Deloitte Risk Advisory talks about how to use combined assurance to extract real value

This article, written by Mimi le Roux and Carla Clamp of Deloitte Risk Advisory, discusses the use of combined assurance to extract real value from the information your organisation pays so much to gather. If you have any questions or require additional information, contact Mimi at mleroux@deloitte.co.za or Carla at cclamp@deloitte.co.za.

Combined assurance – Taking organisations to the next level of maturity

Simply put, assurance providers are the internal and external people who tell managers what is on track and what is not within the company. They provide managers with information about the risks (hazards and opportunities) that have been identified within an organisation. They provide information about the measures that have been put in place to prevent hazards from occurring and reduce their negative impact if they do.

Further, they report on opportunities, particularly those in line with the company’s strategic objectives, and the steps that have been taken to encourage these positive events. Both functions are vital to an organisation’s health, heading off dangers and controlling damage while also eliminating the risk of not achieving strategic objectives.

However, assurance providers create a mass of reports, generating so much information that much of its value is lost as managers battle to account for it in their decision making processes; while duplication and overlaps reported from several perspectives often skews the view.

Read the full article . . . .  Combined assurance – Taking organisations to the next level of maturity

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Filed under: Executive Leadership, Finance, Information Technology, Risk Management, Talent & Human Capital, combined assurance, Deloitte, hazards, opportunities, risks, strategic objectives, value

Navigating the risks of Project Finance

 

In a world of increasing demand for infrastructure and tightened financial markets, companies are seeking alternative capital and debt raising methods. South Africa is the gateway to Africa in providing transactional advisory services and it is imperative for Financial Advisory firms to become tactically responsive to the needs of the public and private sector clients.  Megaprojects defined as projects with a minimum value of R750 million.  Companies undertaking these projects require transactional advisory services ranging from feasibility studies to project funding.

Project finance is an innovative technique allowing entities to raise funding for projects such as toll roads, mines and hospitals to name a few.  The need for project financing comes at a crucial stage for the development of Africa which is growing at a rapid pace.  Increasingly this mechanism is emerging as the preferred alternative to previously used methods of funding.  In essence, a project finance transaction provides the ability to ring-fence project assets and operations in raising funding based on the cash flow potential.

The term Project Finance is usually referred to as off-balance sheet funding, while on balance sheet funding is referred to as a corporate finance transaction.  Project Finance is different from conventional balance sheet funding where the lender looks at the balance sheet strength of the corporation.  The lenders have virtually no recourse on the project assets or on the sponsors of the project and can only rely on the project cash flows.

Project Finance encapsulates the preparation of a feasibility study, assessment and reallocation of the risks, structuring the financing for the project and ultimately raising the funds in the market place.  It is imperative that experienced project financiers are involved in assessing project needs from initial planning through to fundraising.

The use of a dynamic financial model is crucial to determine the cash flow generation once the project is operational.  These costs and revenues are assessed by independent experts.  Various scenario analyses are performed and stress tested by adjusting economic variables to evaluate the variation in output.

The optimal funding mix for a project of this nature will typically include a combination of sponsor equity, senior, mezzanine, and subordinated debt.  The mix of equity and debt will likely be determined using project-finance principles, i.e. based on the modelled cash flows of the project, supported by a credible off take agreement.

Debt funding plays a major role in funding projects in the Project Finance arena.  In structuring the optimal funding mix for a project of this calibre, it is essential to investigate the various aspects of the project i.e. pre-completion and post-completion.  Pre-completion means the initial stages of the project including construction, financial and technical completion tests and commissioning.  Post-completion is when the project begins to generate cash flows to service its commitments.  The pre-completion phase of the project is essential to support fundability, as this forms a platform for the project, which will ultimately generate the cash flows required.  Hence, if the guarantee on the pre-completion phase of the project is weak, it poses a significant threat to the transaction.

The lender bears the most risk in the pre-completion phase of the project as the greatest risk is that the project will not meet the completion criteria or will be delayed.  This may also cause further issues with the off take agreements where buyers might not require the product anymore.  Hence, the technical completion tests and completion guarantees need to be in place, which require the sponsors to settle all debt and damages incurred by the lender if the project is not complete by a certain deadline, usually referred to as the long stop date.

