(Note: This article was produced by Bryan Clark of Lion CFC Inc. This article is provided for information purposes only and does not constitute an endorsement or recommendation of CFC Inc. or its products and services by the American Coal Council or its member companies.)

Investment banks, private equity funds, commercial banks and various other financial institutions have long been utilized to fund coal mining ventures and operations. Although these funding sources can offer a quick source of funds to begin a project or expand an existing project, these funding sources also typically require a "piece of the action," otherwise known as an equity or ownership position in the mine project. Depending on the mine owner's banking relationships and past projects, or even the availability of capital in the various capital markets, a mine owner can be forced to share anywhere from 10 percent to 65 percent of the profits of the mine with the equity partner, investment bank, lender, etc. Depending on how the deal or loan is structured, the mine owner's credit and assets can also be required as additional collateral and/or recourse for the loan. Of course, this is a less than ideal scenario. Additionally, commercial banks and lenders are tightening lending guidelines, raising rates, changing terms on their clients at the last minute, and worst of all, backing out of financing commitments days (and sometimes hours) before the scheduled closing. So how else can coal miners secure the financing they need without giving up a large "chunk" of equity and/or profits from their project?

In response to the tightening of commercial lending guidelines in the coal mining and alternative energy industries, several investment banks and Commercial Funding Specialists have begun providing financing for coal mines using unconditional purchase contracts and financial instruments as collateral for financing instead of the mine and/or project itself. Using unconditional "take or pay" purchase contracts or collateralized financial instruments including (but not limited to) bank guarantees, medium term notes, and standby letters of credit, mine owners can secure the financing they need within weeks, not months, and with NO SURPRISES! These methods allow any company from start-up to industry leader to secure 100 percent financing with nothing other than a financial instrument and/or an unconditional ("take or pay") purchase contract needed as collateral. No underwriting, no financials, no credit ratings, and no third party reports are typically needed. Additionally, there is no recourse to the borrower in the event of default.

"Advanced Contract Funding" and "Collateralized Financial Instrument Based Funding" were once difficult to secure due to the extensive track record, credit, and banking relationships required to obtain this type of financing. However, much of this has changed within the last twelve to eighteen months.

Let's start by examining "Advanced Contract Funding". In order to secure financing using the "Advanced Contract Funding" method, the mine owner will need to find a buyer that is willing purchase X amount of coal, over X amount of years, at X price. The buyer will also need to be investment grade, meaning the buyer (corporate or government entity) of the coal must be rated BBB or better by Standard and Poor's, or Baa or better by Moody's. It is worth noting that city and state governments are often rated BBB or better, meaning this type of financing is ideal for mine owners that sell coal to public and/or private entities.

Here's an example:
Consider a situation where your company has recently landed a $100 million contract with a BBB or better rated company or government entity (rated by S&P or Moody's). The BBB or better rated company or government, who we'll call XYZ Company, is guaranteeing to purchase $100 million worth of your coal over the course of the next five years. During the negotiations of the contract, several things must be discussed with XYZ and included in the contract including:

1. Contract must be date certain (in this example five years)
2. Contract must be sum certain  (in this example $100 million)
3. Currency needs to be specified (US dollars typically)
4. Jurisdiction of contract (Often the United States)
5. Contract must be "assignable"
6. Contract must be unconditional (contract cannot contain conditions or "off sets")

Once your company has obtained these requirements in the contract with XYZ, your financing is virtually guaranteed. This contract now qualifies as "investment grade" and is the only collateral needed to secure funding of up to 100 percent of the contract's face value ($100 million in this example) within two weeks at rates fixed between 6.5 to 10.5 percent without giving up any ownership or equity in your mining project. Simply provide a copy of the contract to a commercial finance institution that provides "Advanced Contract Funding" and they will begin due diligence on the contract and entities involved in the transaction. Due diligence typically takes two to three weeks. Once due diligence is completed, the lender/funding institution will provide you with a "letter of intent" or "term sheet" spelling out the terms of the proposed financing. Since the investment banker or commercial funding specialist providing the financing can verify the legitimacy of the contract quickly and without much expense, your upfront costs should be between $1500 and $4500. Depending on the financial institution you choose to work with, your closing costs could be as much as 3 percent and as low as $0.

Many of the more sophisticated and experienced firms will charge "consultant" or "success fees" of 1-3 percent outside of closing, meaning zero closing costs show up on the closing statement, but you will get a bill for 1-3 percent of the total loan amount you financed once, and only if, the loan funds. Lastly, it is important to note that this is a "non-recourse" funding, meaning your company and/or mining project is not liable for the loan, or its payments, if the "off-taker" (buyer of the coal paying on the contract) defaults on their payments as agreed in the contract. The investment bank or commercial lender would take legal action against the "buyer/off taker," not you, to recoup their money and enforce the terms of the contract.

"Collateralized Instrument Based Funding," is the second finance structure worth considering. Collateralized Instrument Based Funding, as mentioned earlier, requires a standby letter of credit, bank guarantee, medium term note, or other financial instrument. In order to utilize this finance structure, a bank willing to issue this type of financial instrument using your real estate and/or mineral rights as collateral will to need to be identified. Please note that various other assets can be used to secure these types of financial instruments. Although this finance structure is very flexible and varies widely from project to project, the typical underlying process is as follows:

1. Mine/Project is identified
2. Real Estate and mining rights/permits are obtained
3. Bank or financial institution issues a Bank Guarantee, Standby letter of credit, or Medium Term Note using the Real Estate, project, or other assets as collateral
4. Financial Instrument is "monetized" and/or used as collateral by a lender to provide financing quickly and at rates of 3.5 percent to 7.5 percent.
5. Funding takes place within one to two weeks

This "Collateralized Instrument Based Funding" process can be beneficial to all parties involved. The bank earns a fee on the financial instrument that it issues while at the same time limiting its financial exposure in the transaction (because the bank is not actually lending any money). Meanwhile the lender finances the transaction with a AA rated bank guaranteeing the repayment of the loan via the financial instrument (the loan amount will typically coincide with the face value of the financial instrument). Lastly, the mine/project owner secures very desirable terms on financing using the financial instrument as collateral without providing financials, third party reports, undergoing months of underwriting, or giving away any profits and/or equity. Again, depending on the project/mine, this financial structure can be a "win-win" for all parties involved. Typically the only hang up or hurdle that is faced in this type of transaction is proving the value of the assets put up as collateral for the financial instrument. Depending on the bank chosen to provide the financial instrument, this process can take as little as one month to complete. Many lenders will provide financing against collateralized financial instruments at rates between 3.5 percent to 7.5 percent without requiring any ownership or profit sharing in your project.