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By D. G. Wilder

D.G. Wilder I found the suggestion that the amount of displacement of a fault can be numerically related to the thickness of gouge or breccia to be both intuitively satisfying and intriguing. I have long agreed that there is some type of relationship between the amount of gouge and the amount of displacement of faults. I congratulate the author for developing a numerical relationship between them. However, I am concerned that the limits for applying this relationship be fully understood. An underlying assumption in this approach is that there is either a uniform thickness of gouge or breccia along a given fault or the thickness does not vary widely. Since it is not always possible to confirm this, the displacements derived by this method should be viewed with caution unless significant fault extent can be observed. At the Nevada Test Site, in drifts constructed in granite for test emplacement of spent nuclear reactor fuel, we found a fault with 0.3 to 0.4 m (12 to 16 in.) of clay gouge. Within a few meters of this location, the fault had no clay gouge, but rather consisted of a highly fractured zone with significantly altered rock and some slickensides. Based on Fig. 1, the 0.3 to 0.4 m (12 to 16 in.) thickness of gouge would indicate a displacement in excess of 30 m (98 ft). However, no gouge thickness would indicate essentially no displacement. Based on a quartz vein that terminated on the fault, and is not identified nearby, an estimated displacement of more than a few meters was made. This estimate is consistent with that obtained using the regression line proposed in the paper if the 0.3 to 0.4 m (12 to 16 in.) thickness for the gouge is used. However, using the regression curves with zero thickness would not yield results consistent with what was observed in the field. Therefore, it is important to recognize that the suggested procedure would properly yield a range of probable displacements. ? *Work performed under the auspices of the US Department of Energy by the Lawrence Livermore National Laboratory under Contract W-7405-Eng-48. Reply by E.C. Robertson It is certainly true that the t (thickness) of gg-bx (gouge and breccia) on a fault does vary along the fault. My observations have been that near the termination of a fault, the displacement d is small and the t is also small, whereas the maximum d and t will usually be found in the central part of the fault. The information on gg-bx and t of the fault found in granite in the NTS tunnel by Mr. Wilder could be interpreted somewhat differently than he does. He speaks of the fault changing within a few meters from 0.3 to 0.4 m (12 to 16 in.) of clay gg to "a highly fractured zone with significantly altered rock and some slickensides," but no gg. The highly fractured rock may be taken to be bx, rock not so finely ground as gg but still crushed by the fault movement, equivalent to the gg in my usage, and probably occupying about the same t. Mr. Wilder's estimates for the fault in the NTS tunnel for t of 0.3 to 0.4 m (12 to 16 in.) and for d of a quartz vein, in excess of "a few meters," would place the point on the low side of the central trend line in my Fig. 1, at the lower limit. There is, of course, a problem with determining d using displacement of only one planar surface. It would be greater or lesser depending on the rake of the movement. Finally, estimating the d of a fault from its t should be made with awareness of our present uncertainties, as pointed out by Mr. Wilder. Although the central trend line in my Fig. 1 has a ratio of d/t of 100, I have put the limiting ratios at 10 and 1000. Understanding of the values of the ratio will be improved only with collection of more data, for which the discussion of Mr. Wilder is much appreciated. ? G.C. Waterman E.C. Robertson's paper provides significant information to a geologist attempting to deduce fault offset by noting the products of structural dislocation. However, considerable mapping in underground and open-pit mines, and examination of structures produced in different geological settings, have convinced me that gouge and breccia thickness are controlled by geological conditions and fault movement. The following paragraphs suggest geological variables that control them. 1. Depth of Loading A near-surface fault resulting from tensional stress has more breccia/gouge than is produced by a similar stress at considerable depth. A deep-loaded compressional stress may produce a linear zone of schist, or structural dislocation may occur along an earlier formed belt of schist. Such "shear zones" are common in Canadian mines in precambrian rocks. In neither case can offset be directly deduced by an analysis of the minimal gouge/breccia in the shistose rocks. At greater depth, stress may be partially to wholly relieved by flowage. I vividly recall first noting the regional "Midas Thrust" in the Lark mine, Bingham Mining District, UT (where we called the structure the North Fault). My recorded notes, as I remember them, showed a narrow gouge streak separated the "Jordan" and "Commercial" limestone units from impure, muddy limestone beds of uncertain stratigraphic position. The visible structure did not indicate the great importance of this premineral fault

Jan 1, 1985

By C. R. Tinsley

A strictly limited number of specialist project finance banks exists, with the necessary specialist personnel able to address project cost-competitiveness, cost and commodity forecasting, joint venture negotiations, and completion and sales undertakings. Different techniques of internal bank appraisal are applied, with the usual equity investment project valuation criteria being seldom useful for loan assessment purposes. Company attention paid to the preparation of a sensitivity structured bankable presentation can prove most effective for securing development project finance. Substantial scope is possible for savings of time and money.

