Fundamentals Always Prevail for Developing Natural Resources Assets

The global natural resources sector and industry is a very complex, highly integrated and sophisticated industry. Whether it is hydrocarbons, mining & metals, rare earths, renewable sources of energy (solar, wind, biomass etc.), water, or other sources, commercial market fundamentals, business fundamentals, and business-revenue models prevail. Major natural resources projects and assets, largely infrastructure based, are highly capital intensive. In many cases, these projects and/or assets have an economic and operating life of multiple decades and must undergo various critical phases as follows:

Project Development (from 12 up to 36 months)

·         Conceptual Engineering

·         Project Feasibility

·         Permits & Clearances

·         Transactional Contracts

·         Financing & Financial Closure

Project Execution (from 12 up to 36 months)

·         Engineering-Procurement-Construction

·         Start-up & Commissioning

·         Commercial Operations

Project Operations (from 10 up to 30 years)

·         Operations & Asset Management

·         Maintenance/Retrofits/Revamps

·         Renovation & Modernization

Based on above, major natural resources projects and/or assets also have an intricate interrelationship between Techno-Economic-Financial viability as well as transactional contracts coupled with Assets Under Management (AUM), operations and maintenance which form the critical basis of an asset’s long-term sustainability.

Major natural resources projects and/or assets also cover a very broad “end-to-end asset value chain” starting with the resource to supplying wholesale and retail end-consumers which includes, but not limited to, Exploration-Production-Processing-Transmission-Distribution.

All such projects and/or assets follow some very basic and key commercial market fundamentals which must be adhered to in order to assure and enhance their inherent viability and sustainability. Typically, project developers, asset owners, investors and lenders undertake a very detailed commercial market assessment during the early stages of the project development phase to ensure “bankability” thereby providing high comfort levels to both equity investors as well as lenders. Primary emphasis is on; higher current income, higher EBITDA and net profit margins, long-term capital appreciation, pre-defined returns on investment as well as a firm exit plan.

Along these lines, conventional structured project finance coupled transactional framework based on “sacro-sanct” and “back-to-back” arrangements are critical to ensuring “bankability” via non-recourse, limited recourse, and possibly total recourse financing. End-of-the-day, the saying “if a project cannot be financed; forget it” still holds true.

Broadly, the major elements of a typical commercial market assessment cover; Supply Scenario, Demand Scenario; Unmet Gap; Influencing Factors; Alternative Scenarios; Infrastructure Aspects, Cost of Production and Techno-Economic-Financial Viability.

The required commercial market assessment must be based on quantitative analysis and sound modeling which is undertaken with various key assumptions, influencing factors and indices as well as graphical representation resulting in determination of combinations and permutations of optimistic, most likely, and worst case scenarios. The results of a high quality commercial market assessment serve as a basis and critical input into a major natural resources project’s Techno-Economic-Financial analysis to satisfactorily demonstrate various investment objectives, project viability and likeliness of the project to succeed.

In summary, any successful major natural resources project and/or asset is critically based on a high quality market assessment which is inherently based on quantitative analysis and modeling of key market fundamentals which serve as a critical input to determining a mining and metals project’s viability, sustainability and “bankability”.