The Role Of The Independent Consulting Firm In Project Financing

INTRODUCTION At the end of the day, the decision by the sponsor to proceed with a project and to seek financing, or the decision by the financier to grant financing are made on a judgmental basis. Cash flow projections, sensitivity and risk analysis, the innumerable ratios applied by the financier, the so-called feasibility study, etc. are all only tools, and the degree to which they affect decisions is as highly varied as are the personality differences and business conduct and outlooks of the persons who render the decision of "go or no-go". The independent consultant, then, is expected to provide an additional increment of credulity and/or reliability to the "tools" which others will use in reaching a decision; the consultant is really not in a position to directly recommend a "go or no-go". PROJECT FINANCE INGREDIENTS The project finance situation has basically three ingredients: - The project; - The inherent risks attendant with project failure; - The parties. The project, to be viable for financing, will have certain essential characteristics, namely: 1. Clear title or rights to the mineral; 2. Proven definition/establishment of mineral quantity; 3. Financial viability; 4. Physical access consistent with financial viability; 5. A market for the product at a price and for the quantity consistent with financial viability; 6. Transportation/shipping from the project facility to the market at a cost consistent with financial viability; 7. Availability and demonstrated expertise of the developer of the facility; 8. Demonstrated expertise of the operator of the facility; 9. Production processes do not involve unproven new technology; 10. Availability of management personnel; 11. The property and the facilities have value (and thus can be used as collateral); 12. Government approvals/support, as required, will have been obtained; 13. The political environment is essentially friendly and stable; 14. The owner(s) of the project have the financial, strength to make equity contributions consistent with total required investment capital and project risk; 15. Backing by credit support other than that of the financier (i.e. guarantees); The inherent risks of failure are (Nevitt, 2nd Edition); 1. Completion delays with consequent delays in the generation of revenue 2. Cost overruns 3. Technical failure 4. Financial failure of contractors 5. Government interference 6. Uninsured losses 7. Increased price or shortages of raw materials, supplies 8. Technical obsolescence 9. Loss of competitive position in the market place 10. Expropriation 11. Inadequate/poor management The parties directly or indirectly integral to the project financing are: - The mineral rights owner - The developer - The operator - The equity investor