Technical And Financial Elements Of A Mining Project Loan Request: Preparing A Complete Information Memorandum

INTRODUCTION From the lender's point of view, the greatest period of risk in a project financing occurs during the construction phase. Therefore, most projects are supported during this phase by completion guarantees supplied by some credit-worthy entity; for example, the project sponsors in the case of a joint venture, such as that of W.R. Grace, Hanna Mining, and Liberty Capital; or by a strong contract with a utility or foreign importer/investor, such as the way North American Coal Corporation has structured many of its transactions. THE PROJECT LOAN REQUEST A project financing is a more complex form of term loan than one using an ongoing corporation's balance sheet as a credit base and, therefore, a potential lender will subject the loan request to a more rigorous analysis. To support this effort, the financial institution will require a more detailed information memorandum to evaluate the credit and technical risks of a project - especially since much of the necessary information is not otherwise available. (See also Gibbs and Sroka paper above in this Chapter) A well-prepared information memorandum will impress prospective lenders with the planning ability and general competence of management. Also, the process of preparing the memorandum will help management understand the true extent of the opportunities and limitations of its venture. Appendix A outlines the topics which comprise a complete information memorandum for a loan request. Of some interest to those seeking to sell a currently-operating mining venture, a similar information memorandum should be prepared i.e., covering the same topics discussed here, for the investment banker to use with potential purchasers. For that purpose, though, one might not want to prepare quite as much detail as for a lender. Appendix B outlines the elements of a reserve evaluation and feasibility study, often called the "Bankable Document." Usually, these studies are prepared by independent engineering consultants for use by potential borrowers and sellers. (Potential purchasers will often contract for a similar study for their use in evaluating an acquisition.) ELEMENTS OF A LOAN INFORMATION MEMORANDUM 1. Outline: The information memorandum should begin with a one-page outline covering such topics as: a. The borrower's name, address, and phone number. b. Principal contact at the borrower. c. Amount of the proposed financing. d. Desired pricing and structure of the proposed financing. This should include a description of the amount and source of equity in the proposed financing. e. Use of the proceeds and timing. 2. Summary: The most important information contained in the memorandum should be summarized in two pages. Note - If the borrower is a recently-formed single-purpose company, then elements 3, 4, and 5 will apply to the guarantors of completion and to the project sponsors. 3. The Borrower: This section is a brief biography of the borrower including such topics as date and state of incorporation, founder(s), lines of business, etc. 4. Capitalization: The borrower's current debt and equity position, including leases and trade debt, with amounts, terms, names, and addresses enumerated. Equity owners, and percentage ownership, should be identified. 5. Historical Financial Statements: If available, a minimum of five year's worth of complete historical financial statements