PFI - Oyu Tolgoi mine picks two

Thu Jun 17, 2010 3:27am EDT

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By Rod Morrison

LONDON (Project Finance International) - BNP Paribas (BNPP.PA) and Standard Chartered (STAN.L) have won the mandate to work on the US$4.6bn Oyu Tolgoi copper and gold mine scheme being developed by Ivanhoe Mines (IVN.TO) and Rio Tinto (RIO.AX) in Mongolia. The two will work on structuring the proposed US$1.2bn B loan part of the debt financing backed by the EBRD and the IFC. The decision on the two will now need to be approved by the project company's board.

The EBRD and the IFC are considering providing a two-part debt package in a limited-recourse project financing consisting of up to US$300m each as part of a group of primary lenders and mobilising of a further US$1.2bn from commercial banks under a B loan structure.

Ivanhoe Mines has received expressions of interest from export credit agencies to provide up to a further US$500m in direct financing. Canada's EDC is likely to be involved. Other agencies could be US Ex-Im and KfW. In addition, it is believed the Oyu Tolgoi funding package could include a Chinese bank tranche totalling US$1bn. However, the eventual size of all the tranches in the deal will depend on what can be raised in the market at the time of financing. It is not expected that the deal will be in the market officially until at least early next year.

The financing options are complicated by the scheme being essentially two projects - a surface operation and an underground mine. If both were financed together, the project would take seven years to complete. It might be easier to finance the first phase and then to start producing cashflows. The underground part would enable more export credit type financing to be procured, based on heavy equipment orders. A total of 13 commercial banks submitted expressions of interest on the deal. Other banks shortlisted for the structuring mandate are believed to have included Credit Agricole, ING, HSBC, SG and Standard Bank. Hatch Corporate Finance is advising Ivanhoe.

It is possible that the Chinese will become more involved in the project. Chinalco has a 9% stake in Rio Tinto and Chinese co-operation and involvement would also be politically sensible, albeit politically sensitive. While the project is expected to send its output to China, political issues surrounding Inner Mongolia have strained relations between Mongolia and China. The Mongolian government is aiming to list the Oyu Tolgoi mine on the local and international stock markets, Sugar Dulam, chairman of the State Property Committee of Mongolia, said at Frontier Securities' Mongolia Capital Raising Conference earlier this week.

Oyu Tolgoi will be one of the largest and highest-grade copper-gold mines in the world. According to the company, securing the proposed financing package - and combining it with possible additional subscriptions of more than US$1bn through existing agreements with Rio Tinto and the funds from its cash position earmarked for project development expenditures - would advance construction of the Oyu Tolgoi mine.

The recently released 2010 Oyu Tolgoi Integrated Development Plan (IDP-10) estimated that the initial capital cost required to achieve first production from the open-pit mine on the Southern Oyu deposits was US$4.6bn. This amount includes US$1.1bn to be spent advancing underground development at the Hugo North Deposit in preparation for the start of block-cave mining following the start of production from the open pit.

rod.morrison@thomsonreuters.com - www.pfie.com

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