George Pyper, director of London-based Endeavour Financial, speaks to Michael Washburn about the challenges of developing projects in Latin America and how the financing arrangements for the Boleo Copper Project in Baja California Sur, the biggest single-asset junior sponsored mine financing on record, got to the finish line
How did Endeavour first become involved in the Boleo Copper Project?
The Boleo assignment started with Baja Mining in 2005, before I joined Endeavour. At the time, Baja owned all of the asset and was looking to develop it. One of the ways they worked on this with us was to bring in some strategic partners. So the team at Endeavour helped with the process of talking to potential partners in various parts of the world, predominantly with counterparties in Asia where after a competitive process, a Korean-led the consortium was the ultimate winner of that process and invested in the project.
It was a two-phase assignment. That was the first phase of the assignment: the first phase was to bring in a partner and get the offtake in place and the second phase was to put the project financing in place.
Certainly, at the time, there was a lot of demand among Asian strategic investors for stakes in projects. Companies and entities from China, Korea, and Japan were all investing at the project level. Their aim was to have a secure supply of strategic metals, and obviously copper was one of them. The Boleo deposit was well known and had been reviously exploited, in the earlier part of the 20th century. The mine was a good project with high-grade, readily minable deposits, in a good location for exporting to Asia.
In the sale of a 30% stake to Korean off-takers, what sort metrics were used as to the valuation of the project? Was there general acceptance of the valuation?
It’s always a challenge, because a lot of the listed companies looking to sell a stake in an asset have a market cap, and if you have one asset, a buyer can say, “If I want to buy 30% of this project, what’s 30% worth on the market?” The argument you’re making, if you’re working for a project company, is that it should be based on net present value or NAV. If an investor only looks at market cap and if they want to spend that amount of money, they can seek to buy whole company, but that’s usually not their model, rather they want to buy a stake at the project level.
The negotiations therefore were, what are the copper prices, what’s the discount rate in order to get to a valuation, and ultimately we were successful in using those cash flow-based metrics. There was some back and forth to make sure people were comfortable that NPV/NAV valuation was the right way to go. As Boleo wasn’t a producing asset, you can’t really look at EBITDA multiples. Generally, with these projects, you look at the NPV/NAV or valuation based on resources and reserves in the ground.
In the course of negotiating with partners and offtakers, were there any particularly contentious points?
We essentially did the financing twice. The first time it was a commercial bank financing, an underwritten deal by two commercial banks. It was close to completion around the time that Lehman Brothers went under, so there was a huge amount of uncertainty in the market and as you might expect the banks weren’t able to complete on the deal. At that point, the company went back and reassessed the project scope and capex and came up with a new financing structure, which incorporated US-EXIM, a key partner in the eventual financing that was put in place. So the challenge of the markets was particularly difficult. Specific to the project, we found that it took a lot of time getting lenders comfortable with the flow sheet, since the project is not just producing copper, it also produces cobalt and a zinc sulphur product. There were some complexities in the flow sheet that people needed to get comfortable with.
Let’s discuss negotiations with international bodies. Were they concerned about risk? How did you win them over?
They were all concerned about project risk. The largest sponsor, Baja, had no other assets so there was no real value in the completion guarantee from Baja. There was value in the completion guarantee from the Korean consortium, but from the sponsors’ perspective, no one wanted to guarantee more than their share of the financing. As for the banks, we had to get them comfortable with the completion risk and the ability of the sponsors to execute the project, so there was a huge amount of due diligence done with independent technical consultants to make sure everything was acceptable from a technical execution perspective and lot of due diligence was done on the EPCM contractor.
From a regulatory perspective, how did this go over?
I think it’s fair to say it’s a sensitive project as it’s in the Baja peninsula, so near some environmentally valuable areas, there’s a biosphere and there are whale habitats nearby, so the level of diligence that was conducted was very high. I think I would say it’s pretty intensive.
Might this deal set a precedent for mining projects in Mexico and beyond?
I think from a lender’s perspective, the lessons to be drawn are less particular to Mexico, and more about junior mining companies and completion risk. That fact is that the project had significant cost overruns, yet the lenders were ultimately supported by the Korean consortium and the debt was refinanced in full. I think some lessons were learned in terms of completion risk, how much a junior mining company can be relied on, and how the legal structure worked from the bank’s perspective, how it gave them the abilities to protect their interest. There have been examples where companies walked away from minority positions in financings, but obviously the Koreans were willing and able to stand behind the project. They increased their share as they satisfied their equity requirements.
From the lender’s perspective, it was important for the market that the project could go through financing and the lenders could be fully repaid. Otherwise, it’s bad news for junior mining companies if banks make a loss on a project like this, because of the effects on other junior-sponsored projects down the line.
Every project has its own strategy, and other ones financed since Boleo have followed different strategies with different lender groups. Basically, in the case of the Korean consortium, Baja couldn’t raise equity to build the project, so the Koreans took control, because they were able to contribute the funds to the project. Baja and the Korean consortium reached an agreement that the Koreans would effectively assume control, and Baja Mining reduced its share as the Koreans spent their equity. This happened over the course of the construction.
