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Sharayev A.P.

- The full version of the article, that was published at issue 6/2008 of "Mineral Resources of Russia. Economics and Management" Magazine, is given with figures and tables www.geoinform.ru
- On-line www.geoinform.vipstd.ru

The expanding financial crisis leads to the suspension of 2/3 of investment projects. Business focuses on current problems and optimization of already operating enterprises. New projects are shelved. What shall be done with the projects already in progress but not yet completed?

A mining project based on project financing may be examined as a case study. This kind of projects is a classic of project financing, however, in Russia banks have been skeptical about such projects mainly because of a misconception of the industry and subjective reserve estimation of deposits. A gold mining project, in addition to its specific risks, has risks of a project trapped in the grip of the financial crisis: the investment risk associated with the commissioning of the project and unpredictable fall in prices of finished goods or decrease in demand for them. In that context the bank that has already started project lending may suspend financing in order not to lose even more funds.

What a borrower can do in this situation? If the borrower is sure that the project has a future, to convince the lender of that. In many cases lenders initiate acceleration of loans and bankruptcies because of insufficient information on the position of the borrower or market prospects. In this connection it is of importance to competently and soundly convince the bank, first, why it makes sense to complete the investment project and, second, how the loan will be repaid.

As a first step it is necessary to prove that the investment project will be viable and profitable under crisis conditions, i.e. in fact to perform all work associated with the development of the project all over again. The project is to be developed taking into account the crisis (slumping sales, changes in the operating costs structure, and reduction of financing) but no overpessimistic predictions should be made. This is the same mistake as overoptimistic predictions during periods of economic growth.

Two ways to overcome the crisis situation for the investment project are as follows: loan restructuring or the sale of the project. Variations with their elements are also possible. For example, the loan may be prolonged and in the meantime a share in the project should be sold to the investor at a high price. It is worthy of note that the restructuring will be conducted under conditions when banks are short of funds and the market is weakening. This means that non-traditional ways of financing and financing sources must be found. One of such ways is asking project suppliers and contractors for help. Commodity loans are a usual practice, but the contractors may be used in a different way. For instance, if the bank is doubtful about the project's creditworthiness, it is possible to request the bank to grant a tied loan to the contractor who will perform the work on credit but this will allow the project to overcome the highest-risk investment phase.

Those investment projects that initially provided for a minimum margin of safety will be terminated. The excess money in the market during its growth period promoted unsound investments and gave rise to marginal projects. Such projects are economically viable when the market is advancing but their margin of safety is very low. In the event of a slight slowdown in the market, they will face a default. In fact their termination is not bad as only those projects are to survive that are based not on market expectations but on the need to meet the actual demand of the economy in resources and production capacities.

Sharayev A.P., 2008


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