Jan 1, 1985

By Pedro L. Lizaur

INTRODUCTION The degree of success of an association between parties in establishing a new venture ultimately depends on three factors: a. the venture's underlying economic strength, which is based on the complementarity of the comparative advantages brought by each party to the negotiating table; b. the ability to reach an agreement which satisfies each party's objectives and constraints; and, c. the capacity to design and implement a funding structure which is consistent with the project economics. A thorough assessment of the venture's profitability and associated risks under alternative technical and economic scenarios is the basis for a sound "go" or "no go" decision. In-depth evaluation of the risks and rewards to each of the parties involved under alternative legal and financial structure must be the foundation for a long lasting "how to go" decision. The allocation of risks and rewards should be consistent with the objectives and constraints of all parties and the sharing mechanisms, established in the contract, should be flexible to assure the long-term stability of the agreement. Rapidly changing economic conditions during the last decade have had a dramatic impact on the envisaged allocation of risks and rewards between host countries and private investors. The effects of these changes, and the fact that the relative strengths of the parties involved may shift during the life of a project (e.g. before and after major capital investments have been made), have forced the renegotiation of a multitude of contracts. Therefore, the present and future stability of an economic agreement would depend not only on the originally designed provisions, but also on provisions which allow for the automatic adjustment of rewards to project sponsors under a variety of future economic situations. A pre-condition for the allocation and quantification of risks and rewards is the definition of standards of measurement used by each of the parties. This is critical in international negotiations when one of the parties represents the national interests of a country. The understanding and use of different standards for the measurement of rewards for risk taken between a government and private enterprise facilitate the negotiation of a satisfactory agreement. This is possible because certain trade-offs between the negotiating parties may have different relative values. STANDARDS OF MEASUREMENT OF REWARDS FOR RISK TAKEN The negotiating process takes a step forward when the parties are able to focus on their interests, explore different alternative solutions and then base results on a set of objective standards. Unfortunately, the parties frequently put more effort into "staking out" and defending positions, than into understanding their intrinsic interests. Moreover, when one party, such as a governemnt owned corporation, represents a country's national interests, the negotiation process increases in complexity. Private firms focus on commercial profitability, using discounted cash flow techniques such as NPV, IRR, or ROE. In contrast, the government is also concerned with the project's impact on the local socio-economic environment. Without entering into a discussion of alternative economic development theories and approaches, there exist several possible measures that could be pragmatically utilized by each party in evaluating the socio-economic impact of a project. The more complete measure is the National Profitability (NP). The NP is a discounted cash flow procedure similar in structure to IRR or NPV but in which the project's financial cash inflows and outflows and discount rates are adjusted to take into consideration the local conditions. The NP is calculated on an unlevered basis and all taxes and duties are removed from the project

