mozambique coal sector funding – options and alternatives

Strictly Private and Confidential An Authorised Financial Services Provider

Raising capital and local partner equity funding options for

Mozambican coal projects

Henk de Hoop – Rand Merchant Bank

July 2013

Henk de Hoop

Business Development Director: Resources

Tel: +27 11 282 4970

Email: [email protected]

010

Series 1

Introduction

Where do banks play

Why and how have funding options changed

Sources of funding, focus on ECA

Financing local partner participation

Conclusion

Strictly Private and Confidential

Introduction

3

FirstRand Limited (“FirstRand”) is the 2nd largest financial institution in

Africa with a market capitalisation of c.US$16.5bn and one of the largest

companies listed on the Johannesburg Stock Exchange

FirstRand operates through 3 divisions:

Rand Merchant Bank (“RMB”) (investment banking)

First National Bank (“FNB”) (retail and commercial banking)

Wesbank (asset financing)

FNB operates throughout Africa, including Mozambique

RMB is the entity that would lend into mining projects and infrastructural

development


FirstRand in Africa

4

On the ground presence

Gaborone

Lagos

Mbabane

Maputo

Maseru

Windhoek

Luanda Lusaka

Accra

South Africa

Representative

offices

Full banking

operations

Target

jurisdiction

Deal footprint


FirstRand’s international footprint

5


# Bookrunner Deals Value ($ m) Market share

1 RMB Morgan Stanley 30 7 181 44.4%

2 UBS 6 1 193 7.4%

3 Standard Bank 11 951 5.9%

4 Java Capital 17 828 5.1%

5 Deutsche Bank 8 715 4.4%

6 BofA Merrill Lynch 3 545 3.4%

7 Goldman Sachs 2 523 3.2%

8 Macquarie Group 4 468 2.9%

RMB is the leading adviser in South Africa

(2007 - 2013YTD) PwC Peer Ranking of Banks

# Adviser No of deals Value (R’m)

Mergers & Acquisitions

1 Rand Merchant Bank 151 370,376 2 Goldman Sachs 18 266,535

3 Standard Bank 78 246,274

4 JP Morgan 25 220,288

5 Deutsche Bank 51 219,920

General Corporate Finance

1 Rand Merchant Bank 175 720,322 2 JP Morgan 30 260,421

3 Goldman Sachs 9 244,206

4 Investec 179 155,590

5 Deutsche Bank 34 140,471

6

M&A deal value (2005 – 2012)

432

284

258

230 210

200

250

300

350

400

450

500

RandMerchant

Bank

StandardBank

JP Morgan DeutscheBank

GoldmanSachs

R'b

n

Listings M&A Equities Underwriting

2013 1st 1st 1st 1st

2011 1st 2nd 1st 1st

2009 1st 1st 2nd 1st

2007 3rd 1st n/a 1st

South African ECM (2010 - 2013YTD)

Introduction

Where do banks play




Conclusion

Strictly Private and Confidential 8

The funding cycle

Structured

Equity

Time/Project Stage

Steady state

mining

Early

exploration

Resource

definition

Pre-feasibility

to bankable

feasibility

Project

development

Equity

Project

Finance

Senior debt

Valu

e

Bank funding

Streaming, royalties, offtakes

Introduction

Where do banks play




Conclusion


What has changed since last year

10

Lagged supply response to period of high margins exacerbating

oversupplied market

Estimated 16% of seaborne met coal market uneconomic – finally

forcing (some) producer discipline

Cost competitiveness / capital efficient capacity addition again key in

assessing project quality for both equity and debt providers

…but easing contractor/capital equipment market constraints, offering

better deals and likely less project delays


Project funding impact

11

Increased equity cheque constraints for both big and small players

Fewer banks, smaller cheques, but more competition for high quality assets

Revenue line outlook more uncertain

Likely increased hedging requirements from funders

Offtake contracts becoming more important (volume, and/or price)

Longer tenors likely required, and longer project reserve tails

Projects likely to require a more phased approach

More palatable capital cheques

Market timing risk reduced

Increased stress testing of project risk, forecast ramp-up, costs, etc

Introduction

Where do banks play




Conclusion


Debt funding market for Mozambique projects

13

Universe of the debt funding market generally available for projects include:

Regional DFIs (ZAR+USD)

International DFIs

(US$ + MZM guarantees)

