurs. (Carter and Crockford, 1974). However, simply stating what "risk" is can lead to debate. For example, risk could be (adapted from Vaughan, 1982): -the chance of a loss - uncertainty of loss -possibility of loss - uncertainty -dispersion of actual from expected results - probability of an outcome different from the one expected - possibility of an occurrence of an undesirable contingency -a condition in which a possibility of a loss exists. For the minerals industry financier, the last definition is probably the most appropriate. However, from a mineral company's point of view the definition might well include the possibility of not achieving the expected financial return. RISK CLASSIFICATION Risk identification will be readily agreed as the all-important first step. There are five major "branches" of risk classification. These are: -Statistical -Modellers -Checklist -Project Financing -Insurance The Statistical set discovered probability theory and any risk discussion soon deteriorates into a mathematical jungle (Megill, 1977; Hartman, 1976; Reutlinger, 1970; and Pouliquen, 1970).Their use of terminology tells its own story: coin toss (binomial distribution), gamblers' ruin, delphi (oracle) techniques, monte-carlo simulations, random walks, etcetera. These techniques inadequately represent the judgements necessary in an increasingly complicated and interrelated world. The risk Modellers have turned to the computer to handle these inter-relationships but soon find barriers because of "simultaneity". Certainly the computer has its uses to conduct various analyses (marketed as "sensitivity" analyses) but very often one finds that this involves changing one or two variables at a time, all other things being equal. Unfortunately, in a modern and complex world all other things do not remain equal. The statisticians will, no doubt, jump to their own defence by citing this

Jan 1, 1985

By F. J. Palumbo

Effective recycling or disposal of flue dusts is a continuing problem for copper, brass, and bronze smelters. Over 300,000 short tons (st) of dust is generated annually by U.S. secondary copper, brass, and bronze smelters. The Bureau of Mines has developed an alkaline leach method for recovering metal values from copper converter flue dust containing zinc, tin, lead, and copper. The dust was leached with a hot solution of ammonium chloride and ammonium hydroxide to solubilize ZnO. All of the tin (as Sn02) and the metallic copper, lead, and zinc, as well as possible insoluble compounds of each, report to the residue. Dissolved copper and lead salts are removed from the leachate by cementation with granular zinc. Zinc oxide is precipitated by diluting the leachate with water. The tin-rich (9.8 pct) residue has a ready market. The cement product is recyclable to the smelting operation. The ZnO is at least 97 pct pure and has potential marketability.

Jan 1, 1985

By Edwin A. Rides

HISTORICAL ORIGIN OF THE EXPORT CREDIT AGENCIES Almost since the inception of international commerce sellers, having manufactured and/or sold and shipped goods to an overseas buyer, have been obliged to accept the risk that they will not be paid for one reason or another. There are many reasons why payment may not be forthcoming, for example, the goods may be lost at sea, or rejected by the buyer or the buyer nay simply not be creditworthy. These risks were brought into sharp relief as international trading became more sophisticated and the practice of giving credit to buyers gathered momentum. Inevitably enterprises sprang up which offered same mitigation of this exposure, accepting houses and later confirming houses and banks were prepared to assure acceptable credit risks an behalf of the seller, usually by discounting trade paper, and for many years the market ticked over reasonably satisfactorily. However, after the 1914-18 War international trade was at an extremely low ebb and its inherent risks were accentuated to a point where they were often commercially unacceptable. Yet a healthy and vigorous international market was indispensable to recovery of the world economy and a number of governments, led by the United Kingdom, perceived a need to offer their exporters a comprehensive form of insurance, particularly to facilitate the extension of credit to foreign buyers. In the United Kingdom the Export Credits Guarantee Department (ECGD) was set up to encourage trade through the provision of export credit insurance. Over the ensuing years others followed suit and now most of the developed trading nations and many developing nations have similar agencies. PRESENT DAY IDLE OF THE EXPORT CREDIT AGENCIES (ECAS ) Traditionally then the BA's role was to encourage trade through the provision to exporters of insurance against the risks of non-payment by overseas buyers of their goods and services. However, during the 1970's the manufacturing industries of most of the developed nations found themselves facing severe competition for business, particularly in the developing world. As a result the more aggressive ECA's began to introduce ancillary forms of cover designed to reduce exporters' risks outside of the credit field. For instance, most of the European agencies now have a form of cover against foreign exchange risks here contracts are denominated in currencies other than that of the exporter's country. Most of the agencies also provide cover to exporters against the risk of unfair calling of bid, advance payment, performance bonds etc and in certain countries, where high inflation rates were endemic, a form of cover against cost escalation. In certain circumstances it is also possible for an exporter to obtain cover against losses arising as a result of the involvency of a partner in a consortium or joint venture. These are all forms of insurance but, also during the 1970's, many of the national export credit programmes took a major step away from their original raison d'etre by facilitating the provision of preferential financing terns for the acquisition of capital equipment by an overseas buyer. This new line of business quickly became an important ingredient of major export financing packages and, as we shall see later, turned out to be extremely costly for the countries providing it.

