LONDON — Zambia generates 60% of its export earnings from copper. In that context, Sentinel , which when completed in two years’ time will be the biggest copper mine in Africa, is a rather big deal for the country. At $2.1bn, the First Quantum Minerals project is equivalent to one fifth of Zambia’s GDP. In this special podcast we meet Sandile Mbulawa, the banker who put the money side together. – Alec Hogg
This special podcast is brought to you by RMB. The African continent possesses enormous mineral wealth, but bringing this rich endowment to account can be a complex matter. For decades Johannesburg-based RMB have specialised in the region. It has now played a major role in supporting the funding of Sentinel – a $2.1bn operation, which when completed in two years’ time, will be Africa’s biggest copper mine. Let’s meet the man who put together the financial side of this massive new transaction, Sandile Mbulawa, Head of Resource Finance at RMB.
Sandile, it’s an interesting story for the African continent, the way that Zambia’s economy has been rejuvenated by the improvement in the copper price over years. It’s very volatile. But how important is copper to Zambia?
Copper is very important to Zambia. We estimate that it earns about 60% of export earnings for Zambia, so it’s quite a big sector.
It’s a bit like Botswana that relies heavily on diamonds. Zambia relies heavily on copper?
Yes, that’s correct and the biggest corporates in Zambia are in the copper sector.
When the copper price falls, does that have an immediate impact on the Zambian economy?
Yes it does. It definitely reduces the export earnings and taxes and royalties that the government earns.
So how do they offset or protect themselves against this?
Typically, the companies hedge the copper price which helps somewhat, but there’s no doubt in my mind that the fiscus in Zambia gets affected when the price falls.
So, if you’re a Zambian you would watch the copper price?
For sure.
Now, the biggest player in the market, the biggest mining group is a Canadian Group who’s been a client of yours for a while, tell us a bit about them.
First Quantum is listed in Canada. We have a very good relationship with them. They have been in Zambia for the past 20 years. Their first mining operation happen to be in Zambia. They are currently the biggest copper producer in Zambia.
And in world terms, I guess significant as well?
They are a significant player. They’ve got mines in seven counties. They produce both copper and nickel, but their primary product is copper.
And primarily from Zambia?
Primarily from Zambia. They are building a big project in Panama that will diversify their production somewhat.
Are they then the biggest producer of copper in Africa?
Yes. They are by far the biggest producer of copper in Africa. We’ve been involved with them since 2012, when they raised the Kansanshi facility (another mine in Zambia). That facility was $1bn and we also participated significantly in it.
How big is Kansanshi? Is that the biggest copper mine in Zambia?
Kansanshi is the biggest copper mine in Africa, not just Zambia. It produces about 240,000 tons of copper per annum.
So, about a quarter of Zambia’s total output.
Yes.
You are now going into yet another development with the same client?
Yes. They’ve developed Sentinel, which is now in ramp-up. It is expected to reach peak production around 2020, and at that point it will be producing about 255,000 tons of copper per annum – surpassing Kansanshi to be the biggest copper mine in Africa.
That’s another story, where does it all start?
Mining companies do exploration. Out of 100 properties that are explored, usually only one gets developed in a mine because it’s quite a high risk effort.
Sandile, that’s extraordinary. So out of every 100 exploration prospects, only one finally gets developed?
Into a mine, yes.
Who funds these explorers?
The exploration is funded through equity which is either done by the big players themselves or the junior miners. The junior mining companies raise equity and do explorations. If they find a prospective site, they will then proceed with viability studies. If the project is deemed to be technical and financially feasible, only then does it get developed into a mine.
In the case of First Quantum Minerals (FQM), has someone presumably approached them with this project beforehand or did they do the exploration themselves?
First Quantum acquired a junior miner who did the exploration and discovered the prospects. When it looked like the prospects could be feasible, First Quantum then acquired that junior mine.
So, it’s a bit like a bigger fish eating a smaller fish that’s already found the nice food?
It is a typical model in mining for the junior miners to discover these prospective sites and for the bigger players to then acquire them.
So once FQM has done the deal (acquired the junior miner) is that when the banks come into the play?
First Quantum did the feasibility studies, and only when they were happy that the project would be economically and technical feasible, that’s when the banks came in.
How does all of that work? What is RMB’s role in that?
First Quantum used its own internal cash resources to develop the project, and at a later stage approached the banks to effectively refinance their own equity that they had spent in the project. Our role was to lead that transaction in raising debt against the project. We actually offered to underwrite the transaction, but First Quantum felt that an underwriter was not necessary and we ended up just arranging the facility.