Local commercial banks (MZM&US$)

Regional commercial banks

(US$ + ZAR)

International commercial banks

(US$, EUR, other)

ECA-backed funding

Regional DFIs (ZAR+USD)

International DFIs

(US$ + MZM guarantees)

Local commercial banks (MZM&US$)

Regional commercial banks

(US$ + ZAR)

International commercial banks

(US$, EUR, other)

ECA-backed funding

DBSA, IDC, AfDB, PIC

EIB, Proparco, DEG

(KfW), FMO, IFC,

EBRD, CDB, BNDS

Africa Exim, ECIC,

Coface, Sace, China

Exim, US Exim, JBIC,

EKN

Broad range of

international banks

Regional banks, among

which FirstRand (RMB/FNB)

Range of 15-20, single

project limit <50m$ max


ECA: South Africa’s ECIC scheme

14

The Export Credit Insurance Corporation of South Africa (“ECIC”) is an

independent, limited liability company in which the Government of South

Africa is the sole shareholder

Principal objective is to facilitate and encourage South African export trade

by underwriting bank loans, supplier credits and investments outside the

country

Very attractive funding rates can be achieved

The project must be commercially robust and include, as applicable:

Bankable feasibility studies, completion guarantees, structured payment

mechanisms (non-recourse, limited recourse or full recourse), off-take

agreements, environmental / social impact assessment studies, security over the

assets, Independent Technical Engineer’s review


ECA: South Africa’s ECIC scheme

15

15

Premium

SA

Bank

Interest+

capital

The ECIC issues a

policy covering:

100% political risk

85% commercial risk

Moz

Borrower

The Borrower:

Pays a premium to the ECIC for the policy

Obtains a loan from a commercial bank

South Africa

i.e. Mozambique

The Bank:

Advances a

loan to the

borrower

85% Loan

SA Contractor

Supply

contract

15% down payment

Insurance

cover

Payment on behalf of

Moz Borrower

Introduction

Where do banks play




Conclusion


RMB - leading local partner adviser in SA

17

45.3%

58.8%

37.9%

71.8%

47.9% 51.7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2004 / 2005 2006 / 2007 2008 / 2009 2010/2011 2012 2004 - 2012

RMB % of deal value

RMB has helped craft the vision of some

of South Africa’s foremost BEE

transactions


The evolution of BEE in SA

18

• Focus on strategic partners

• Small group of politically well-connected individuals involved in most of the landmark transactions

• Growing discontent with ‘enrichment of a few’

• More broad-based empowerment partners

• Encouragement of the involvement of employees, communities and social-upliftment organisations

• Significant increase in the number of Employee Share schemes

• Realisation that selecting individuals may not be the most ‘productive’ method of empowerment

• More balanced and inclusive ownership

• Importance of strategic partners in driving localisation within the organisation

• Increased emphasis on ‘new entrant’ strategic partners

• Inclusion of broad-based groups continues to be incentivised

• Local public offers increase in popularity

2012 +

Emphasis on:

-broad based

ownership

(employees,

communities)

-skills

development

-enterprise

and supplier

development

1994 2000 2006 2009 2012


Local partner funding solutions

19

RMB has developed a number of bespoke solutions to structure and fund

transactions where local partners are not able to finance their participation

These solutions utilise a facilitation mechanism by a company and its

shareholders and can be provided in a variety of forms

If structured correctly value loss from the facilitation is recovered through value

created in the project by the introduction of local shareholders

Nature of facilitation is ultimately a function of the transaction structure

Subordination

of shareholder

loans

SOFT FACILITATION HARD FACILITATION

Restricted

dividend

policy

Access to

underlying

cash flows

Put option Guarantee

Subsidised

vendor

funding

Free

options

Discounted

purchase

price

Donation of

shares

Soft facilitation is likely to affect credit lines

Hard facilitation is more expensive for shareholders F

ac

ilit

ati

on

co

nti

nu

um


Typical facilitation solutions

20

A transaction with employees and communities is likely to be vendor financed or a

combination of vendor financed and “unfunded”