Jan 1, 1985

By Peter Tegart

The discovery of gold in the Toodoggone River area is credited to Charles McClair who mined placer deposits in 1925, reportedly valued at $17,500. After he and his partner went missing in 1927, efforts to relocate their workings resulted in the formation of Two Brothers Valley Gold Mines Ltd. in 1933, in which the legendary Grant McConachie (first president of CP Air) played an active role. This was the age when the prospector first utilized the airplane to reconnoitre remote areas. What greeted the observer from the air was an area rich in orange and yellow colours characteristic of gossans formed by the oxidation of sulphides. However, Samuel Black, a Hudson Bay Company fur trader, had also noted in his diary as early as 1824, the unusual and many gossanous colours in the headwaters of the Finlay River. These gossans, coupled with white limestone bluffs and the presence of placer gold, attracted the first reconnaissance of the area by Cominco in 1929. Cominco was ever active in remote areas at this time. They staked and worked several base-metal showings hosted by limestone at the margins of intrusive stocks. These early workers also obtained erratic high gold assays from chalcedony float samples found in creeks draining into the Toodoggone River. However, because the samples gave inconsistent assays, no concerted effort was made to locate their source. Except for the occasional horse-supported prospecting party of the late 1940s and early 1950s, the area did not receive much attention until 1968. Work until this time focused on the base metal lead-zinc showings which contained attractive silver credits. Gold was not an attraction because of the set price established by the US government. The late 1960s saw the northward expansion of porphyry copper exploration into the Toodoggone. A program of gossan soil sampling (gossans which had attracted the early workers) was carried out by Kennco Explorations (Western) Ltd. in 1966-1967. They analysed for base metals in the field, using a cold extraction method. The Kemess copper- gold prospect was staked as a result of anomalous copper values from this early geochemical program. In 1968, Kennco continued the program of silt traversing and field geochemical testing. The samples were further subjected to multielement analysis consisting of copper, molybdenum, lead, zinc, cobalt, nickel, and silver at Kennco's North Vancouver laboratory. Several anomalous creeks, high in combinations of copper, molybdenum, and silver, were outlined. Some initial soil grids were also established. The fall of 1969 saw the return of Kennco prospector Gordon Davies and geologist Bob Stevenson to check out a well-defined molybdenum, scattered copper and silver anomaly in soils from a grid on the Chappelle claims. The subsequent analysis of several selected quartz felsenmeer floats yielded one assay which ran in the order of 0.25 kg/t (8 oz per st) gold and 2.2 kg/t (70 oz per st) silver. Subsequent trenching on the Chappelle claims exposed the source of float in a 4- m (134) wide vein of high grade gold-silver mineralization. These results led quickly to the realization that the district had precious metal potential. Subsequent exploration in the period 1969-1974 by Kennco resulted in the discovery of most of the gold and silver occurrences on the Chappelle and Lawyers properties. Several other gold and silver occurrences were found in this district by Cordilleran, Cominco, and Sumitomo, working the district during this period. Conwest optioned the Chappelle in 1973 and explored underground by adit entry as part of a one-year program. In 1974, Du Pont of Canada Exploration Ltd. optioned the Chappelle claims and in March 1980, using reserves developed on the A vein, placed the Baker mine into production at a rate of 90.7 Vd (100 stpd). The Amethyst zone on the Lawyers property, 8 km (5 miles) north of Chappelle, was found in 1973 by Kennco using continued, persistent followup prospecting of silver silt geochemical anomalies. A silt anomaly in the order of 3.4 ppm silver occurred in a stream flowing 300 m (984 ft)

