One of the major challenges facing the mining industry today is the lack of infrastructure in resource rich locations. Without investment in infrastructure, mines cannot easily get metals and minerals to market. This has been a greater problem in Africa as there is little, if any, established road or rail transport infrastructure in many countries. This is compounded with the current crop of undeveloped finds, given the distance to be travelled to the sea, and thus the scale of finance required to complete the system. If you examine the junior mining companies with iron assets along the west coast of Africa, almost all of them will require the provision of infrastructure costing in excess of US $3 billion. In fact, the infrastructure spend now massively dwarfs that for construction of the mine itself.
Governments have two broad options in terms of developing this infrastructure. The first is to develop the infrastructure itself, and provide the mining companies with rights of use. The second is to issue concessions to develop the mines and connecting infrastructure, but provide that the infrastructure benefits from shared use arrangements with other mining projects or other users.
The mining companies will generally require:
- Road infrastructure (initially for construction, then for haulage, service personnel and consumables/supplies)
- Rail infrastructure to transport the product (depending on the volume of the product to be transported)
- Power infrastructure to operate any process plant (for example crushing and beneficiation)
- Port infrastructure that is suitable for appropriate sized vessels and is fully integrated with the miners’ rail/road infrastructure.
The combination of these infrastructure needs will depend to a great extent on the mineral being extracted and exported. For example, the gold ore is almost always processed at the mine, hence the transportation quantities involved, and the value of that product will probably mean the mineral is airlifted by helicopter. However, where the product is iron ore, whether direct shipped or concentrated, the millions of tonnes of iron ore required to be transported will in most circumstances, necessitate a rail system or at least a dedicated haul road. Where the mineral product that requires transporting is less voluminous, ie, in the region of thousands of tonnes per week, then the choice of infrastructure becomes dependent on the cost/distance per tonne.
Government funding programmes
Sub-saharan African governments are clearly not cash rich, and historically infrastructure development in the region has been slow. However, there are possibilities for governments to fund these investments.
One possibility would be for governments to adopt a public-private-partnership style scheme, and grant concessions to private partners to develop the infrastructure on a standalone basis. This would still require significant finance, and if developed independently of the mine would lack recourse to the commodities/mining licence, which is so critical to appetite amongst mining banks. The western lending market for infrastructure projects of this scale remains illiquid, so African governments would need to look elsewhere for funding.
Receivables financing solution
Governments might seekDFI to adopt a prepayment/discounting type facility to fund the infrastructure build, based on future receivables for the government in connection with the mine. Governments typically receive revenue from two sources in relation to mine developments - dividends paid in connection with a mandatory government shareholding in the project company, and/or royalties received in connection with sales of product. Finance could be obtained up front in return for the right to that future revenue stream - this type of finance is not uncommon with mining companies themselves, so governments ought to be able to obtain the same leverage. The circularity however is that such prepayment type financing is typically only available once a mine has passed completion tests and reached operational phase, which it cannot practically do until infrastructure is in place to get product to market - the infrastructure cost must be paid up front in order that the infrastructure is developed in parallel with the mine.
The other complication with this structure is that any government which receives World Bank funding will be subject to the World Bank negative pledge restrictions, which would prevent those governments from pledging/selling their rights to royalty payments and dividend streams. Of course, the World Bank may be willing to waive these restrictions if the purpose of such arrangements was in order to raise finance to develop infrastructure benefiting the wider population.
These multi-use infrastructure developments fall squarely into the spectrum of projects that development finance institutions are mandated to finance. DFI’s have been very active in financing sub-sea cable developments bringing greater telecommunications services to Africa, however there has been less interest amongst those same institutions in road and rail infrastructure in the region. Clearly there is a significant need for better rail and road infrastructure, both for general movement of population as well as business development, and as such these mine developments present an obvious opportunity to create better infrastructure for the region. There is an obvious role for DFIs in this regard, alone or in tandem with financing from commercial lenders.
The other alternative for African governments seeking to develop infrastructure is to enter into joint venture development arrangements with Chinese institutions. China has already evidenced its willingness and ability to build and finance infrastructure projects across Africa, in return mining rights and offtake opportunities. Given the massive infrastructure needs of African governments in order to support mining projects and general development, and that fact that China remains the only viable source of funding for these mega projects, it is inevitable that we will see further Sino-African agreements on this front. We are seeing further interest in Asia for financing these types of development, particularly from Korea and India, however at the moment China is still leading the race.
Mining company funding
Governments may seek to push infrastructure development costs onto the mining companies themselves. If so this will not only test the economic viability of projects but will significantly limit the ability to fund such projects.
Reducing capital costs
Capital costs can be spread amongst more than one mining project (and possibly amongst other non-mining related users) by sharing use of the infrastructure. Clearly the abundance of mineral resources in Africa means that any rail or port infrastructure can serve a number of mining sites by adding branch lines and spurs. This solution is not free from important caveats. Whilst it can help to spread the financial burden, sharing infrastructure in this way brings with it a number of issues around commercial competition, provision of wider logistics, the pricing of access charges, early termination of access, insurance costs… the list goes on.
