AUZ Chart, page-4187

Alway was running a pretty weak argument, but this is no a lot better HAC... I know these things intimately, and there is very little correct there.

Considering:

At levels of gearing acceptable for senior debt, senior lenders would not be charging much over ~3% margin plus perhaps 2% in upfront fees amortising over a (say) 5 year debt period. On top of the 5 year swap rate (about 2.5%), the max actual cost of debt for the first 5 years would be about 6% p.a..

No senior lender could originate a new project finance deal that requires so much capital that a ~7% margin is necessary - that would be well outside their underwriting standards. Margins of ~7% are more applicable to junior and mezz debt, which this will not be. As an aside, senior lenders will be making a return above 10% p.a.

A higher IRR is not critical to attract finance. What is critical is the stability of earnings - cash flow certainty. Project finance is very specialise din this way, and there are a number of features to project finance transactions which provide lenders with sufficient comfort in low IRR transactions, including:
- Offtake on take or pay basis to a strong counterparty. If there is underlying commodity volatility (tick), then a pricing mechanism (e.g. price floor) can assist greatly
- Cash waterfalls, sweep, lock ups, distribution stoppers etc. All of which are entirely customary, well observed and practiced by senior banks, and provide the necessary comfort levels to sculpt and prioritise debt payback
- Project finance models are extremely detailed and robust, and will forecast lifecycle and maintenance capex (as well as opex) requirements. Thee are often reserve accounts established with committed financing (or reserved cash flow) to account for overs and unders, and ensure the project stays on foot. All of this is diligenced to death.

Marcus should be across these features. Given the metal price volatility I hope his offtake negotiations are focused on locking in a take or pay volume and price floor. I truly believe in the wider sector and therefore my investment thesis hinges on SKI's willingness to protect supply in this way.