Commentary

Exploration and financial sectors must work together to realise mineral wealth

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By James Karama

Posted  Tuesday, December 3  2013 at  02:00
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At the beginning of October, the Uganda Chamber of Mines and Petroleum hosted the 2nd Uganda Annual Mineral Wealth Conference. In one of the sessions, Mr Anthony Ndegwa, an Investment Banker with Standard Bank Group’s (Stanbic Bank’s parent Bank) Mining and Metals Finance division, made a presentation on ‘Financing Mineral Development Projects’.

Standard Bank has a long history and deep specialisation in natural resources, with strong capabilities in financial, advisory, commodity trading and risk management products.

During the conference, participants pointed to the inaccessibility of capital and stringent credit conditions as key obstacles to the extraction of mineral wealth, borne out of the experiences of local mining entrepreneurs.

In one extreme example, a local investor suffered financial ruin when their assets were sequestered by a lender following project delays which triggered a default under their project loan agreements. The participants also observed that a number of licensees, unable to raise exploration and development capital, had lost their concessions and risked being branded as speculators.

Despite the above challenges, many banks are keen to partner with investors in the mining sector. Lenders approach mining with a ‘lifecycle’ view, taking into account a project’s potential value from cradle to grave.

The key phases of a mining project, in sequence, are exploration and prospecting, discovery and advanced feasibility stage, development and construction, operations and production, and ultimately mine closure.

Lenders are unwilling to get involved at the exploration and feasibility phases which are high risk yet “low value” phases.

At the exploration and prospecting stage (Stage one), licensees establish the target areas of exploration and carry out geological, geophysical and geochemical tests. Geological information can be obtained through airborne electromagnetic surveys, which are sometimes undertaken by host governments or development institutions prior to concessioning.

As an example, the African Development Bank, the World Bank and the Nordic Development Bank have financed airborne electromagnetic surveys to support mineral development in Uganda.

The discovery and advanced feasibility stages (Stage two) confirm commercial viability of the mineral. At this stage, more detailed tests are undertaken and the size and character of the mineral reserve established.

The mineralogical data will be shared with the government, potential buyers, industrial partners, investors and lenders. If it is established that the reserves can be profitably exploited, sponsors will usually invite lenders and their independent technical experts (geologists, engineers, etc.) to verify mineral information and review the feasibility studies.

The high risk Stages 1 and 2 can take up to 10 years; yes 10 years, depending on the complexity of the project, and therefore, project sponsors rely solely on equity raised from a series of private placements and/or stock exchange listings.
Once the resource estimates have been verified and project feasibility established, the project is significantly “de-risked” and moves to the development and construction phase where lenders provide tailored financing solutions.

The lenders will also design strategies to mitigate, manage and transfer the potential risks that they identify thereby ensuring that the project is “bankable”. The financing solutions will include IPOs, Project Finance, Off-take Financing, Export Credit Financing and other forms of structured financing. Financing may also be raised from asset sales by the sponsors.

Financing and investing parties include banks, Export Credit Agencies, Multilateral Agencies, DFI’s, commodity trading houses, funds and strategic investors.

In conclusion, Uganda’s vast mineral wealth potential will be realised through close collaboration between the exploration and financial sector. Furthermore, the mineral sector will only attract investment through a deliberate and methodical process that is based on accurate geo-scientific data obtained through continuous research and development.

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