Head: Project Finance
Commercial banks have reduced their appetite to fund greenfield projects because of the risks involved.
The appetite of banks to fund greenfield projects in sub-Sahara Africa has tapered down from the active levels seen three to four years ago mainly due to volatile commodity prices and viability concerns of the projects.
Funding focus shifts to existing projects
On the other hand, there has been an increase in funding requests for existing (brownfield) developments across a number of commodity sectors.
The demand for funding for brownfield projects is particularly from small and medium sized mining companies, who find it easier to raise funding for such developments on the back of existing operations and cash-flows to underpin debt servicing.
Commercial banks are now more cautious when it comes to financing greenfield operations, and where they decide to provide funding, they are asking for additional credit support to mitigate against project completion risk.
Up until three to four years ago, commercial banks in Africa were very active in financing for greenfield mining developments, across most commodities. But we have noticed that the appetite for the sector tapered down over the past few years.
This is due to a number of reasons, including volatile commodity prices, technical difficulties to achieve promised production and cost levels and failure of a number of greenfield operations to reach completion on time and budget, all of which impacted on their ability to honour debt servicing commitments.
Analysing greenfield versus brownfield projects
In addition to commercial bank funding, many junior miners are looking to tap other sources of liquidity to develop their projects.
These include commodity prepayment facilities or streaming facilities (typically provided by commodity trading houses), asset financing facilities for moveable equipment, as well as high yield bonds in the capital markets.
Some projects are also being developed in a fully equity financed basis, with a view to re-finance a portion of the equity once the project is up and running and completion risks have been largely mitigated.
Demand for funding for brownfield developments is increasing, and funding for such projects is relatively easier to raise and/or provide.
Generally, commercial banks find it much easier to take credit risk against existing or operating mines and cash flows or a diversified portfolio of mining assets.
We also find that the commodity price break-even levels for brownfields developments are much better or lower than is the case for new developments, because of factors such as infrastructure sharing and lower overall capital cost layout.