• Dilution • Disposal price and funding

rates

• Dilution

• Disposal price

• Recourse for financiers

• Entire “sale proceeds” used

for financing

• Shareholders dilute over

time on an agreed basis

• Sale proceeds accrue to

company

• Agreed hurdles need to

be achieved

• Share and/or financial

outperformance is essential

• Share and/or financial

outperformance is essential

• Dividend flow required

• Financial covenants

“Unfunded” structure Vendor financed Third-party financed

• Earn-out structures that

overcome many traditional

tax and financial

assistance obstacles are

used

• Value to local partners is

dependent on growth of the

business

• Robust and flexible

structure

• In a private environment,

regular valuations required

• The optimal mix of equity,

mezzanine and/or senior

debt within a tax efficient

framework is required

• Difficult and expensive to

raise in volatile markets

Subsidy

Effect

Requirement

Comments


Notional vendor financing example

21

21

• Shares issued to local partner at nominal value, Mine A has the right to repurchase a

certain number of the shares at maturity at nominal value:

• Number of shares based on a formula: N = [ ($100m x (1 + r) ^ t ] / share price at maturity

• r is the notional interest rate Mine A requires on its notional vendor finance, which is a

function of the level of facilitation that Mine A is willing to provide

• Dividends paid on the shares can either be remitted to local partner, used to re-invest in

Mine A shares or used to repay the notional vendor financing

• Re-investment of dividends allows local partner to acquire additional Mine A shares at

varying share prices - reduces exposure to a single entry price

Mine A

Issue of shares (or a new class of shares)

to local SPV at nominal value

Call option to acquire a variable number of

shares at nominal value at maturity

Local partner

SPV


Third party funding example

22

Developer

Mine A

Equity by

Developer

(100%-X)

Equity by

Local Partners (X%)

Project

funding

Non-recourse funding

(DFI’s, FI’s, Developer)

Recourse funding by Fin

Institutions (backed by

Developer)

100%-X

<49%

X%

Local Partner SPV

Equity by

Developer

(<49%)

Equity by

Local Partners

(>51%)

Acquisition

funding

Non-recourse funding

(DFI’s, FI’s, Developer)

Recourse funding by Fin

Institutions (backed by

Developer)

Local partner(s)

>51%

Introduction

Where do banks play




Conclusion


Conclusion

24

• A more subdued bulk commodity environment is forcing a changed

approach to project funding, both from an equity and debt

perspective

• Regional banks have built up significant experience in integrating

project funding and local partner equity funding requirements

• It will be beneficial for Mozambique to make use of the lessons

learned on how NOT to structure local partner participation

• RMB is keen to assist in advising and funding the required solutions

for the inclusive development of Mozambique’s exciting growth

opportunities


Contacts

25

Henk Deist

Head: Resources Finance

Tel: +27 11 282 4345


Jan Cronje

Corporate Finance

Tel: +27 11 282 8597


Werner van Oudenhove

Head: Infrastructure Finance

Tel: +27 11 282 8121


Greg Mckenzie

Head: Asset Based Finance

Tel: +27 11 282 8143


Henk de Hoop

Business Development Director: Resources

Tel: +27 11 282 4970


mailto:[email protected]






Strictly Private & Confidential

This presentation has been prepared by FirstRand Bank Limited, acting through Rand Merchant Bank (“RMB”).

The information contained in this presentation is confidential and intended solely for the use of the intended recipient. This presentation may contain

information proprietary to RMB and accordingly may not be reproduced, acted upon or disseminated in whole or in part without RMB’s prior written

consent. By attending this presentation, the intended recipient undertakes to keep the information contained in the presentation confidential and not to do

any act or allow same to be done on his behalf which is in breach of the above mentioned prohibition.

This presentation contains information which has not been independently verified by RMB. RMB and its directors, officers, employees and agents make no

representation and give no warranty with respect to, and assume no responsibility for:

the correctness, accuracy and completeness or otherwise of the information contained in this presentation; or

the correctness or otherwise of the Advisers’ conclusions based on such information.

Any liability of whatsoever nature and howsoever arising on the part of RMB, their directors, officers, employees and agents relating to the contents of this

presentation is hereby expressly disclaimed.

This presentation is intended for discussion purposes only and does not represent a commitment, proposal, recommendation, offer open for acceptance or

agreement to enter into a transaction. Any transaction is subject to the agreement of final terms to be set out in a separate written agreement. The decision

to enter into any transaction and to assume the risks associated with the transaction rests solely with the intended recipient.

July 2012

Disclaimer

26

mozambique coal sector funding – options and alternatives

Economy & Finance