Another vital aspect is that lenders require the sponsor to maintain a minimum balance in a reserve account usually equal to two loan payments.  This further ascertains the commitment of the sponsor.  Performance bonds are usually also in place that bind the construction companies in the case of non-performance or breach of agreements.  During this pre-completion phase, there is a staggered drawdown procedure which is conditional upon certain progress made on the project.  Lenders usually insist on step in rights which enables the lender at any stage of the project to step in and make decisions that would affect the project in the case that the borrower defaults.  A default refers to a breach of performance default or not making the required debt payments.  This risk is usually mitigated or measured closely by the use of negative or prohibitive debt covenants.

Considering the risks in project finance, a financial advisory team is ideally placed to assist companies with their risk identifications process.  Typical risks that need to be assessed are:

•           Delays in construction of project;

•           Varying performance capacity of the project from initial to ramp up stages;

•           Project prematurely ending resulting in a stranded asset with no real benefits thereby decreasing the probability of reviving the project to extract further cash flows;

•           Market risk if a product cannot be sold for a price as determined in the financial model;

•           Technical risks such as issues with equipment which could result in defective outputs;

•           Force majeure risk of natural disasters and the extent of the damage that could either cripple the project eternally or have a delaying effect on the project;

•           Political instability in the country or region where the project resides.  Events such as strikes, expropriation of land, foreign exchange suspension and nationalisation are some of the examples that pose a risk to the project; and

•           Foreign exchange risk for commodities that are priced in USD.  Example, a gold mix generates revenue in USD but the associated costs are priced in the local currency.

Mastering the art of successfully executing project finance transactions is a long haul process.  Each project has its unique risks which are sector specific and it is vital that advisors are able to effectively identify and minimise these inherent risks in order to facilitate a successful and meaningful transaction.

Article compiled by Shehzad Omar (Manager at Deloitte Corporate Finance) and Andre Pottas (Partner at Deloitte Corporate Finance).

Filed under: Executive Leadership, Finance, Balance Sheet Funding, Financial Advisory, Project Finance, risks

How will mineral beneficiation affect your business?

This paper, prepared by Ebrahim Takolia of Deloitte Consulting, South Africa, is aimed at all decision-makers, across all industries. I have provided an introduction below and welcome you to download the full paper which is very comprehensive and highlights challenges, opportunities and the effects mineral beneficiation will have on businesses. If you have any questions or require additional information, you may contact Ebrahim Takolia at etakolia@deloitte.co.za. Click Here to download the Deloitte Mineral Beneficiation paper.

Positioning for mineral beneficiation – Opportunity knocks

Mineral beneficiation is a priority for governments of resource rich countries that would like to leverage the potential of mineral beneficiation to create local employment and drive economic growth. Many governments are developing strategies for domestic mineral beneficiation.

South African President, Jacob Zuma, has said that mineral beneficiation is a priority for his government and will finalise and adopt a beneficiation strategy as its official policy. In June 2011, government released a strategy that identified a number of instruments such as policies, legislation and incentives that can be put in place to enable beneficiation.

A mining company will typically be in one of the following assessment phases with respect to beneficiation:

Strategic Assessment: an analysis of the strategic considerations as well as risks and opportunities for mineral beneficiation, particularly focusing on the business case and taking into consideration government incentives and social imperatives like job creation;

Feasibility Assessment: the beneficiation opportunities have been identified and feasibility studies need to be undertaken to determine the viability of such initiatives; or

Implementation: the feasibility of an initiative has been determined and an implementation plan and schedule needs to be developed.

This paper is the first in a series about beneficiation and will be updated as legislation and incentives come into effect, which assesses the merits of beneficiation.

Download the full article . . . . Positioning for mineral beneficiation – Opportunity knocks

We welcome your feedback on this interesting and topical subject!

Filed under: Executive Leadership, Government & Public Sector, Mining, Energy & Resources, Deloitte Mining Advisory, economic growth, incentives, job creation, legislation, local employment, Mineral Beneficiation, mining, opportunities, policies, risks, South Africa