El Dorado: Peru's Cerro Corona Gold Mine


The financial close of South African miner Gold Fields Limited's (GFL) US$340 million Cerro Corona gold and copper mining project marks the latest milestone in the project finance metals mining boom

Cerro Corona is the largest greenfield gold project financing in Peru since the financing of the world's second biggest gold mine, Yanacocha.

The MLAs - RBS, Citigroup and Bank of Nova Scotia - also eschewed political risk insurance, despite financing through a potentially volatile period of both national and local elections. The banks have also innovated by including pre-provision for a local bond option to part-refinance project debt.

The confidence of the sponsor and banks in the deal is a function both of the high gold price and the project's own robust economics.

The deal is GFL's first project financing in Latin America, and capitalises on the growth of a mature mining industry that has sprung up with aim of monetising Peru's vast gold reserves.


Background

Peru's northern gold reserves, which lie in a rich belt stretching almost 160km along the Eastern Andes mountain range, have been internationally renowned for 500 years but arguably have never reached their full potential.

Historical small-scale exploitation of the surface reserves widened in scope during the twentieth century but development was stifled by the nationalisation of the mines by the military juntas of 1968 to 1980.

With the return of the market economy to Peru in 1990  a series of small locally-owned mines began to spring up and were in turn bought out en masse by international mining concerns.

Only after the project financing of the development of the Yanacocha project in the 1990s - a JV of Newmont and Peru's Buenaventura, backed by loans and equity from the IFC - did modern mining begin in earnest.

In 2003, Gold Fields - whose international portfolio had been centred in South Africa, Ghana and Australia - purchased 92 per cent of the voting rights in Sociedad Minera La Cima giving it control of the nascent Cerro Corona project.

The purchase price was approximately US$91.3 million, a price valuing each reserve ounce of reserve gold-equivalent at just US$11.

In December 2005, the Peruvian government gave Gold Fields environmental clearance paving the way to start work on the project.


The project

The Cerro Corona project lies 90km north of the departmental capital of Cajamarca and 35km north of the Yanacocha project.

Gold Fields estimates the project has reserves of 2.9 million ounces of gold and 480,000 tons of copper, equating to approximately 5.4 million ounces of gold equivalent.

The project is expected to return 2.3 million ounces of gold and 412,000 tons of copper over an estimated 15 year lifespan, averaging some 300,000 ounces per year of gold equivalent.

Ore will be treated in a conventional sulphide flotation concentrator, to produce a 25 per cent copper concentrate containing typically 40 grams per tonne of gold. The concentrate will be shipped to third-party smelters for processing.

Construction of the new works at Cerro Corona, including the mining operations is scheduled to be carried out over an 18 month period and completed by late 2007.

In order to achieve the goodwill of the local community and avoid the disruptions, blockades and strikes that have hampered the Yanacocha project, Gold Fields has involved the local community.

The project employs 600 local residents who are at work on the construction of the project, and more than 40 local, small contractors also involved in the construction of the project. Cerro Corona has also launched an initiative to encourage local farmers to grow crops for use as biofuel.

The project is also expected to give a substantial boost to the economy of Cajamarca through the development of road links, the electrification of the surrounding area and the increase in traffic flow at the local port.

To fulfil their obligations as Equator Principle signatories, the MLAs employed an independent technical consultant  to undertake a full environmental audit of the project.

 

Financing

GFL mandated RBS, Citigroup and Bank of Nova Scotia to provide a US$150 million debt tranche in February 2006.

Each institution will underwrite US$50 million of the project debt over the ten-year tenor of the term loan.

The arrangement also contains a pre-arranged option for a US$100 million locally placed bond to part-refinane the commercial debt. The bond option will allow the project to tap local sources of liquidity and give domestic investors an opportunity to participate in the Project.

The bond option demonstrates sensitivity to local conditions but adds to a growing trend. Canadian developer, Barrick, raised US$50 million for its Alto Chicama gold mine on the Lima Stock Exchange in April 2005 and Socieded Minera Cerro Verde raised US$250 million in 2006.

Alonso y Asociados, a local advisory firm, was financial adviser to Gold Fields on this financing.
 
A further US$190 million will be contributed in shareholder equity.

According to Greg Arandt Senior Director & Co-Head of Mining & Metals Global Project Finance the MLAs' risks are satisfactorily covered:

'Currency risk is mitigated by a conventional offshore/onshore account structure, construction risk is mitigated by the certain Gold Fields undertakings, commodity price risk is mitigated by the cost base and market risk is mitigated by various offtake contracts,' he says 'Fundamentally the Project is very solid.'

In April, the project participants' decision not to take out PRI was highlighted when Olanta Humala, allegedly a close political ally of Hugo Chavez and Evo Morales whose regimes have been market by resource nationalisation, won the first round of voting in the Peruvian presidential election.

However left-of-centre candidate Alan Garcia won through in the June run-off, vindicating the project's strategy for the short-term at least.


Conclusion

Overall the project's fundamentals combined with the high-tracking gold price highlight Cerro Corona's significant upside potential which has allowed the participants to bear greater project risk.

According to Gold Fields the cost of developing the gold, including the purchase, capital and operating costs will be US$340 per ounce.

In 2006 gold traded on the London metals exchange has tracked between US$530 per ounce and a high of US$720 per ounce in May. Moreover the gold price has grown year-by-year at a rate of more than 40 per cent since December 2001.

The project also reflects a recognition of the importance of dealing with social and environmental issues both in the development of the project and more innovatively, in the financing structure of the project.

In its initial scale Cerro Corona cannot match last year's US$850 million Cerro Verde copper project, which was also financed by RBS and Bank of Nova Scotia. However, if the sprawling expansion of the Yanacocha project is anything to go by, the Cerro Corona deal could be another spoke  of a much larger mining hub.

The deal also closes a significant year for infrastructure development in Peru through the development of the IIRSA Norte and IIRSA Sud toll roads and the award of the upgrade contract of the country's prinicpal port at Callao near the capital Lima.

2007 is expected to see the award of a further five regional port concessions, the Majes Siguas II hydro deal and a series of road projects. The ongoing development of the country's support infrastructure through private finance should lay firm foundations for miners seeking to access the country's vast mineral wealth.

The project at a glance

Project Name Cerro Corona gold and copper mine
Location  90km north of Cajamarca, northern Peru
Description 15-year mining project incorporating: opencast mine with reserves of 2.9 million ounces of gold and 480,000 tons of copper, processing facility and sulphide flotation concentrator
Sponsors  Goldfields Limited
Operator  Goldfields La Cima SA
Construction Stage  18 months
Operational date  Late 2007
Total Project Value  US$340 million
Total equity  US$190 million
Equity Breakdown  Goldfields Ltd: US$190 million
Total senior debt  US$150 million
Senior debt breakdown

 US$150 million underwritten by:

RBS:                           US$50million
Citigroup:                    US$50 million
Bank of Nova Scotia: US$50 million

Debt:equity ratio  44:56
Mandated lead arrangers  RBS, Citigroup, Bank of Nova Scotia
Legal Adviser to sponsor  White & Case
Legal adviser to banks  Milbank
Financial adviser to sponsor Alonso y Asociados
Date of financial close  14/11/06