What makes a mining project-financial options

"This paper will examine the role of debt and equity in project financing and will illustrate the impact on the return to the project sponsor of each type. Conventional debt sources will be examined, as will product purchaser advances, foreign export-import bank loans and lease financing. The paper will review guarantees, charges against the project, dividend restrictions and other commitments. It will also discuss various features of sales contracts and the degree to which they can assist in securing financing. IntroductionThe cost of bringing new mining projects on stream is escalating significantly more rapidly than general rates of inflation. Reasons for this include the higher costs of safeguarding the environment and ensuring the health and safety of workers. The need to develop properties in more remote areas is also a significant factor. These higher costs have not been matched by increases in metal prices, making the task of financing these projects ever more difficult. At the same time, the imagination of borrowers and lenders seems boundless, and innovative schemes for financing projects are constantly being unveiled.It is probably safe to say that no two projects have ever been financed in precisely the same way and the number of financing options for any project is limited only by the imagination of the sponsors themselves. The objectives of the project sponsor represent the most important factor in determining the scope of possible financial arrangements. For example, the sponsor may wish to maximize over-all company leverage by isolating each of its projects in separate companies. In so doing, it hopes to facilitate more ventures than would otherwise be the case. These objectives point toward true project financing. Additional objectives may be to develop a number of its properties by joint venture and to reduce the amount of debt on the sponsor's balance sheet. Those sponsors whose objectives include minimizing over-all financing costs will wish to increase the number of financial options and, as a result, will not be so concerned with effecting true project financing. This approach may also provide ""greater certainty that tax benefits are utilized quickly."