Innovation in technology versus innovation in financing: two case studies

This paper examines two major metal projects in 2001. Both projects aimed to mine ore, treat it, and then smelt the metal. Both estimated the costs of their metal production to be at, or near, the bottom of the international cost curve. Both projects had contracts for the sale of a significant proportion of their future production. Both were located in Australia. One project received funding, while the other was initially unable to raise the required finance. One project was based on known technology. It used some innovative financing approaches, with the result that it had no need to raise equity finance from the public. The other project employed innovative new technology and advanced engineering. It attempted to fund the project in a conventional way, with 70% bank finance, and 30% equity to be raised from the public and the institutions. The first case study describes a new steel mill complex with extensive associated infrastructure, representing a total capital investment of about A$5 billion (with two Australian dollars equal to one US dollar in mid 2001). The second case study examines a large new magnesium metal production facility, requiring A$1.7 billion in finance. The steel industry was depressed worldwide in late 2001. The prospects for magnesium, on the other hand, appeared to be bright. Yet it was the steel project that achieved early funding, while the "new economy" magnesium project had to deal with an initial equity-raising set back. Later an innovative financing approach was used, and the magnesium project finally received the required finance. The article concludes by examining why these outcomes occurred. (C) 2002 Published by Elsevier Ltd.