Banks, especially in South Africa, are circumspect in their lending criteria, hence Newton Mthethwa (NM) from African Mining Brief engages Ryan Blumenow (RB), a senior consultant and financial modelling specialist from Eunomix on a number of issues relating to Project Financing and Risk Management in Africa.
NM. State of the industry in terms of large project funding and financing in Africa.
RB. Financing and funding largely depends on the ability of the firm investing to leverage their balance sheet, as well as the overall state of the market, which is in a downturn. While this does potentially limit the available pot of money for large-scale investments, there are pockets of finance available from various sources (including overseas development funding), especially if we consider investments in ancillary operations such as power or water that, while one step removed from mining shaft operations, have significant amounts of money available. In this vein, it is important that when considering what type of investment is being considered project sponsors also consider what stage of the investment lifecycle monetary interventions are required, as finance and funding sources and money available differ depending on whether one needs project preparation assistance, technical assistance, transaction advisory, strict debt and equity, etc.
NM. Options available for the existing mines, expansion projects as well as the future mines.
RB. There are many sources of funding for expansions, including on- and off-balance sheet funding. This depends on prior leverage ratios as well as relationships with debt and equity providers. There are overseas development assistance agencies’ (ODA) funding, export credit agencies, debt and finance providers, private partners, PPP structures if working with government, and many other sources. Deciding on Greenfield versus Brownfield investment is an important first step.
NM. Key requirements for the project to obtain funding
RB. There are many factors. The strength of the balance sheet of the project sponsor, the relationships between project partners (a strong and legally bound structure), project preparation activities (such as strong pre-feasibility and feasibility studies, environmental impact assessments, scoping studies, geotechnical assessments, business cases, and project finance modelling), the financial and economic viability of the project, location, and community involvement, and many other factors. A properly formulated project concept and associated business case predicated on a sound and robust feasibility study underpinned by solid economics and financials is key.
NM. Key impediments to funding
RB. This is the flip side of the coin to the question above. Generally, the strength of the balance sheet of the project sponsor and an inadequately defined relationship between project sponsor and project developer (they may /may not not be the same) are constraints, but by far the greatest constraint to acquiring finance is poorly or inadequately done project preparation, such as incomplete feasibility studies, inadequately modelled project finance, under-mitigation of risk, and incomplete or under-conceived business case.
NM. What needs to be done by African governments to increase/ improve project funding options?
RB. There are many factors here. Amongst them, government should target areas for investment that are in line with national economic development objectives but that also have a strong economic case. Enhancing the ability of project sponsors to access finance houses is critical, but investment should be predicated on efficiency and the economic case of the investment under consideration. Provision of technical assistance, expert partnerships, and solid economic analysis that takes into account the sectoral structure, inter-sectoral linkages, and impacts of investment on economic operation, diversity, and efficiency should also be considered to lower the investment justification hurdle. Lowering the thresholds for international partnerships and attracting international capital is also key.
NM. Impact of Chinese money in funding mining projects in Africa
RB. This is somewhat difficult to put into short form as many books could be written on this subject. Generally, the Chinese investment model differs from that of the West, with different terms and a higher incidence of concessional financing. However, lifecycle costing of technology used, terms of loans and tenures, and the conditionalities of each contract need to be carefully weighed as in any transaction.
NM. Risks associated with large project funding and financing in Africa
RB. There are many areas – including political, social, environmental, economic/financial, geotechnical, technological, and others. Each needs to be managed both jointly and severally, as they have a material impact on the ability of a project sponsor to make an economic case for investment and thereby to attract financing.
Investment that is uneconomic or fettered by an incomplete risk profile run the risk of being constrained either at the project development stage or encumbered by growing costs and externalities that are inadequately covered by the economic returns generated.
NM. Identifying and assessing risks associated with large projects
RB. A complete risk assessment is required to identify the nature, scale, and potential impact of the various risk categories of any individual project. This is done on an individual, case by case basis as part of project development and upfront project conceptualization, planning, and preparation. Certain methodological tools exist to attempt to identify and quantify these risk categories and impacts, and are widely recognized as internationally accepted mechanisms but require experts versed in their use and interpretation.
NM. Mitigating the risks associated with large project funding
RB. Proper project preparation and financial and economic modelling are key, and considering the various risk categories and quantifying their impacts and potential mitigation mechanisms is inherently an economic undertaking. This would rely on proper engineering planning feeding into robust and comprehensive economic and financial modelling.
NM. Benefits of risk management
RB. Lower project finance risks; a greater availability of finance sources and diversity of funding available; lower impacts on communities, project sponsors, and customers/investors; lower overall project costs; lower hurdle rates for investment; higher IRRs; shorter payback periods; enhanced ability to engage with customers, financiers, and government; smaller impacts on balance sheets; and many others.