Jan 1, 1985

By V. F. Hollister

The Queen Charlotte gold deposit (also known as the Specogna, Babe, or Cinola) was discovered in late 1970 by Efrem Specogna and Johnny Trico. They were prospecting along the trace of the Sandspit fault, and they sampled jarositic material that included veins from the fault zone. Their assays included some good gold values. They located the Babe Claims in 1971 and optioned them to Kennco Explorations Ltd. Kennco conducted stream sediment and soil geochem studies, geological mapping and drilling of 55.2 m (181 ft) in two drill holes. Kennco withdrew from the property, and by 1977, Cominco, Placer Development, Silver Standard, and Quintana Minerals had each successively worked on the deposit. Consolidated Cinola Mines bought the claims in 1977 and completed exploration of the deposit ultimately in a joint venture arrangement with Energy Reserves. Energy Reserves entered in late 1979, and by 1983, a total of 200 surface and 12 underground drill holes had been completed, totaling 28 600 m (93,832 ft). In addition, a 461.9 m (1515 ft) adit was driven in the ore body. Reserves published by Cinola aggregate 34 Mt (37 million st) of 1.7 g (0.060 oz) Au per tonne. All industry geologists working in the area agree that the Queen Charlotte gold is an epithermal gold deposit in porous volcaniclastic and clastic rocks that is genetically related to a Miocene-Pliocene rhyolite plug. The geologic description here follows the oral presentation made by G. G. Richards, J. S. Christie, and M. R. Wolfhard at a 1976 CIM meeting. Additional comments by the late C. S. Ney of Kennco Explorations are included with the Richards, Christie, and Wolfhard data to complete the geologic set- ting. The attached reprint by Champigny and Sinclair (1 980) provides additional data on the deposit. The Queen Charlotte (Babe, Specogna, or Cinola) gold deposit is located on Graham Island in the northern Charlotte Islands, at the fault boundary of the Skidegate plateau and the Charlotte lowlands. The Sandspit fault marks the physiographic boundary, and it is intruded by rhyolite porphyry at the deposit. Because displaced geochem anomalies, drain- age patterns, and topography suggest dextral and east side down movement for the fault, exposed east block rocks are younger than rocks west of the fault. The east block, which included the ore deposit, is a lowland largely masked by unconsolidated Pleistocene and Recent clastic rocks. Rocks west of the rhyolite plug, on the Skidegate plateau, are Cretaceous carbonaceous and calcareous shale unconformably overlain by a thin veneer of rhyolite tuff. The deposit is about 100 m (328 ft) above sea level. GEOLOGIC SETTING At the ore deposit, the Sandspit fault is a complex structure. However, lithologies on either side of the fault-controlled rhyolite porphyry plug are distinct. West of the rhyolite, the upper member of the Cretaceous Haida formation shale is the most common rock type. The member is composed of dark grey to black, poorly consolidated, and thinly bedded carbonaceous and calcareous shale. The sequence is silicified to an argillite or a hornfels near the rhyolite. West of the rhyolite porphyry plug, but not importantly involved in the mineralization, is a thin masking cover of rhyolite tuff. The tuff unconformably succeeds the cretaceous shale, but it is largely eroded in the mine area. East of the fault-controlled rhyolite porphyry plug is a thick section of conglomerate and sandstone of the Miocene- Pliocene Skonun formation. The ore body occurs within the coarse clastics, the rhyolite intrusive as the western boundary. Ore is entirely contained within the clastics. Original permeability of the clastic rocks was a major control for ore deposition and alteration, and for that reason, the Skonun formation is described in greater detail. The Skonun formation clastics unconformably overlie Haida shale. The Skonun is at least 300 m (984 ft) thick in the mine area, where it trends northerly and dips easterly 15º to 25º. The sequence is about 62 percent conglomerate, 3 1 percent coarse arkosic sandstone, and 7 percent interbedded siltstone and sandstone. Contacts between adjacent beds are generally sharp. Stratigraphic correlations between drill

Jan 1, 1985

By Norman J. Gibbs, John Sroka

INTRODUCTION At the point a company decides to begin mine development and wishes to convince lending institutions that the proposed operation will return their borrowed funds, plus interest, over the terms of the loan, communications between lender and borrower are crucial. The importance of the mine feasibility presentation should not be underplayed, especially as new projects continue to increase in size, complexity, and cost. While the content and emphasis of a report to the lender will vary according to the particular project and type of debt financing sought, there is a general base of information upon which all such studies are built. THE PROJECT'S TECHNICAL ASPECTS Here, the object is to satisfy the lender that he will not be unduly exposed to technical risks as a result of the physical scope of the project. Reserves The feasibility report submitted to financial institutions should include an adequate description of the geologic setting, mineralogy, ore types, and reserves broken down into such recognized categories as proven/probable/possible or measured/indicated/inferred. Rather than a bald statement of reserves, lenders prefer to have detailed information on: History of exploration Drilling, both percussion and core, with core recovery, drill hole spacing, analyses, and continuity of mineralization Bulk sampling, with core assay comparisons Overburden, with stripping ratios Specific methodology of reserve calculation, and Geologic reserves vs. mineable reserves. As a rule of thumb, a lender would prefer to see that reserves in the proven class alone are sufficient to support operations at the design rates until the borrowed funds are repaid. (See also Schreiber above in this Chapter.) Mining The rationale for adoption of a particular mining technique should be presented as well as descriptions and justifications for: Preproduction development Preliminary mine plan, with forecasts of grades and material movements Geotechnical test work which influenced decisions Mining recoveries and efficiencies Major equipment, with type, model, rating life, spares, replacement schedules, utilization, and productivity Manpower requirements and work schedules Design assumptions Ore stockpiling and blending Environmental requirements, and Waste disposal Processing If a new ore body is to be developed or a new process used, it is important to provide details of test work, scale up, and extrapolation factors. A basic process description with a summary of the studies which justify the intended processing route should be included with the following data:

