Competing Considerations in Intercreditor Agreements for Project Finance , Mining Streams and Royalties
4
Chapter 2
Competing Considerations in Intercreditor Agreements for Project Finance , Mining Streams and Royalties
Oliver Irwin
Darren Spalding
Bracewell ( UK ) LLP Anglo Pacific Group PLC
Alice England
Introduction
The development of a mining project typically requires significant capital expenditure . For that reason , as is the case with many other major infrastructure projects , all but the largest mining companies will seek external financing solutions to fund the development of their mines . Many mining companies raise capital to finance the development of their projects through traditional means such as the debt and equity capital markets and limited-recourse project finance debt . They also frequently utilise a number of more industry-specific pools of capital , such as streaming arrangements and royalties .
Where mining companies seek to combine project financing with secured streaming and / or royalty agreements , an “ intercreditor agreement ” will usually be required in order to regulate the interests and rights of the various finance providers . Generally speaking , an intercreditor agreement would typically only be required when creditors are secured ( which may not be the case for a royalty if the regulatory framework for that jurisdiction allows the royalty to “ run with the land ”).
Although not uncommon in the international project finance market for mining , intercreditor agreements can give rise to relatively complex legal arrangements , as the competing considerations of each of the parties to these multi-source hybrid financing structures must be taken into account . The intercreditor agreement harmonises these considerations and acts to regulate the parties ’ relationship , potentially for decades .
■ “ Resource and Reserve Risks ” – What is the grade and quality of that metal or mineral , and how probable or proven is the economically minable part of the measured or indicated mineral resource ?
■ “ Commodity Price Risk ” – Will the cyclical and often volatile nature of commodity prices impact on the certainty of the long-term revenue for the mine , and is any hedging possible against that risk ?
■ “ Political Risk ” – Given the challenging and emerging market jurisdictions in which some mines are located , can the risk of resource nationalism be mitigated ?
To mitigate some of these risks , project finance structures for mining projects are often described as “ limited recourse ” to sponsors , rather than “ no recourse ”, because they will often include a number of specific features , such as completion support in the form of either a debt service undertaking or completion guarantee from sponsors , and / or the increased use of political risk insurance ( or involvement of export credit agencies or multilateral agencies ).
Figure 1 : Traditional project finance structure
Project Financing
Although it is found in many different shapes and sizes , project financing is , in essence , the provision of limited-recourse debt to a newly incorporated special purpose vehicle for the purpose of developing a specific project . The providers of that debt have limited recourse to the sponsors of the project and must therefore look solely to the revenues of the project for repayment of their debt ( and the payment of the interest that accrues on that debt ).
The project financing of mining projects gives rise to a number of specific risks that may not be present in other sectors where project finance is common ( such as , for example , the financing of independent power projects ). This can include exposure to :
■ “ Completion Risk ” – Will the project produce the anticipated grade of metal or minerals within the anticipated timescale for the anticipated construction budget ?
* Upfront loan amount for project financing is often a single payment , but can be staged for development projects
Streaming Agreements
Under a streaming agreement , in exchange for upfront payment ( s ), a “ Stream Investor ” will receive the right to purchase the future production of all or a portion of one or more metals produced by that mine ( at a discount to the prevailing market price ). Historically , streams related to by-products produced by a mine in addition
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Mining Law 2023