Member Info for Digittt

I mentioned this AM, but I genuinely believe the contingency numbers we have been provided will go up further as the lenders review the new plan. It's not a train-smash, but it does need to be factored in. This is based on my own experience so no guarantees, but it's what I would expect from the messages we have received:

- I don't think their number yet includes provision for interest rate movements, final margin pricing from lenders, some FX cover and for a 6 month to 1 year delay risk (extra interest, ongoing opex).
- The reference to a strategic partner is because they want someone vested who will push the project to completion and be beaten up by the lenders if things go wrong.
- The passing of risks back onto contractors through renegotiation is because we won't have a typical completion guarantee. If there is any significant renegotiation ongoing still on this there is risk of further increases, but the tunnel would have been one of the big ones I guess..
- The Q1 closing is a heroic assumption with the timing that the lenders will be getting this data. I so want to be wrong on this.
- Myo and others are absolutely right - this de-risks the project, but at a cost. It's still a great project.

I wasn't able to join the call, was there any info given on the ECA's / govt guarantee?...I didn't see anything in the PPT to give a sense of why there was scant reference to them?

Some quick thoughts...
- Which burks made the company focus on Monte Carlo.
- Lenders will demand P90 possibly even P95 run or signed off by their own tech advisor. P90 would add a chunk more typically but all depends on the distribution curves they used
- their overrun I highly suspect reflects a capex overrun and doesn't include contingency for interest rate increases and a production delay. I would assume $150 (plucked out of the air but similar to number I've seen on a similar sized deal) + $300 (guess based on 6 months delay could be worse...). That's ignoring FX risks and if real pricing from. Lenders pushes up interest cost currently assumed.. Ignoring this for the moment.
- no mention of ECAs is suspect. Now comes the pressuring and politicking on govt guarantee.
- personally expect Q1 next year unlikely (unless they are in documentation now) but very much hope to be wrong.

Still going to be built, just hope everyone up North isnt too glum today.

It was the longest word (at one stage, not sure if still is) in the english language. Gives me another reason to dislike JRM, not that I needed it.

Many thanks Verde - and there it is clear as day in the presentation so apologies to SL as well and take back a fair amount of what I guessed.

I'm (clearly) surprised by the bond approach but then again into the 3rd year on one of my deals so maybe it would have all been done ages ago with them! My experience on bonds is the refinancing penalties in the early years can be punitive, and every man and his dog will want this to refinanced the minute it's looking like a regular corporate. Unless some clever structuring means the bond covenants phase out on performance...

Just to go back to my prior response...I really don't know where the bond idea came from...the guarantee does not mean it needs to be a bond at all (don't think it precludes it, but would really be surprised if it was).

All facilities including the guaranteed facilities will be drawn as cash is needed unless there is an ECA in there specifically financing certain equipment in which case their facility likely will be drawn as the ECA pays the vendor directly...The company doesn't even see the cash from these ECA's unless they are being reimbursed for payments for equipment that was purchased prior to financial close.

Hi SL, interesting view - project bonds are a possibility, but I really don't expect them.

My 2 cents of how I think ST2 would work is it would be based on senior term loans, with possibly of some junior / mezz thrown in (I won't suggest anything about equity!).

The IPA guarantee, I would assume works the same as UKEF / BPI and other ECA type guarantees in that they will guarantee X% of the debt (typically isn't exactly 100% to keep the banks honest so they're at least a little exposed but can be close to it).

The MLA's would get approvals for their tickets (likely $200m to $300m each in my mind, won't be surprised if the odd one is lower than $200m) and then there will be a syndication process to fill the remainder of the requirements. There will be an element of non-guaranteed debt, and they'll play around with how much of the guaranteed vs non-guaranteed debt the lenders will each get to optimise the syndication result. There may be lenders who are happy to take pure commercial risk on the deal as well.

The IPA guarantee will only come into effect at financial close when all conditions precedent are met and the full amount of funding is raised. There is zero chance of the guarantee coming into effect without a fully funded plan (including funding for significant contingencies). The MLA's will also not underwrite the full debt amount.

The above is all what I typically see...ie on similar transactions. Could obviously be wrong, but would be somewhat surprised to be very wrong on it.

Cheers

Digittt

SL - you've referred to bonds a number of times before. Been meaning to ask - Is there something steering you to say that they're going to be (project) bonds? ie something in the comms that's come out suggesting that? Just trying to understand if I missed something.

FWIW if I was CF I would have been communicating exactly as he has been. His public comments are 100% there to put pressure on lenders, ECA's, other agencies both in terms of timeline for ST2 and debt amounts. Oops...did I say 100%, I meant 99.9%

And of course...there are different layers of debt. It's messy and painful, but you can of course bring in mezzanine finance below senior lenders to try and avoid going back to the shareholders - all within reason.