Jan 1, 1985

By William H. Breeding

The remarks that follow are based substantially on experience covering 45 years, 80% of which has been in placer work, rather than on a review of available literature. Most commercial placers have been deposited by the action of water. The richer and more- difficult-to-mine placers are those in the headwater areas where gradients are steepest. The most lucrative placers are generally in inter- mediate areas where volumes are greater, fewer boulders are present, and gradients are from 3% to 1-1/2%. The higher volume, lower grade placers are in the lower reaches of river systems where gradients are lower. Where gold-bearing rivers have discharged into the sea, wave action can concentrate values on beaches, past and present. Most of the rich, readily accessible placers were mined by our forefathers. Current opportunities exist: (1) in remote areas where infrastructure has been absent in the past, or development has been prohibited by adverse ownership - political or commercial; (2) in deposits that could not be mined by equipment available to our forefathers; (3) in deposits unidentified by our forefathers; (4) where the-price-of-product/cost ratio is substantially better than in earlier years; or (5) a combination of those factors. When I entered the placer business in the late 1930s, and subsequently, a prevailing opinion believed that glacial deposits should be avoided as irregular in mineral content and composition, and unrewarding to explore and develop; yet an operator has been mining a fluvio-glacial deposit profitably for the past 17 years. Rich buried placer channels, of ten called paleo-channels were worked in the last century, generally by hand methods, and under conditions that would be unacceptable today. Exploration and mining equipment now available make some of these channels attractive targets. Well-known examples are in California and Australia. The formation of a commercial placer requires a source of valuable minerals. Above primary deposits, there may be eluvial deposits formed by the erosion of gangue minerals and the concentration "in situ" of valuable minerals. Down slope from these deposits are the hillside or colluvial deposits, and below them are the alluvial deposits of redeposited material. Most of the great placer fields of the world are the result of several generations of erosion and deposition. Well-known examples are in California and Colombia. Gold is a very resistant and malleable material, and gold placers may extend for 64 or 80 km (40 or 50 miles) along a river system. Platinum is less malleable, but is very resistant to disintegration. Diamonds are extremely hard, and (especially gem diamonds) may be found over great lengths of a river system. Cassiterite is less resistant to disintegration, and tin placers seldom extend over two miles without resupply from an additional source or sources of mineralizaton. Tungsten minerals are generally more friable, and within a few hundred yards of the source disintegrate to the point that they are uneconomical to recover. Rutile, ilmenite and zircon placers generally result from the weathering of massive deposits, and may be encountered over extensive areas; most are fine grained and durable. What does a geologist or mining engineer look for in placer exploration? The old adage to look for a mine near an existing mine is still valid. You need a source of valuable mineral. Then you require conditions for concentration, which means a satisfactory gradient and/or other conditions that will permit heavy minerals to settle. Nicely riffled gravel, often called a shingling of the bars, is conducive to placer formation. Coarser gravel is logically associated with coarser gold. Excessive clay and/or high stream velocities in narrow channels can carry gold far downstream and distribute it uncommercially over a large area. When material is extremely fine, in situ weathering and concentration become more important. Placers frequently occur distant from lode mines, and one must remember that in a larger watershed the exceptional floods that occur once in a hundred or a thousand years can move great quantities of material long distances. The carrying power of water is said to vary with the fifth or sixth power of its velocity. I am not ready to disagree with Waldemar Lindgren and accept that many commercial placers are substantially enriched by the chemical deposition of gold from solutions; however, I have seen crystalline gold in clayey material quite distant from known sources of primary gold that is dif-

Jan 1, 1985

By J. Menashi, D. A. Douglas, A. S. Rappas

A process has been developed for recovering the refractory metals chromium (Cr), vanadium (V), molybdenum (Mo), and tungsten (W) in mixed secondary source materials, such as contaminated grinding wastes. The wastes are calcined with sodium carbonate in air to yield water-insoluble oxides of the base metals iron (Fe), nickel (Ni), cobalt (Co), and copper (Cu) and water-soluble salts of the refractory metals. An aqueous leach separates these two classes of metal values. Cobalt, nickel, and copper can be recovered from the oxidic residue by conventional processing methods. The leach solution is purified and then treated to recover the refractory metals. The process can accommodate a wide range of feed compositions and generates a minimum of aqueous effluents.

