Sources at PT Aneka Tambank (Antam), the Indonesian state mining company, confirmed yesterday that they were "very close" to appointing a lead manager for an inaugural international bond deal. The announcement should be made in the next day or so but it is thought that UBS Warburg, CSFB, Barclays Capital and Citigroup are in the running for the position.
The deal is likely to be for about $150 million and would pay an interest rate of around 10%, at current market spreads. Launch of the deal is slated for the third quarter, although officials stress that nothing is set in stone.
Proceeds of the issue will be used for the construction of a new ferronickel smelter in South Sulawesi province, the third such smelter the company is looking to build. Antam originally had funding for this project from the German export credit agency (ECA), Hermes. But ECA financing carries with it the obligation to use contractors from that country. As a result of the euro's rapid appreciation against the US dollar, German contractors have become too expensive for the project to make sense, despite the cheap finance available.
Antam could have hedged its future euro exposure at a cost of around $10 million, but decided against it. Instead it deciding to rework the project making it cheaper but using more expensive market based dollar financing.
The approvals for the ECA loans were granted by shareholders at Antam's AGM last summer, but were declared void on March 31 this year. As a result the original project plan has been reworked. Originally the project would have cost some $400 million, of which $40 million would have been the financing costs and around $100 million, the cost of a new captive power plant. Antam has decided to outsource the power needs of the project to a third party reducing the overall project cost to a more manageable $240 million to $250 million.
The cost of this can be met by an existing approved loan from Bank Mandiri of $150 million, plus cash in the bank of around $70 million and new equity. The loan is priced at around 9% and if the bond can be done for a similar or slightly more expensive price but with a longer tenor, then Antam looks keen to progress with its issuance.
International bond investors have shown some appetite for Indonesian mining paper. Last year Freeport sold a $500 million, 10-year issue with an all in cost of around 10%. Although backed by the US parent, it was essentially a play on the company's extensive mining interests in Indonesia.
Antam's main products are nickel and gold, both of which have enjoyed strong prices of late. In the global nickel market, for the first time in living memory, there is currently demand for 30,000 more tonnes of nickel than the annual global supply of 1.1 million tonnes, which is keeping prices buoyant. This is likely to continue to the end of the current five-year nickel price cycle in 2005-2006.
In the gold market, many are predicting that current prices of between $330 and $350 an ounce are likely to remain for the next few years. Antam has a cash cost of production for its gold of $166 an ounce or a $223 an ounce production cost once depreciation is taken into account. If market prices hold up, such economics could provide credit wary bond investors with the necessary comfort to invest, despite the obvious risks involved.