All those issues deserve entire articles and discussions in their own right. However, in the context of investment in African infrastructure, the key will be to strike a balance between providing for an appropriate level of investor protection on one hand and on the other, the need to provide wider opportunities for the host state and its population and other investors looking to access the continent’s resources.
Even with capital cost sharing arrangements, there is still a need for significant amounts of financing. Whilst there is now a resurgent appetite to finance strong mining projects among the key western mining focused financial institutions, such as Standard Bank, Standard Chartered, Caterpillar Finance, BNP Paribas and Investec, given that there remains at this stage only a small group of active banks in the sector there are inevitably liquidity constraints in the context of the surge in new development projects seeking finance.
Consequently, junior mining companies themselves inevitably need to look to China to source finance for their mine developments. Whilst there has more recently been some consolidation, China’s focus remains on strategic resource based investments and its appetite for raw materials continues. The Chinese banks have the depth of resource to be able to fund these mega projects in their multiples, and they have a mandate to do so given the potential offtake opportunities.
So whether government funded or privately funded, these massive infrastructure developments and programmes are dependent on Chinese funding, as the Chinese state owned banks still have the deepest pockets and the strongest appetite for investment. As development opportunities are found in increasingly remote areas across the globe, this is a trend that looks set to continue, although new sources of finance from India and Korea may soon provide viable alternatives.
Considerations affecting shared access arrangements
African governments are keen to earn the royalties from the revenue generated by the mineral ore exports but many are also very keen to ensure the associated development of their countries’ infrastructure to benefit the wider population. Increased mobilisation of the population can bring even greater benefits to a country. Therefore, mining companies and investors need to consider the implications of sharing access to the infrastructure when developing projects in Africa.
Generally, a concession agreement would give the party granted the concession (“the Concessionaire”) the right to construct, operate, maintain and expand the rail and port infrastructure or to rehabilitate existing infrastructure. The position of a first mover into securing the concession or right to build the infrastructure could have significant value not only for the cost/efficiency of getting the product to market but also as a potentially profit making infrastructure provider. Therefore a mining company should generally seek to ensure that all available capacity is for its exclusive use. However this is not always possible or practical.
The mining company will look to optimise the combined use of the rail and port infrastructure with its mines so that they will operate as an integrated operating model and thus use any flexibility in the port and rail part of the logistics chain to smooth interruptions in production. What this means in practice is that the actual capacity utilisation of the port and railroad will be higher than the actual tonnages carried.
If this leaves little spare capacity in the rail and port infrastructure system, then the mining company will certainly be of the view that any additional access by any Third Party Access Seeker (or TPAS) to the rail and port infrastructure will have an adverse and detrimental impact upon the efficiency and economics of their operations. This will ultimately affect the price of production and export of its material.
If the mining development agreement/concession agreement does not provide for exclusive use of the infrastructure then the agreement should provide protection of the Concessionaire. Protections may include listing the circumstances under which it must allow access to third parties, detailing the rights of the Concessionaire to challenge such access requests and setting out the protections that the Concessionaire will receive if, by giving such access, the Concessionaire suffers loss.
It will clearly be important for African governments to balance the protection sought by foreign investors against the benefits of unlocking the wider potential for infrastructure development in their countries.
The terms and conditions for access to the Concessionaire’s rail and port infrastructure will be set out in an agreement between the Concessionaire, TPAS and the Government or Government Authority (the “Third Party Access Agreement”). The mining company would also require the TPAS to provide satisfactory “Guarantees” in support of their Third Party Access Agreement obligations and liabilities.
Access to the infrastructure can be provided in one of two ways:
- Simply allowing access to rail, track and port facilities at designated times using time slots.
- Providing an ore logistics transportation and port service. On this basis, the mining company would now be an infrastructure operator. Accordingly it would be required not only to allow access to its infrastructure but also to manage and facilitate the operation of that infrastructure for the benefit of itself and third parties. This would include the provision of a logistics service in accordance with a type of access protocol.
Clearly, where investors have first mover advantage in African countries, they will naturally work to ensure they protect themselves as much as possible against any adverse impact that arises through sharing infrastructure. It’s an important point to understand for any new entrant into African markets.
However, it’s also clear that being able to share a certain amount of the infrastructure costs can outweigh the limitations such sharing will likely impose. The upfront capital required to develop significant infrastructure which is available to Chinese investors for example can certainly provide opportunities for non-Chinese investors, mining companies and host states. It is essential however that the balances alluded to in this article are achieved by host governments to unlock the potential for wider non Chinese inward investment and increased social and economic mobility for the host state.
However, any miner looking to go down this road needs to also ensure it properly understands issues such as the pricing of access charges, early termination of access, insurance costs, expanding the infrastructure, etc. Those, though, are topics for a much longer conversation.
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