Jan 1, 1985

By M. M. Singh

Coal mine operators are obligated to mitigate or plan for subsidence under the new regulations. This paper presents the types of subsidence control measures that may be employed to meet these requirements, which include: changes in mining methods, strata stabilization after coal extraction, construction of specially designed surface structures and foundations to accommodate ground movements, and comprehensive planning and coordination of surface land use with underground mining. The basic principles of these techniques, along with specific procedures that may be followed to implement them, are briefly discussed. Subsidence control methods that are currently being investigated are mentioned.

Jan 1, 1985

By Kenneth G. Arne

INTRODUCTION The real problem is finding the "appropriate" financing sources by matching the risk and reward expectations of the various classes of investors and lenders. Generally, lenders who advance funds temporarily are interested in assuming only limited risk and conversely expect to earn only a limited reward. The equity owners on the other hand, are expected to take most of the risk of the enterprise, but should receive a reward commensurate with that risk. In particular they will receive the benefit of the company's increase in net worth over time. MINE DEVELOPMENT CYCLE Consider the development cycle of a mining project beginning with rank wildcat exploration (Figure 1) [ ] Just as different professionals must be utilized at different stages, so must different funding sources be used at different points in the pipeline. Figure 2 shows the general sources of funding: [ ] This concept can perhaps be better understood if we compare the risk with the capital requirements. Suppose each area within a triangle is proportional to the risk taken (see Figure 3): [ ]

Jan 1, 1985

Stringent controls now placed on the quality of coal make it important to be able to predict not only the tonnage and the grade of the coal in situ, but also the recovery factory and average grade after the coal has been washed. The established techniques of linear geostatistics (ordinary kriging) can be used to estimate the total tonnage and the grade of the coal in situ, but more sophisticated techniques are required for predicting the characteristics of washed coal. Two approaches are currently being investigated at Fontainebleau. One involves a parametric model of the washability curves and disjunctive kriging. This is described in Armstrong (1980(a) and (b)). The other is similar to the service variable approach used for estimating recoverable uranium reserves. The method is described in this paper.

Jan 1, 1985

By Charles E. Barker

Jan 1, 1985

By Osamu Fukuta

The geological and geochemical characteristics of the Japanese iodine-rich brines are outlined. The iodine-rich brine in Japan is primary in its origin and its occurrence is limited in the younger marine sediments. The iodine-rich subsurface water is saturated or over- saturated by natural gas, but the water saturated by natural gas is not always rich in iodine. The iodide and bromide contents decrease with time. The bromide content decreases much more rapidly than that of iodide. It should be emphasized that the genetic environment of the Japanese type of dissolved gas and iodine deposit is not peculiar to the Japanese islands.

