Escondida built on risk-sharing

The Escondida copper mine in Chile started producing copper concentrates in December, 1990, after a two-and-half-year construction period. It was seven months early and US$320 million under budget. This success story is an example of risk-sharing in international mining ventures.

Circumstances were not as positive in the early- to mid-1980s when plans were being made for the development of Escondida. Copper prices were fluctuating wildly, from US$1.50 to below US60 cents per lb. in a 2-year period. Chile was led by a military dictator and its economy was in recession. The problems of Latin American debt seemed intractable. Fifteen years earlier, Chile’s government had taken over the operations of two international copper companies.

Furthermore, the project was expected to cost more than US$1 billion. It would produce a significant amount of copper (about 4% of world production) and it was aimed at a narrow band of the copper market — custom smelters. The 50-50 joint venture of Utah International and Getty Minerals discovered the orebody in March, 1981. After a couple of years of development drilling and bulk sampling, the owners knew they had a world-class resource that was susceptible to open-pit mining. What was not clear was how the money could be raised for this project.

The first challenge was unexpected. In early 1984, Texaco purchased Getty and decided to divest its minerals business. About the same time, General Electric decided that mining did not fit its long-term strategy and sold Utah to BHP. In order to move forward, BHP put together a new joint venture to purchase the Texaco half of Escondida, bringing in RTZ for 30% of the project and a Japanese consortium led by Mitsubishi for 10%. The new ownership group provided financial strength, a spread of national interests, lots of relevant experience and ties to key markets.

For lenders, we turned to government agencies, which offered loans to support the long-term supply of key commodities to their industries, to the International Finance Corporation (IFC) and to export lenders. Import loans accounted for US$537 million, almost 80% of the total, from Japan Eximbank, KfW of Germany and a Finnish bank supported by a government guarantee. IFC added US$70 million and export credits of US$73 million.

This was a special group of lenders, which complemented the owners group well. From a risk-sharing perspective, we had started with the mix of Australian, British and Japanese owners. IFC provided a political comfort factor to all participants and helped the other lenders with the technical review and the risk-sharing aspects of the proposed loan arrangements. Concerning the loan arrangements themselves, we had the following key objectives: to share the commercial and political risks of the project; to protect the project from short-term problems, such as temporary periods of low copper prices; and to get the process finished before the market opportunity disappeared.

A special feature of our planned risk-sharing was the assumption by the lenders of political risks during the development period when the owners’ guarantees were still in place. The theory behind this approach was that the exposure of the lenders was itself a disincentive to adverse actions by the host government and thus reduced the political risk for all participants, owners and lenders alike.

In addition to dealing with the default aspects of short-term problems, we were able to leave copper prices out of the other financial equations in the loan agreements.

We did not get a perfect score on meeting the timing objective. It took almost three years from the formation of the new joint venture to the kickoff of the project. We did what we could to speed the process — developing alternative approaches and using deadlines and persuasion.

But perhaps we didn’t do too badly. The official Escondida inauguration took place on March 14, 1991, exactly 10 years after the discovery, not excessive for such a large project.

Joint ventures and project financing do provide a level of risk-sharing that may be necessary for large-scale investments, especially in challenging environments. At Escondida, we have gotten real benefit from the background and expertise of our partners, and without the project financing (with lenders sharing the risks) the project could not have gone forward when it did.

— From a speech by T.R. Dankmeyer, senior vice-president and general counsel, BHP Minerals-New Business Development, which appeared in a recent issue of “Washington Concentrates” of the American Mining Congress.