Julietta Project Financing
Ian Coles, Mayer Brown LLP (November 1, 2000)
(Published in Legal Week)
Mayer, Brown & Platt was first retained by the bank group in connection with the financing of the Julietta gold mining project in 1996. Four years, two owners, several bank syndicates, multiple financing structures and many frequent flyer miles to Moscow later, the financing finally closed in September, 2000. This is a story of man against the elements, the titanic struggle to penetrate the inner workings of the Russian governmental bureaucracy and good old fashioned hard work.
The Julietta gold mining project is situated in one of the most inhospitable areas of the world. Located in the Magadan Oblast of Russia (in the far east of that country, almost as far as the Kamchatka Peninsula) the project is closer to Alaska than Moscow. The nearest evidence of civilisation is the city of Magadan, located many kilometres to the south of the project. The project is capable of access by road for only part of the year. During the extreme winter, climatic conditions mean that the project must be accessed by helicopter although an ice road has been constructed to alleviate this problem. The attraction of the area to that group of explorers known as "gold bugs" is that the geology in the area is such as to encourage the formation of gold and other precious metal deposits. One gold mine (the Kubaka project) is already up and running in the region.
When Mayer, Brown & Platt was originally retained the project was owned by Arian Resources Corporation, a company based in Canada and it was with that entity that the original bank group (led by Standard Bank London Limited - the London based subsidiary of the large South African bank which retained Mayer, Brown & Platt) set off on their voyage of discovery in 1996. What were the problems that we faced? First and foremost, the project is located in Russia. Beyond the hostile physical environment the legal system in that country is in very early stages of development and definitive analysis of rights and remedies frequently defies standards familiar to European and north American lawyers. There are also a plethora of constituencies which need to be satisfied. Both federal government based in Moscow and local government based in Magadan need to be kept informed and a variety of consents need to be issued by then. As an emerging economy, the export of foreign exchange is severely limited. Gold is sold in the international markets for dollars and both foreign investors and foreign lenders require that the project has the ability to remit dollars outside Russia both to provide a return on the equity investment and in order to repay the loans. Accordingly, extensive negotiations with the Russian Central Bank, the regulatory authority with jurisdiction over the remission of foreign exchange from Russia, were required. To compound the problem, gold and other precious metals are jealously guarded by governments and extensive consents are required in order to sanction their extraction, refining and sale.
In common with all such projects which are now seeking financing in the private arena the assets constituting the Julietta project were originally owned by the Russian governmental authorities. The assets were privatised several years ago and so our initial legal task was to ensure that the privatisation had effectively and legally occurred. We were aware of several horror stories which had happened in the past (and which continue to occur) where privatisation of private sector projects had not taken place thoroughly in accordance with Russian law and procedure with the result that title to the relevant assets was under attack by a variety of vested interests in Russia and elsewhere (indeed, at the time we commenced work on the Julietta project one of the largest potential gold deposits in the world - the Sukhoi Log deposit located in Siberia - was experiencing a similar problem). The problem is compounded by virtue of the fact that some of the laws relating to privatisation are not easily available. Neither are records relating to the method in which the privatisation was accomplished. However, through tenacious digging by our Russian legal advisers we were able to obtain comfort in connection with this process.
The original bank syndicate, led by Standard Bank, laboured through the legal and regulatory issues involved for some considerable period of time until we came to the position where we felt able to close the transaction in the summer of 1998. Finding lenders willing to participate in a facility of this nature had obviously been a challenge although a group was ultimately put together, political risk insurance obtained and other relevant issues taken care of. The merry band of bankers, sponsors and lawyers therefore assembled in New York in late July with a view to closing the transaction and indulging in traditional post-closing activities. Unfortunately, after our having landed at JFK, Russia defaulted on its sovereign debt and there followed an immediate collapse in the availability of the capital markets and other credit sources to Russian borrowers. As a result, the financing did not close. All that work for nothing - or maybe not.
The ensuing period saw - to coin a phrase - a true Siberian winter in the availability of credit for anything with a Russian flavour, never mind a yet to be constructed gold mining project in Magadan. The existing owner sold its interest in the project to Bema Gold Corporation, a mining company based in Vancouver on the west coast of Canada. Bema had experience with the development of mining projects in equally inhospitable environments such as the Andes. In late 1999, and with the (relative) decline in concern about projects in Russia we all returned to the fray. Standard Bank reorganised the lending syndicate bringing in the large Munich based bank Bayerische Hypo-und Vereinsbank AG, as a co-arranger of the financing.
In its original incarnation, the financing had been organised as one which would be supplied solely by commercial banks. In the new environment in Russia following the 1998 crisis, it was felt prudent to involve a multi-lateral lender and the International Finance Corporation (IFC) agreed to participate in the financing. However, unlike other projects in the emerging markets involving the multi-laterals where the multi-lateral in question fronts the entire loan to be effectively funded in part by commercial banks, the structure utilised in the Julietta project financing involved two separate (but parallel) loan agreements with the commercial lending group and the IFC. We are told by those in the know that this was a first for projects in Russia.
The principal risk to be covered off in connection with a transaction such as the Julietta project is political risk, given the level of concern about political stability in Russia and the perceived ability of Russian governmental departments to interfere with the smooth running of any project located in the country. The Multilateral Insurance Guarantee Agency (MIGA - an arm of the World Bank) was approached to provide political risk insurance for the commercial banks and this was ultimately secured thereby taking care of an area of substantial concern for the lenders. With this in place, the financing and legal teams swung into full action (yet again) in late 1999/early 2000. Faced with very real timing deadlines due to the fact that construction of the project was due to take place during the summer months prior to the onset of the winter icepack we worked throughout the year to attempt to accomplish a closing to address that practicality. The number of law firms involved swelled considerably (in addition to Mayer, Brown, there were two sets of legal advisers in Russia (Padva, Rozenberg & Partners and Macleod Dixon), legal advisers to the IFC (White & Case), two sets of law firms in Barbados and no less than five sets of legal advisers in Canada (principally Fasken Martineau and Blake, Cassels)). This assured the traditional amount of paperwork. When coupled with the frequent need to board the plane to Moscow to seek yet another necessary consent the closing process became somewhat tortuous and it was with a great sigh of relief that the initial funds were ultimately advanced towards the end of September.
What do we learn from this experience? If in 1998 anyone had suggested that a financing like this could have been accomplished in Russia that would have been regarded as somewhat fanciful. With the right degree of structuring, covering of risk and hard work, we got there. I have to say that there was also a large element of trust between all involved, not something ever present in a financing in 2000 but necessary in a transaction such as this with so many differing parties with differing vested interests. The problem is how do we better this one? Onwards to Siberia I think.
And the highlight? Definitely staying for a couple of nights in the rooms in Moscow occupied by Lenin during the aftermath of the 1917 revolution. Although the bear steak in a berry coulis at the National Hotel in Moscow runs it a close second.