Jan 1, 1985

INTRODUCTION Trade financing is a particularly important component of short-term financing for a minerals company since errors, extra costs, or payment delays/defaults can easily wipe out the profit margin on a particular shipment or can cause problems when arranging purchases of e.g. reagents. It is required to make any minerals operation function and does not have to be cross-border to require proper management. Sources of working capital are as follows: 1. Extended credit terms from suppliers 2. Inventory loans from banks, finance companies 3. Accounts receivable financing or factoring 4. Credit lines or overdraft facilities from banks. TRADE CREDITS These are provided under the familiar terms "net 10 days" or payment due by the "10th day of the following month." Thirty days for payment is usual but longer periods can be negotiated with regular suppliers. Shipment may be made on open account with specified periods for settlement. In the mining industry, a custom smelter gains trade credit by paying for concentrates three months after the month of shipment. INVENTORY LOANS Various forms of inventory finance are provided via "floor-plan" or warehouse financing. A set percentage, usually 60%-80%, of a good-quality, readily saleable inventory item (e.g. bullion, concentrates, ingots) will be provided by a bank or finance company which will usually have security over these products and has a right to inspect the goods from time to time. Legal security will he achieved by warehouse receipts, floating liens, chattel mortgages, trust receipts, or through collateral management service companies. The latter certify control over stock or distribution outlets and often carry insurance against fraud. Costs range around 1.5% - 2.0% p.a. or more plus some fees to cover out-of-pockets or other costs. ACCOUNTS RECEIVABLES Accounts receivable financing is based on the company's generation of satisfactory receivables which are continuously assigned to a bank or finance company ("factoring"). Because of the risks in being able to collect receivables, such as payments to a smelter for its blister copper shipments to a refinery, this form of financing costs as much as 3% - 5% of the debt amount purchased plus an additional charge for processing paperwork. Receivables can be purchased with or without recourse and on a notification or non-notification basis to the client's customer to, respectively, pay the invoice directly to the bank or not. LETTERS OF CREDIT Letters of Credit ("L/C's") are a common feature of international trade finance whereby a bank, at the request of the buyer, issues a written undertaking to an exporter to pay a specified sum of money within a set time on presentation of previously specified documents. This undertaking means that the exporter is no longer relying on the credit standing and integrity of the foreign importer. A dispute about shipment does not otherwise affect the obligation to pay upon presentation of a "clean" set of documents. These documents include the hill of lading and other documentation, often on standard "form" bases. There are a number of conventions and techniques in L/C's such as irrevocable/revocable L/C's, time L/C's, confirmation/advising L/C's and transferable L/C's. These are tools to adjust for the varying risks that the importer will not pay. Other routes where one is comfortable with an importer include documentary sight hills (D/P hill), documentary term bills (D/A bill), and, of course, open account.

Jan 1, 1985

By L. Hartsell Cash

INTRODUCTION Created in 1944 to help rebuild those economies, principally in Europe, which were seriously damaged or destroyed during the Second World War, the World Bank--or to use its correct name, the International Bank for Reconstruction and Development-began its operational phase by making a loan to the Government of France to accomplish two tasks: (i) to import coal for space heating purposes; and (ii) to buy new machinery and equipment to help rehabilitate its coal mines. Once the thrust of reconstruction in postwar Europe was largely accomplished, the World Bank Group (for today the World Bank has three separate lending windows) turned to mobilizing funds to improve living standards in developing countries, which remains its primary goal today. Over this period of time, the World Bank Group has continued to assist the world mining industry in various ways and, since 1955 the World Bank Group has financed mining or mineral processing projects with loans/credits totalling $1.5 billion. The World Bank Group consists of two institutions--the World Bank itself and the International Finance Corporation (IFC), which was founded as a separate institution in 1956 and three separate lending windows--the World Bank, the International Development Association (IDA), and IFC. The World Bank loans are provided at commercially-related interest rates but have grace periods usually of up to 3 to 5 years and repayment periods ranging from around 15 to 20 years. Since the World Bank raises its operating funds on the international capital markets in varying currencies and in varying interest rates, it relends a basket of currencies at floating interest rates which are fixed every six months to reflect the Bank's own borrowing cost. At the present time, the interest rate is just below 10% per year and in addition, a one-time front-end fee of 1/4 of 1% is charged. Also, a commitment fee of 3/4% per year is charged on the undisbursed amount of the loan itself. For loans to industrial and mining projects, it is normal to charge an additional guarantee fee of 1 to 1.5% in addition to the annual interest rate. This guarantee fee is payable to the government of the country in which the project is carried out since, by its charter, the World Bank is required to have the guarantee of the host government for each loan made in a specific country. By far the greatest source of lending funds within the World Bank Group is that of the World Bank itself and for the fiscal year ending June 30, 1984, the World Bank approved loans totalling $12 billion. The second lending window within the World Bank Group is IDA which performs the same functions as the Bank itself and has the same staff. Nevertheless, its loans (called credits) are made on much softer terms and are made to the poorest nations only. IDA funds are subscribed by the wealthier countries, usually as grants, and these are relent as credits to those countries with the lowest per capita income. IDA credits are made for 50 year periods, including 10 years of grace, to the government itself. The credits are interest free, but there is a service charge of 3/4% per year on the amount withdrawn and outstanding to defray the administrative costs of IDA. Credits approved during fiscal 1984 totalled $3.5 billion. The third lending window is IFC. While IFC is a separate corporation and operates quite separately from the World Bank and has its own staff and regulations, it works very closely with the World Bank on its overall approach to the mining sector and to a particular country. IFC's mission is essentially to supply venture capital and to stimulate development of the local private sector in capital markets as well as to promote the international flow of private capital to developing countries. Unlike the World Bank and IDA, the IFC does not lend directly to governments

Jan 1, 1985