By Bastian Stroemsheim | September 5, 2024
Project Finance for Mining and Critical Minerals
Metals and minerals are key building stones and drive momentum in constructing new sustainable energy and infrastructure projects. The heavy reliance on mining to propel the energy transition has important implications for understanding how mining projects operate and are funded.
How mining and electrification go hand in hand
The build-out of renewable generation projects and EVs are heavily supported by minerals such as copper, lithium, nickel and zinc to name a few. According to the IEA, an offshore wind project requires copper amounting to 8,000 kg/MW of nameplate capacity, while an electric car needs close to 50 kg copper per vehicle.
There are concerns about how mining output can keep pace with the level of supply needed to “electrify everything” over the coming years. Recent studies have quantified it to 1-6 new large copper mines (0.472 MT production rate per year) must become operational annually over the next decades to meet the needs to electrify the global vehicle fleet. Another layer to this challenge is the timeline for mines to become operational. On average, copper mines need around 16 years to move through the cycle of discovery to production. Scaling mining production while shortening the development and construction cycle will be key to staying on track for a net zero emissions scenario in the coming years.
How project finance applies to mining?
At the core, mining projects are similar to renewable generation and infrastructure assets. Volumes from production are forecasted and can be used to predict cashflows and size debt funding. The same best-practice modeling from our renewable course applies to mining models; timing, control accounts to track volumes and solving for funding are key elements to understand returns.
Risk is magnified across all stages of the project. Operational risk from wider error margins in resource estimates and ability to meet forecasted production rates. Supporting infrastructure for mining projects can often entail processing facilities, railroads and airstrips. Integrating multiple infrastructure projects in a seamless manner to optimize the physical movement of mining outputs is challenging. The risk of cost overruns from constructing any one of these facilities, or from underground drilling can pose a significant threat to project returns. Commonly accepted variance ranges for EPCM costs have been +/- 15% in the past, and studies measuring the average cost overrun for mining projects have put it above 30% of budgeted capex.
Lenders will take all of this into account when providing capital to projects. A DSCR in the 1.20x-1.40x range is not likely, and debt service reserve accounts (DSRA) are commonly used to ensure the owner is able to repay debt service in every period. Cost overrun facilities (COF) could also be used to address concerns about equity’s ability to cover cost overruns. These can easily range from USD $20-$50 million in size.
Mining projects can also entail pilot and demo plants to address technological and production risk before scaling production to commercial facilities. Altogether, the construction phase can involve a greater set of milestones to reach, and pre-operation revenues as part of a slower ramp-up period before the Commercial Operation Date (COD).
Lastly, mining involves invasive and damaging impacts on the landscape and soil. In the early stages of project planning, governments will often require specific plans for the post-operations mine rehabilitation. This will also entail financial assurances such as cash deposits, bonds and financial guarantees.
Over the next couple of months Pivotal180 will release a course on mining. This will include instructional videos, demo models to follow key financial modeling concepts, and a larger training model adapted to a mining project. It will be available as part of our Project Finance Modeling Course
Check out the links below to learn more about Pivotal180 and our financial modeling courses and services. Experience the Pivotal180 difference
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