Jan 1, 1985

INTRODUCTION Besides the European export credit agencies covered in Ted Rides' paper in this Chapter, other agencies are also active (see Appendix) but the most notable for mining projects are The Export-Import Bank of the United States ("US Exim") and the Export Development Corporation ("EDC") of Canada. Mexico's Fomex is basically a short-term trade-finance fund administered by the Central Bank. US Exim This independent agency can provide loans, guarantees, and insurance. Like all export-credit agencies, its mandate is to support the export of goods and services from the US as a means of competing against other countries' products. If a piece of mining equipment can only he made in the US, the US Exim may very well not provide any financial assistance. (It is important not to place the order for any item for which export credit is sought because, once ordered, the situation is no longer competitive in US Exim's eyes.) Direct Credits and financial guarantees ("buyer credits") are commonly in amounts greater than 85 million and for terms longer than six years. An example here is the $48.5 million provided to PT International Nickel Indonesia (see Robert de Gavre's paper in Chapter 12). US Exim usually requires a 15% downpayment and, therefore, finances up to 857 of the goods; less if the US content is lower. The dollar funding can he US prime, London Interbank Offered Rate (LIBOR), or other sources. Exim can fund in either or both of the following ways: 1. Under a US bank Letter of Credit ("L/C") 2. Reimbursement to the buyer/borrower via a US bank account. US Exim will, without charge, issue a preliminary commitment. It will, however, need to approve the various credit agreements and prefers to tie other parallel financings into one loan agreement. US Exim's total commitments are large, up to $5R billion in aggregate under various programs. US Exim has been the world's leader in medium-to long-term minerals project financings/ co-financings but suffers from (i) aggressive foreign export-credit competition whereby other nations mix in soft-loans or aid programs ("mixed credits") to increase the percentage financed and lower the interest margin and (ii) an imbalance in its own cost of funds. A common US Exim package would be as follows: 15% Banks under US Exim guarantee, floating rate over prime or LIBOR. 35% US Exim funding, fixed rate 35% Pefco funding, fixed rate 857 Drawn down pro-rata under US bank L/C 15% Cash down payment (may have been financed within a project/corporate credit) 100% Repayment usually begins six months after planned start-up in equal semi-annual instalments, with the banks usually paid out first, Pefco next, and US Exim last. Medium-term credits ("supplier credits") are issued for US equipment exports for terms up to five years, again for 85% of the equipment costs although the exporter is expected to bear at least 10% out of that 857 for its own risk. The buyer is required to be a first-class credit such as some governments or highly credit-worthy companies. Otherwise a bank L/C would be required. (This may be wrapped into an overall project-finance package for a minerals development. The project-finance banks provide an L/C to US Exim instead of funding that portion themselves.) US Exim guarantees 100% of the political risk and either 85% or 95% of the commercial risk for

Jan 1, 1985

By Donald J. Worth

INTRODUCTION Minera Real de Angeles makes a very interesting case study in more ways than one. To begin with, it represents the first time a bulk silver deposit has been put into production in Mexico. Second, the feasibility and financing stage spanned a period when the silver price ranged from $4 to $40 per ounce. Third, there was a major devaluation of the peso and a financial crisis in Mexico at completion of the project. Fourth, the composition of the partnership (a major Canadian mining company, a major Mexican mining company and the host government's own mining entity) is worthy of note. This paper gives considerable background on the project and how it came to fruition. The political risk aspects and how the major provider of funds perceived Mexican risk at the time of decision to participate and afterwards are highlighted. LOCATION AND HISTORY The Real de Angeles deposit is located at an elevation of 2300 meters in Central Mexico in the State of Zacatecas (Figure 1). The closest village is Noria de Angeles, three kilometers to the north. The closest cities are Aguascalientes, Zacatecas and San Luis Potosi. The first-mentioned is one hour to the southwest by automobile over good roads. Exploitation of the vein outcrops probably began towards the end of the sixteenth century by the Spanish. Evidence of past mining activity is shown by numerous shafts, manways, dumps and ruins. Also, there were remnants of two rudimentary concentrating mills now obliterated by pit development and in the nearby town of Noria de Angeles the ruins of a small smelter still exist. Compania Minera Gamma, an affiliate of a major international mining company, investigated Real de Angeles from 1969 to 1971. Its evaluation program included 20 drill holes and comprehensive geological engineering and metallurgical studies. The results were not encouraging and the option on the property was dropped. In late August 1973 geologists representing Placer Mexicana which was later renamed Explomin were advised of the availability of the property and liked the prospects sufficiently to make an option payment soon due and to agree to outright purchase by year-end. A series of 34 holes were drilled by Explomin and a preliminary study indicated that the prospect had mine-making potential if the silver price was right. [ ] DESCRIPTION OF THE PROJECT Real de Angeles is best described as a large, low grade open pit silver mine because at today's prices approximately 70% of the realizable revenue is derived from that metal. One must also keep in mind that the operation produces two concentrates - a lead concentrate with high silver content and

