Borrowing base lending in resources projects

When developing mining projects it is not uncommon to discover resources that are, on their own, too small to project finance. For many years this has meant that smaller scale projects have not been developed even in favourable prevailing market conditions.

In recent times, the global project finance market has worked hard to find a solution to financing portfolio’s of such projects. This approach is generally termed a ‘Borrowing Base’ facility and is used extensively in the mining and resources sector.

At the heart of the Borrowing Base approach is the recognition that the cashflows available to service and repay debt are provided from more than one asset. The mining industry is a great example of where this innovative lending approach has gathered momentum amongst borrowers and lenders alike. Once adopted this broader method of project financing provides junior and mid cap resource companies with a leverage that would otherwise not be possible.

There are many conventions of structuring a borrowing base facility in the global markets. This tutorial has focused on one of the more challenging and sometimes controversial methods from the modellers’ point of view, the sculpted LLCR method.

Calculations in the LLCR Sculpting

The essence of a Borrowing Base arrangement is that the amount available to borrow at any one time is a function of future cashflows, often expressed in terms of a target Loan Life Cover Ratio (LLCR).

Given that

LLCR = NPV (Cashflow over the life of the loan) / Debt Balance

We can re-arrange this as

Debt Balance = NPV (Cashflows over life of the loan) / Target LLCR

The Principal drawdown / repayment in each period is governed by the movement in target debt balance. Usually other conditions also have to be satisfied so careful financial analysis is required.

LLCR Calculations

Screenshot below shows example of debt balance / principal repayment calculation to achieve Target LLCR.

Screenshot #1: Debt Sculpting to Achieve Target LLCR

The challenges presented by Borrowing Base facilities are wide ranging, from Documentation and Legal Risk, to the technical challenges of preparing comprehensive, non-circular, financial models to assess the quantifiable risks and the impacts of longer term changes in reserve estimates and commodity prices.

Screenshot #2: Graph Presentation of the Debt Sculpting

Borrowing Base arrangements

A Borrowing Base arrangement offers

• Leverage to borrowers who otherwise would not have access to such funds;
• Low ongoing documentation / reporting obligations;
• Flexible, pre-arranged funds if resources and prices evolve favourably.

Before entering into a Borrowing Base arrangement a borrower should consider the following points

• High initial due-diligence and documentation obligations;
• That sophisticated financial analysis / cashflow modelling will be required;
• The facility can be scaled back quickly if a lender’s commodity forecasts reduce after establishment.

In summary, Borrowing Base arrangements offer leverage to owners of portfolio’s of smaller scale projects, with flexible pre-arranged funding once established, however requires sophisticated financial analysis in order to reach financial close.

Limitations of the sculpted LLCR approach

Some participants in the market question the validity of a sculpted LLCR facility with the following arguments:

• It back-ends payments which increases the risk of the loan compared to the a more common sculpted DSCR facility;
• The volatility of the debt sizing can become substantial in the estimation of long term debt;
• The regular re-sizing events (commonly semi-annual) can get more complicated due to the high dependence of future pricing assumptions.

Want more Tutorials?

See All Resources Get the latest Project Finance Tutorials and Blog Posts...