And this was for a brand-new mine?
Well it was developed and it was still in ramp-up.
This is Sentinel?
Yes.
Explain when you say it was developed, but in ramp-up? How far is it from full production?
It’s still about two years away. I would say, at this stage, it’ is about half of its full capacity, so it’s going to take another two years to reach full production.
Is it an underground or surface mine?
It is an open-cast mine, so they dig a hole in the ground and then they transport the ore to a processing plant. The processing plant then uses the latest technologies to try and reduce the operating costs. Once the copper concentrate has been produced, it is then transported into smelters where it’s refined.
250,000 Tonnes a year – that’s a lot of copper. How much is the project in total costing?
The total investment was $2.1bn and what has been raised against the project is $400m. So, in terms of capital structure it’s quite a low geared project.
And the rest of the money?
The rest of the money came from First Quantum.
It sounds like a company that we should also be looking at as a potential investment.
Yes. The reason why we like doing business with First Quantum is that when they come into investing in projects, they actually spend the money and de-risk a project quite a lot before the banks come in. They understand how banks work and that’s why we’ve identified them as a strategic client.
So, the gearing here, $400m in debt?
It’s $1.7bn in equity.
It sounds like a pretty safe bet, but I suppose there never is a safe bet, but you are talking about a commodities business as well. Of the $400m, which you are now the lead arranger for, how much of that would come onto RMB’s own books? How does that process work?
RMB funded $100m of the $400m. We then syndicated the rest of the facility to market.
Just explain when you say you syndicated?
We put together the deal. We structured it and then we went through our internal credit approvals for our $100m. We then invited other banks to come in to go through their credit approvals to fund the balance.
Which banks have come along to support you?
For this facility Standard Chartered Bank, Nedbank, Absa and Standard Bank got involved.
So, primarily apart from Standard Chartered, it’s SA banks?
Yes.
Was there a reason for that?
We felt that the South African banks would have the risk appetite for Zambia. Following the volatility in commodity prices, we’ve seen international banks pull back from sub-Saharan Africa in particular. That’s why we raised the liquidity primarily from the South African market.
And that $100m you’re putting in yourselves is also a significant amount. In the league table of the other deals that you’ve done in resources, where does this stack up?
This is one of our biggest commitments yet outside of South Africa. If I cast my mind back, I don’t think in mining outside of SA we’ve done tickets that are bigger than $100m, so it is significant exposure for us.
What does it mean for Zambia?
I think it means that there will obviously be more copper being produced. There will be royalties earned and more taxes produced for government – not to mention more employment. As part of this project, First Quantum developed a town called Kalumbila which was developed independently of the mine. Should the mine closes in two or three decades’ time, the town can continue to be sustainable.
Two or three decades, so this is a real long-term investment?
Yes. There’s obviously an initial mine plan, which takes us to just over 20 years, but as the mine continues, First Quantum will continue to explore and find even more deposits around the mine and convert those into reserves. This way the mine can last for a very long time.
I guess the key issue that you would have looked at, as RMB, is ‘what’s going to happen to copper?’ Because it doesn’t help you put all this money up if the copper price collapses. What’s the runway like for the metal?
We believe that copper’s prospects look positive. Electric vehicles will demand much more on copper, so as more and more electric cars are built, we expect that the demand for copper will increase. In addition, China’s power and infrastructure sector is growing and that consumes a lot of copper. So we think that at least for the medium-term, copper’s prospects look positive.
So you’ve got the two big demand factors. How much more copper do they use than a traditional combustion engine?
They use about four times more copper. A traditional engine uses about 20kgs and electric vehicles about 80kgs.
Then looking at China?
China is a big consumer of copper for power and infrastructure, as copper is the metal that’s used for transferring electricity primarily.
So the copper market is looking good. Zambia has got lots of copper and here is another investment that a Canadian company is making in Zambia. It feels very global to me. Is that the way you guys view the world?
That’s definitely how we view the world. Although the mine is in Zambia, we view mining as a global sector because the commodities that are produced are used globally and they are affected by global events.
Is this one of your favourite metals, copper?
For sure. Gold is also a favourite metal, but again, gold suffers from volatility like most metals.
That was Sandile Mbulawa, who’s the Head of Resource Finance at RMB. This special podcast was brought to you by RMB.
