Metals Volatility – Issues for Transacting Hedging Arrangements

The current metals volatility being experienced as a result of the latest US-China trade tensions has real implications for financing mining and resources projects, especially when transacting hedging arrangements. 

Volatility in base and precious metals means that many resources companies, particularly those with projects that are finance-ready, will be keeping a close eye on the market to pick the right time to hedge.

So what do producers or near producers need to be thinking about when documenting the arrangements from a financing perspective?

Metals hedging is typically transacted under an ISDA Master Agreement and Schedule, which is the accepted legal framework used to transact over-the-counter derivatives. It is important to engage a lawyer who is familiar with both the ISDA documentation (and negotiating the Schedule) and the documentation used to transact secured financing, whether that is for a planned project financing or for potential corporate facilities.

In the project financing context, where a lending bank usually insists on a minimum hedge volume being transacted as a condition precedent to funding, hedging a specified production volume of product is often essential to making a project bankable. Banks understand the need for producers to move quickly and take advantage of a hedging window, so a bank will usually work with the company to take advantage of any favourable pricing environment ahead of completing all of the arrangements in relation to the project financing.

The security documents and a committed letter of offer and term sheet applicable to the financing can usually be agreed, and the parties can agree the minimum conditions precedent to satisfy to allow early hedging, so the company can be ready to act quickly when a favourable hedge window opens.

Even if a project financing is not being implemented, hedging can of course still be transacted as a stand-alone risk management strategy. In those circumstances, producers should carefully consider whether those arrangements are flexible enough to introduce a future debt financing. A secured, long-dated hedge book may cause an unwanted roadblock to introducing a secured debt financier down the track. Under either scenario, care needs to be taken with the ISDA documentation to make sure that it does not conflict with the terms of any finance documentation.

For many, ISDA documentation can be a bit of a mystery, as it’s usually “left to the banks’ hedging team”.

See our transactions lists for a record of our experience in hedging.

Contact us to discuss your hedging needs.

Wright Legal has successfully completed Mining and Resources transactions since 2000.For a snapshot of our diverse transactions see our Transactions List Here