Andy, thanks...so if one of us was an expert financier who has worked and currently is working on project finance transactions of similar size and similar complexity - would you think they would have valuable insight to offer? Or would you find another reason to attack and dismiss?

We have all put our money where our mouth is to own these shares. We have different views on how ST2 will play out, but we all believe there is value in the share. Haven't sold an SXX share I have bought, and am unlikely to until production or the takeover offer comes out of the blue.

Quoting Myo from earlier who himself quoted the AGM reasonably:
"Let's just get this plan b/c/d stuff in context........at the AGM, in answer to a question CF made it clear that the sole focus was on attaining stg 2 by 100% debt.......and that confidence was high in achieving such but there was a lot of work still to be done to satisy all parties, (sales agreements, procurement, the fluid port situation (that has since been solved) etc etc).......but as an add on he made it clear the mine is going to be built regardless......and if that means plan b..c..d etc then that is what we'll do....."

Doesn't sound like CF's is saying he is absolutely certain of 100% debt. What he is certain of is this project will be financed, which we are all certain of.

Actually, that may be being a bit harsh...to Eeyore. Jokes aside, you can get good deal teams, but ultimately they are civil servants who feed into a big bureaucratic machines that only really have one speed.

Thanks Stokey, I will ponder. Good that it sounds like they went with an initial package and proposition to the lenders back in 2016, that will all have changed, but that's what you want to hear. That reference to DD still stands out of place relative to everything else in my mind.

Andy - I've been through all of this quite a few times and have a good feel for the art of the possible...particularly when you involve export credit agencies and other government institutions and larger lending groups. I've worked with fantastic entrepreneurs like CF who can inspire anyone to work at faster than they ever thought was possible...that magic though doesn't work on ECA's / govt institutions etc. Think of them as Eeyore...in every single conversation and work stream.

Thought about this for the last few days, and there's one bit of data that confuses me on ST2. That's the fact that they indicated the lenders were starting their DD early in Q2. Most things indicate to me that ST2 is achievable somewhere in the next 6 months, but that reference to the DD in early Q2 worries me. DD in my experience is easily 3 to 6 months and you will need typically 6 to 9 months from an agreed term sheet just for documentation to be drafted (I've also seen both of those being much longer). You're unlikely to have an agreed term sheet until the DD is complete.

With those lead times, it all eats away in my mind the likelihood of a ST2 close this year. There are some levers that can be pulled to shorten some time periods and overlap some of the work, but experience says it's difficult to meaningfully accelerate the above.

With the above consideration, what are the implications (apart from on SP) of a Q1 / Q2 19 close on ST2? This board is full of people who have a good sense of the costs / existing funding. Would be good to read some thoughts...do we have enough funding to get to say Q2-19?

My expectation is that every lender we can get is going to be needed. Not sure we will have much of an opportunity to deselect or leave a lender if they are too slow. Well not without it being made up with equity. EDC I've seen forward leaning for the good and for the bad...in this and other sectors. I used the term commercial thinking but they do tend to be more conservative than what a typical PF lender is on their asks. I suspect them being labelled MLA is more to do with them being around the table early for the structuring than to do with them doing any real arranging other than for their piece.

Likely down to Canadian content in the capex program. If we know a Canadian equipment manufacturer is supplying, say greater than $200m of equipment into the project that is why they will be up there. EDC are more flexible than other export credit agencies in terms of how you derive the debt amount they will lend to, but above is what I would suggest is the driver. EDC will lend on more commercial terms than say a UKEF or US-exim (read as more expensive), but they will support their manufacturers and you can see it the same as debt guaranteed by UK govt.

I did mention the disconnect in a comment on the FT as I was saw it as the same. There was some feedback here earlier today that suggested some of the TorPs may have been focussing on it as a speciality product, so maybe my bad.

I would agree...my comment on the FT was effectively against those sprouting that this was the best article they've seen in forever. It's a bear article, take it for what it was. As to his research, I would say he clearly did some research, but skipped some, or intentionally chose to omit it in chasing his honey.

Mine hold SXX in their junior ISA's and I do all the trading. They clearly have no idea it exists at this point but one-day maybe they'll thank me. If it all goes pop...I'll just pretend it never existed!

Not sure if anyone mentioned this already, but I wonder if the timing of the article was intentional to try disrupt any live credit committee or guarantee approval processes that are going on for ST2 right now. No idea, but I've seen similar behaviour before.

Lenders will have market and technical reports that ultimately have to be somewhat supportive of the company views (as otherwise there will never be a deal), but there's likely items in the margins that could be influenced with committee views being tarnished.

I think we can solve the Kent and style requirements by going by boat.