Alternative Solutions For Capitalizing On The Upturn

In an industry mostly dependent on volatile metal prices,  strong financial structures are vital. The mining cycle’s upturns and downturns have taught operators and explorers how to shield themselves against slumps and continue whetting investor appetite. This has been especially important during the last seven years, a period of contraction that followed the commodities super-cycle of the early 21st century. As signs of recovery begin to make their appearance, it is imperative that the industry regains the faith of investors. The process is already on its way, although advancing slowly. “The industry has had to make a concerted effort to prove to investors that it is becoming more optimized and productive, given that it has lost access to many of the pools of capital it used to have,” says Loui Anastasopoulos, President of Capital formation at TSXV.
Operators in Mexico have a wide variety of financing solutions to turn to. Among these, the Mexican Stock Exchange (BMV) offers visibility and a broad access to financing options as potential benefits for listing. Nevertheless, this alternative is not fully exploited by miners with operations in Mexico. José Oriol Bosch, Director General of BMV, provides an explanation for the relative scarcity of mining companies that are listed. First, Bosch says, “to be listed on the stock market implies a certain level of transparency and not all companies are willing to implement the required protocols.” Furthermore, listing requires companies to have a corporate governance structure in place: many family-owned Mexican companies are reticent about having independent parties overseeing management. Finally, there are operational costs involved in producing the compliance and audit reports that going public entails. These three factors amount to perceived costs that keep mining companies away from the BMV.
In addition to BMV, companies in the Mexican mining industry can turn to FIFOMI for financing. A unique institution in Latin America, this state-owned development bank is designed to promote and modernize mining in Mexico through financial loans and other types of support. FIFOMI is regulated by the same standards as commercial banks, but as Alfredo Tijerina, the institution’s Director General says, “it offers unique specialization and a deep knowledge of the industry.” FIFOMI partners with commercial banks, like Accendo Banco, to fund small mining projects, prioritizing those with a social and environmental component. However, accessing credit from FIFOMI can be challenging and time-consuming, says Carlos Silva, CEO of Carrizal Silver Mining. “When we finally got the money, we no longer required it. The upside was that FIFOMI prepared us to comply with the highest financing requirements. If a company can meet these standards, then it will be easier for it to succeed in stock exchanges.”
But companies, juniors in particular, often have to rely on their own guile to find financing, as resources tend to be scarce and highly sought-after. Production-based financing, whereby companies secure cash by selling rights to receive future production from their mines, has become a common feature of the mining industry. For example, Aura Minerals has a three-year offtake agreement with IXM to buy concentrate from the Aranzazu mine. IXM’s funding has allowed Aura to restart the operation and reduce risk simultaneously. Additionally, mining companies frequently turn to royalty agreements for financing. As Alan Monk and David Edwards of Kenny & Bray LLP, explain, royalties are common in the mineral exploration business. They typically arise when an owner of mineral claims sells or options them to another party, while retaining a royalty if production ever occurs on those claims. Minera Alamos is an example in Mexico of a company that is employing a royalty agreement to develop its assets. As the company has stated, it has made an agreement with Osisko Gold Royalties that will allow Minera Alamos to take its Santana and La Fortuna projects to commercial operations in the short term.
Also noteworthy was Industrias Peñoles’ debt refinancing strategy. In September 2019, the company issued a debt bond for US$1.1 billion, spurred by positive interest rate conditions. The resulting resources will be destined to liquidate US$800 million long-term debt that was expiring in the next four years. Peñoles was thus able to raise US$1.1 billion in 3Q19.
As metal prices continue to rise and the industry seeks to capitalize on the coming upturn, a combination of emerging and established sources of financing is often required. Be it public or private equity, debt refinancing on international markets, production-based financing or even crypto and crowdfunding solutions, mining companies have an array of options to bring extremely capital-intensive projects to fruition.