Jan 1, 1985

By Robert Gillham, Victoria Yablonsky, Grover R. Castle

INTRODUCTION The commercial paper market, unique to the United States, is a direct exchange of funds between high-grade borrowers and large lenders; because it eliminates both the bank's role as middleman and also some significant transaction costs, commercial paper is the lowest cost short term instrument in the world. For this reason, virtually all borrowers would like to enter the market, but only issuers with the highest rating from Moody's and Standard & Poor can attract purchasers at the best rates. COMMERCIAL PAPER The commercial paper market, in existence for over 100 years, has traditionally been used for short-term financings, with most paper maturing within 30-45 days. Under the U. S. Securities Act of 1933, (section 3(a)3) industrial paper can avoid registration only if it matures within 270 days and is used for current transactions. It was first used to finance the short-term seasonal working capital needs of manufacturing companies. Since World War II, commercial paper use has grown steadily, serving in the 1950's as the market in which finance companies financed the explosion in consumer credit purchases of heavy consumer durables. LETTER OF CREDIT BACKING As far as is known, the use of letters of credit to support energy-related commercial paper began about 13 years ago with an arrangement to finance the nuclear fuel for Con Edison's Indian Point 3 Plant. Goldman, Sachs was the architect of this financing and Chemical Bank provided the letter of credit support. After an early burst of interest, this type of financing wobbled severely in the difficult credit markets of the mid-seventies before regaining serious momentum in 1976 and 1977. A mining project would not normally qualify as a borrower in the commercial paper market because of its credit standing and because its large capital needs require long term financing. However, lately, commercial paper has begun to take the place of a bank term loan in limited recourse project financings. L/C backed commercial paper took this new and startling turn in 1982 when it was used as part of the $700 million financing for the development of the Newlands-Collinsville coal mines of Mount Isa Mines Ltd. in Australia. This was the first use of L/C backed commercial paper in a long-term limited recourse project financing. First Boston acted as financial advisor and, again, Chemical Bank provided sole letter of credit support of $155 million. The $785 million BHP financing for the acquisition of the Queensland (Australia) coal assets of Utah International from General Electric Company followed the next year; there we acted with two other Front Banks to provide $270 million of L/C support. These two important transactions indicate that not only has commercial paper become an integral part of a long-term financing package, but also that it is no longer the exclusive domain of the best known U. S. companies. Lesser-rated companies and a multitude of foreign borrowers have gained access to this "exclusive club." How has this become possible? OPERATION OF AN L/C An instrument of the commercial banks, the "direct pay" letter of credit, has enabled lesser-rated companies to issue commercial paper in their own names. The letter of credit allows the issuer to substitute the credit rating of the supporting bank for its own. The L/C in effect allows a lesser-rated company to rent the bank's credit rating. This upgrading is possible because the bank is unconditionally obliged to pay the note-holders at maturity and then turn to the Issuer for reimbursement. The Issuer commonly "rolls over" a new short-term issue and reimburses the supporting bank from the sale of the new issue until cash flows from the project allow the borrower to reduce the level of paper outstanding. The commitment for an L/C facility, up to 12 years in the case of the Broken Hill transaction, governs the life of the commercial paper tranche of the financing. The term of the L/C commitment thus has the power to extend the ordinary 30-45

Jan 1, 1985

By James M. Barker

Jan 1, 1985

By Christian F. Baiz

INTRODUCTION Industrial minerals can have similar financing requirements to those needs of metaliferrous and coal mining projects. One of the outstanding differences is the understanding of the many different markets that these industrial minerals represent. There are in excess of 30 principal industrial minerals ranging in terms of annual production from the largest quantity such as sand and gravel, to possibly the smallest quantity of production of a legitimate industrial mineral which may be defined as industrial and rough gem diamond. (See Tables 1 and 2) Project finance techniques, analytical methods, and information requirements are covered elsewhere in this Chapter and Chapter 10. Some comments on equity finance aspects follow. EQUITY AMOUNT The amount of equity in a financing transaction provides a cushion to the lender in case the project runs into trouble. Generally speaking, the greater the amount of risk in a project, the more equity a lender will require. The amount of cash equity in a project financing transaction is between 25 and 40 percent. The amount of leverage (debt/equity) is negotiable based on such factors as the strength and extent of the sponsor's undertakings, of the project's economics, and the term of a strong sales contract. Naturally, a borrower seeks to obtain d loan with as little equity required as can be negotiated. Zero percent equity is usually associated with a take-or-pay contract (a hell-or-high- water unconditional commitment under which the purchaser must pay for the commodity as though it were shipped regardless of whether it is actually mined or shipped) with a financially strong corporate entity i.e., the parent company or an end user. As a take-or-pay contract is tantamount to a guarantee of payment, the banker views the credit basis of the loan as being other than the borrower's mining operation and therefore will analyze the creditworthiness of the institution purchasing the commodity on the basis of its corporate balance sheet. Do not confuse a take-or-pay contract with a take-if- tendered or take-and-pay contract. Another means in the United States of obtaining zero percent equity is the carved out production payment financing, typical of coal mine financing. This involves the sale, or conveyance, by the owner of the mineral property of a production payment to a nominally capitalized company. The nominally capitalized company is formed solely to buy the production payment and usually borrows 100 percent of the purchase price from a lender. Equity amounts of 10 to 20 percent generally are found in transactions which employ techniques such as an advance sale or a subordinated lease/loan. These agreements are viewed as quasi equity by most banks for several reasons. First, the proceeds represent a cash infusion early in the project's life - usually prior to the bank lending any funds. Thus, the repayment schedule is "behind" that of the bank debt. In the case of an advance sale, repayment is in the form of a long-term supply contract with favorable terms, usually priced close to the mining operation's costs. There is also usually a requirement that all costs of the project be paid for by the loan or equity, often making the sponsors financially responsible for any cost overruns. Cost overruns are a major risk in any project, large or small, and are often due to unforeseen factors such as wildcat strikes, a piece of faulty equipment, or any event which delays completion, e.g., remote location, weather, etc.. . The question of how overruns are covered can be negotiated. For example, in addition to the original debt/equity ratio of the project, there can also be a cost overrun ratio that will

