Discovery Metals is in the process of graduating from the junior explorer tier of mining companies after closing the first greenfield project financing for a mining project in Botswana. Boseto, which closed its financing in six months, will be the first producing copper mine in Botswana when it comes online later this year.

The $205 million debt financing for the $260 million project benefited from strong commercial bank interest, and combined a term loan, a revolving contingent facility and structured copper and silver hedging. The sponsor sought early feedback on its financing from lenders but was able to maintain competition for the eventual mandate. The resulting deal closed quickly, despite looming market uncertainty, and allowed Discovery to get generous terms on its debt and, particularly, hedging.

Discovery Metals is Australian-listed, and Boseto is its flagship project. It is located on 8,877km2 of tenements that Discovery owns in the Kalahari Copperbelt. The region shares some geology with the better-known Copperbelt that runs through the Democratic Republic of the Congo and Zambia. Botswana, until recently, has been better known for diamond-mining, coal-mining and coal-fired power generation – than copper.

The country boasts a strong reputation for political stability and transparency. Boseto is located in an area of low economic intensity, characterised by low-density grazing, few large nearby population centres, and the potential for additional future exploration.

Discovery’s managing director, Brad Simpson, and chief financial officer, Paul Fulton, joined the developer to complete the pre- feasibility study for Boseto and to take the project forward through full feasibility into production. According to Fulton, the sponsor made sure all early-stage development work was carried out with bankability in mind, and contacted banks at an early stage in the feasibility process “to establish our bona-fides, explain our process and timeline and to engage them in the development of Boseto.” The sponsor also engaged an independent engineer for the project – SRK – far in advance of formally mandating banks.

In August 2010 the developer completed the bankable feasibility study, which estimated the resource at 111.5 million tonnes at 1.4% copper and 17.6g per tonne silver. In November, Discovery raised A$51 million through an institutional equity placement led by UBS, and in December, it raised another A$91 million in a rights issue.

Alongside the equity raising, Discovery put together an indicative term sheet to explain what the bank mandate would need to cover, and received pitches from 15 institutions, some of which came as pre-formed syndicates. On 9 February, Discovery signed the lending mandate letter with Standard Chartered, Standard Bank, Credit Suisse and Caterpillar Finance.

According to Fulton, Discovery picked the group based on Standard and StanChart’s presence in the country, and the group’s willingness to include covenants, particularly restrictions on distributions, closest to the sponsor’s. Each of the three commercial banks offered to underwrite, and had credit approval for, the entire $180 million in project debt.

The project involves constructing an open-pit mine and processing facility, running on diesel generation equipment. The annual production at the project will be about 36,000 tonnes of copper and over 1 million ounces of silver, with a mine life of over 15 years. The mine is set for commissioning later this year.

While there are no export credit agencies or development banks involved in the financing, the deal was documented in accordance with the Equator Principles and International Finance Corporation’s performance standards. Development banks are offering terms for Botswana that are not competitive with commercial lenders. Silver streaming providers asked to keep more metals price upside than commercial banks demanded.

The financing consists of a $180 million construction facility, with $105 million dedicated towards the mine and processing facility, and $75 million towards the equipment fleet, and a $25 million construction overrun facility. The debt matures in June 2015, is repayable in quarterly instalments from December 2012, and is secured over Boseto’s assets, leases and 100% of its shares in project company Discovery Copper Botswana. The financing includes a sweep of 30% of excess cash, and complements $80 million in equity, which was in place by June 2011.

The three banks in the arranging group, Standard Chartered, Standard Bank and Credit Suisse, provided the hedging for the project. The hedge covers roughly 40% of copper and 65% of silver produced at Boseto during the life of the debt. The hedging took place at a time of volatility in metals prices, but was still locked in at prices above the bankable feasibility study. The average copper price in the hedge was $4.01 per pound compared to $3 in the study, and that for silver was $36.07 per ounce compared to the study’s $17.

The hedging arrangements take the form of swap contracts – physical delivery is to Transamine, a Geneva-based trader. The offtake price and the prices for the swap contracts are both average monthly LME prices, eliminating any quotational period risk. Discovery now moves on to other prospects near Boseto, including the Zeta NE and Selene resources, and is also looking at prospects elsewhere in Africa, Asia and Australia.

Discovery Copper Botswana
STATUS: Signed 5 July 2011, funded 15 July
TOTAL PROJECT COST: $260 million
DESCRIPTION: Development of Boseto open pit copper and solver mine in Ngamiland, Botswana
SPONSOR: Discovery Metals
EQUITY: $80 million
DEBT: $205 million (including $25 million cost overrun facility)
LEAD ARRANGERS: Standard Chartered, Standard Bank, Credit Suisse, Caterpillar Financial.
MATURITY: July 2015
MARGIN: 375bp over Libor
EPC CONTRACTOR: Sedgman
INDEPENDENT ENGINEER: SRK
ENVIRONMENTAL CONSULTANT: Golder
MODEL AUDITOR: PKF
FINANCIAL ADVISER: PCF Capital Group
SPONSOR LEGAL ADVISER: Mayer Brown (international), GRT (corporate), Collins Newman (local)
LENDER LEGAL ADVISER: Norton Rose (Armstrongs)