How are you and your colleagues at Endeavour adapting to these circumstances?
We’re spending a lot of time looking at non-traditional sources of finance. The public equity markets aren’t cooperating, and there are a reasonable number of private equity firms that have recently raised funds or have got funds available for mining companies, but they’re pretty selective as to what they’ll invest in. One challenge is identifying who’s interested in which sorts of deals. This is pretty time-consuming, but all alternatives to equity is what we’re focusing on at the moment. We’ve got at least another year of difficult challenges in terms of raising funds in public equity markets. So what are the alternatives to the public markets, in order to get projects into development?
Let’s talk about the external counsel you hire for your deals in Latin America.
Sometimes our clients have their own preference, and they’ve got existing relationships with legal counsel based locally. Often they will want to hire Canadian counsel, or counsel relevant to wherever their headquarters are. Generally, we’re happy to work with companies’ existing counsel if they’ve got the right skill set internally for a project financing. They may not have expertise in joint venture negotiations, mineral development agreements with countries, or project finance, so sometimes you do see expert counsel brought in alongside corporate counsel.
Are these preferences immutable?
Generally we see deals done under English law, or New York or sometimes under Ontario law. But often the banks will require New York or English law, so that may drive the introduction of new legal counsel on a deal. We’ve got good experience with a number of the law firms so we can generally run a process of getting three to four law firms to put in proposals to our clients, they can look at who’s got the most relevant experience in terms of the project or financing, and the banks will do the same for lenders’ counsel.
Joint venture partners will also do the same. Sometimes we can tell the client will have, if not a requirement, then at least a preference in terms of whom the lenders decide to appoint. It depends on the deal specifics. On some deals, we may actually have the lawyers working before we’ve got the lenders in place if there’s specific due diligence that needs to be done.
What about Endeavour’s preferences with respect to outside counsel?
We’ve got a reasonable amount of experience. We don’t have a specific panel, but there are firms we’ve used and talked to in past years in New York, Toronto, Vancouver and London, teams that we know well. These are the big New York or London project finance firms with big project finance teams, good mining expertise. At the same time, we’re always open to finding new teams that we like.
We’ve done a reasonable amount with Mayer Brown, Shearman & Sterling, Allen & Overy, Norton Rose Fulbright, those are probably the ones we speak most to. There’s also Skadden and Clifford Chance. It does somewhat depend on which part of the world the project is, but those two are probably up there, and then Milbank and Sullivan & Cromwell are the other two. We’ve done less work with them recently, but that’s for deal-specific reasons. There are also good firms in Canada. Cassels Brock, Stikeman Elliott, and Blakes are the ones we see quite a lot of.
We did a deal in Guyana last year, and we had Canadian counsel because the project sponsor was Canadian. We had Guyana counsel for the local issues, we had Barbados counsel because of the holding company structure, and we had New York counsel because the deal got done under New York law. And for the Baja one, we had US counsel, Canadian counsel, and Korean counsel, because we had Korean lenders and joint venture partners, as well as Mexican counsel advising on issues.
Do you have a preference with respect to hourly versus fixed billing rates?
In terms of billing structures, ultimately it comes down to what the client wants. We don’t have our own counsel as the advisor, we work with our clients’ counsel, and from our personal perspective, we’re agnostic as to what the fee structure should be. From a client perspective, if you can have a cap fee structure, that may be helpful. But the assumptions behind that cap structure may not prove to be born out in reality, and you find that cap isn’t really a cap, you get to it and you keep going.
We might have a firm accruing fees at a discounted rate. It’s also helpful if a firm can accrue the fees but defer the billing.
Let’s talk about your vision for the future of your operations in Mexico.
We’re not looking to expand into other sectors at the moment. We do some oil and gas deals, but not that many, probably less than 5% I would say are oil and gas, and the majority are focused on mining. We’re keen to do more deals in Mexico, though I think some parts of the country have challenges, security issues at the moment, which is giving some of the mining companies headaches.
I think we’re probably more affected, and the industry overall is more affected, by what’s happening in the equity markets. Either the metals prices don’t make these projects economic, or the equity markets are depressed if they don’t have funds to get projects to the point where they can be readily financed by debt.
Getting projects to a point where they are suited for project finance is a key part of what we do, but then there is executing on financing with lenders. When the equity markets are pretty weak, particularly for junior mining companies in markets in Toronto, London and Australia, that inevitably has an impact on the development timeframes.
George Pyper has been advising and financing Natural Resources companies and projects for over fifteen years. Prior to joining Endeavour in 2008, he was at Rothschild based in London, Denver and Sydney. His experience at Endeavour and Rothschild has been primarily mining sector transactions including JV/partnering assignments, offtake negotiation, and a range of syndicated and bilateral structured and project debt facilities and commodity linked financial products.