Jan 1, 1985

By Phillip O. Tyree, Joseph W. Mussey

Bio-epigenetic sulphur deposits occur in Pecos, Reeves and Culberson Counties of far West Texas. Sulfate reducing bacteria, utilizing hydrocarbons as energy, transformed gypsum into replacement limestone and hydrogen sulfide. Hydrogen sulfide, retained in the pores of the replacement limestone, was subsequently oxidized by highly oxygenated groundwaters, and native sulphur precipitated. West Texas sulphur was first recognized at surface exposures by William P. Blake, a geologist attached to the Captain Pope Military/ Scientific Expedition of 1854. Attempts were made in the early 1900's to mine these sulphur vent exposures by a retort method, but the ventures met with little success. In 1967, Duval discovered a large sulphur deposit near some of the old sulphur works in Culberson County. Duval also expanded reserves in a small sulphur deposit in Pecos County. The Frasch process, developed for producing sulphur from Gulf Coast salt domes, proved successful in West Texas type sulphur deposits also. However, modifications of the process were necessary to provide economical and efficient sulphur recovery from the varied ore occurrences. West Texas conditions and logistics require the ultimate in productivity to be competitive in the domestic and foreign sulphur markets. Several companies, in addition to Duval, are producing or have produced sulphur in West Texas. As of June 1, 1984, a total of 29.87 million mt (29.4 million long tons) of sulphur had been produced west of the Pecos River. Duval Corporation has produced more than 88 percent of that total.

Jan 1, 1985

By Gary P. Thomason

INTRODUCTION One may have heard about how various projects were financed or certain companies were successful in obtaining a bank loan, but there are many more projects and companies who fail to get the money they need. At least a portion of these failures, and a large percentage of the frustrations connected with even the successful financings, are a result of not understanding the process of obtaining money. Recent years have seen a proliferation of debt financing sources available to finance minerals operations (see the next Chapter 11), but these represent only a minor portion of the minerals financing market. The fundamental source of borrowed money to many minerals related companies remains the banks. Therefore, understanding the "Loan Approval Process" can easily mean the difference between getting the money or not. LOAN APPROVAL PROCESS The initial stages of the loan approval process should begin long before the bankers, and the organizations they represent, enter upon the scene. The loan approval can be broken down into six stages: 1) Generation 2) Preparation 3) Presentation 4) Evaluation 5) Approval 6) Documentation As you can see in Figure 1, the bank is only directly involved in the second half of the process. The perils in obtaining financing for the smaller minerals venture are primarily in the first three stages, not the last three. The minerals venture making application for a loan can, in almost every case, improve its chances of success by carefully planning and preparing itself and the information that will be required of it in the loan approval process. Generation This first step in the process is deciding on the need for a loan. (Earlier papers in this Book and in Chapter 11 provide some guidance.) It is surprising how many ventures confuse the need for money with the need for a loan. Suffice to say that the equity investor risks both the timing of the yield on his capital and, ultimately, his capital. The lender, on the other hand, advances temporary funds which he expects to be repaid on a specific schedule with a fixed

Jan 1, 1985

By Ernest L. Bohnet

Jan 1, 1985