Government lenders pony up for projects

When listed company Kalium Lakes fell into receivership last August, it triggered speculation the Northern Australia Infrastructure Facility might wind back its support for resources projects.

NAIF had loaned Kalium Lakes $83 million to help fund development of its potash project, making it one of the company’s largest creditors.

It had also agreed to make big loans to two other companies in the same sector: $490 million to BCI Minerals for its Mardie project, and $140 million to Australian Potash for its Lake Wells project.

A dearth of new investment decisions by NAIF during 2023 suggested the lender had, indeed, gone into its shell.

That was a big change from the preceding years, when the government lender had been very active.

NAIF has agreed to lend close to $4 billion to 31 projects since it was established by the federal government in 2016, with a mandate to boost development across the north of Australia.

Nearly half the total is in Western Australia, where NAIF had become a major source of finance; especially for mining projects in commodities such as lithium, mineral sands and rare earths (see table).

It has not been alone. Export Finance Australia and the Clean Energy Finance Corporation have also been big lenders to resources projects.

The largest beneficiary has been Iluka Resources, which secured a $1 billion loan from the federal government’s Critical Minerals Facility, administered by EFA, for its Eneabba rare earths refinery.

Eight months on from the collapse of Kalium Lakes, and after two failed rescue attempts by the receivers from McGrathNicol, NAIF is still waiting to recover any of its taxpayer money from the failed company.

The entire potash sector is struggling, with most other companies in the sector scrapping their projects.

That includes Australian Potash, which consequently did not proceed with its NAIF loan.

High risk

Led by chief executive Craig Doyle, NAIF told Business News it would continue to pursue higher-risk projects.

“Due to the unique challenges of northern Australia in accessing capital, NAIF as a government facility has a higher risk appetite than commercial financiers would usually accept,” a spokesperson said.

NAIF maintains its loan to Kalium Lakes still delivered benefits.

“Kalium Lakes previously reported to NAIF that more than 380 jobs have been created during the construction and operational phase of the project to date,” the spokesperson said.

Of course, none of those jobs exist today. NAIF also said it had learned from the experience.

“NAIF’s experience from working with Kalium Lakes and other related projects will allow for significant learnings to be applied to the front-end due diligence process, and in particular around technology and commissioning risk,” the spokesperson said.

NAIF’s pre-investment pipeline indicates there are numerous projects on its radar.

The government agency told Business News it was currently evaluating $2.8 billion in loans for 32 projects across northern Australia.

However, there aren’t many projects getting over the line. One of the few to progress has been BCI Minerals’ Mardie project.

NAIF announced its investment decision to advance a big loan to BCI in 2020.

In August last year, just three weeks after the collapse of Kalium Lakes, NAIF and the EFA confirmed they would lend a total of $650 million for the Mardie project.

BCI Minerals’ Mardie project, under construction, is set to be the largest recipient of NAIF funding in WA.

That credit approval came after BCI pivoted its project execution plan to focus on lower-risk salt production, with potash to follow later.

BCI’s success in de-risking the project encouraged Export Development Canada and two commercial lenders, Westpac and Industrial and Commercial Bank of China, to join NAIF and EFA for a mammoth $981 million loan to the project.

The loan terms are not the same for all lenders. NAIF’s loan has a maturity of 15 years, which is about double that of the private lenders.

BCI announced further progress in December, when the five lenders signed a syndicated facility agreement.

However, it has still not reached financial close or made the first drawdown. They are dependent on multiple conditions, including equity funding, approvals, updated expert reports and executing the remaining project contracts.

Slow progress

BCI is not alone in facing a long lead time.

Across WA, NAIF has made 15 investment decisions worth $1.84 billion.

Of this total, about $1.6 billion of loans have reached contractual close (as of February 28).

Of those, $879 million have reached financial close, while $671 million have been drawn down.

NAIF said a focus last year was helping its clients progress their projects.

It described a 75 per cent increase in drawdown as a highlight for the year.

It also claims that, for every dollar contributed by NAIF, the economic benefit and return is just under $8.

The value of NAIF’s lending has been questioned by another government agency.

The Productivity Commission says the provision of concessional loans is an example of government subsidies being increasingly opaque.

One thing NAIF did not do in 2023 was make investment decisions on any new resources projects.

That finally changed in January this year, when the NAIF board conditionally agreed to lend $200 million to Perth company Arafura Rare Earths for its Nolans project in the Northern Territory.

NAIF has been joined by the EFA, which has agreed to lend up to $650 million to the same project.

Arafura is aiming to lock in total debt funding of $1.2 billion with support from commercial lenders and export credit agencies in Canada, South Korea and Germany.

It will be hoping to emulate the success of Liontown Resources, which last month locked in a $550 million debt package for its Kathleen Valley lithium mine.

The Liontown loan will come from two government agencies – EFA and the Clean Energy Finance Corporation – and commercial lenders Commonwealth Bank, National Australia Bank and Société Générale.

Liontown had a few advantages: it will produce a commodity that is still volatile but more mature, its project is half complete, and it completed a major equity raising prior to securing the debt.

Funding strategy

Corporate adviser Patrick Leung, who spent three years working for NAIF, said many aspiring project developers needed to take a close look at their strategy if they wanted to succeed.

“They need to spend a bit more time thinking through their funding strategy,” he said.

Mr Leung has seen a lot of resources companies with a market value of $50 million or $100 million trying to develop projects worth more than $1 billion.

“It’s hard to do that unless you bring in a strategic partner,” Mr Leung told Business News.

He believes Sheffield Resources (which he advised, after leaving NAIF) provides a good example.

After trying for years to get its Thunderbird mineral sands project off the ground, Sheffield brought in China’s Yansteel as a project partner.

Operating together as Kimberley Mineral Sands, the joint venture celebrated its first shipment early this year.

“Sheffield is a great case study on what a company should do,” Mr Leung said.

He said many companies were also failing to maximise the value of their offtake agreements.

Kimberley Mineral Sands' Thunderbird project was helped by a NAIF loan.

Mr Leung suggested mining companies should negotiate prepayments or encourage the offtake partner to invest at the project level.

Both would help companies secure debt funding for their projects.

Mr Leung believes government lenders such as NAIF, EFA and CEFC have played a big role in accelerating the development of sectors such as lithium, mineral sands and rare earths.

He recalled that Pilbara Minerals was able to develop its first lithium mine only after an issue of Nordic bonds, and that was only possible because CEFC effectively underwrote the deal.

While the lithium market has started to mature since then, sectors such as rare earths remain challenging for other lenders.

“If commercial banks could get there, they would have done so,” Mr Leung said.

“The last thing I would like to see is NAIF be more risk averse, because that would add no value to what the commercial banks are doing.”