Study On Risk Allocation In Mining Project Finance

Mining industry characteristics determine mining financing with a long cycle, capital demand for large, high-risk and periodic characteristics. In China, current mining financing is facing the situation that mining industry capital markets is low developed, foreign capital utilization level is low, it is difficult to obtain foreign loans, funding sources is narrow channels. Project finance, as a new, important technique to raise long-term funds for large capital-intensive projects, with strong fund-raising function, flexible financing methods, can reduce financial burden on the government and achieve risk diversification and risk isolation, improve the likelihood of success of the project. In the world, it is widely used in electric power, telecommunications, mining and natural resources, petroleum and petrochemicals, infrastructure and other fields. Project finance is applied especially for the design and construction phase in mining financing. Therefore, it is an effective way to solve the current financial plight to carry out project finance in mining industry in China.The nature of project finance is risk allocation. In fact, it is the interests of the community that risk is shared by the participants connected with contracts. In this paper, based on an overview of the research literature at home and abroad, the author introduces theories about structure of mining project finance and risk allocation principles and procedures in project finance, applies hierarchical holographic modeling techniques to identify risk factors and characteristics in mining project finance in China. The author researches risk allocation mechanism and principles, and establish a gray correlation model about the assessment of risk allocation, and conducts assessment and analysis about the risk allocation in mining project finance. Risk is allocated to the participants by guarantees, insurance, other credit enhancement instruments which build a credit guarantee structure in mining project finance. Other risk management measures are put out in this paper. The author analysis contract features in mining project finance, and realize risks allocation through the contract between the parties involved in project finance. Credit risk evaluation index system and models are established based on the Basel II to assess the final results about risk allocation in mining project finance, and through case studies, it shows that credit risk rating is high in mining project financing.The results show that, in current legal, financial and mining environment, it is viable option for structure of mining project finance by corporate joint venture structure, financing model arranged by project company to raise syndicated loans debt capital. At present, there are twenty kinds of risks such as geological risk etc. in mining project finance in China. Major risks come from system risks such as legal risks and tax and fee risks because mining laws and regulations are reformed in China, and safety and market risks during mining development process. Based on the principle of risk-tolerance degree (risk-relational degree), risk can be allocated to the project participants, the participants with high risk-tolerance degree (risk-relational degree) should bear more risk, rather than just the risk assigned to the most appropriate sole responsibility of the participants. Some risk may be associated with a number of participants, while some participant may also be associated with a number of risks. Securities, insurance and other credit guarantee instrument is effective tools for risk allocation in mining project finance. More credit guarantees come from indirect guarantees provided by interest parties with project, while the government's support is an important guarantee for the success of mining projects in mining project finance in China. Based on the "back to back" risk allocation mechanism, financing contract design is the ultimate guarantee of risk allocation. We should focus on designing risk allocation measures in joint venture agreement, the loan agreement, construction contracts, sales contracts and operation and maintenance contracts, and other key contracts. Through allocation of risk, there is a lower credit risk for mining project finance. It is difficult to apply the traditional credit measurement model according to corporate historical operational data to project finance. Based on Basel II, the credit risk assessment model can be realized to assess credit risk of the mining project finance. Case analysis shows that the mining project financing with low credit default risk, but also demonstrate the effectiveness of credit risk measurement model.This paper provides important theoretical and practical significance to carry out project finance and broaden financing channels for mining project in China.