Jorge Sánchez-Dávila
Partner
Haynes and Boone
/
View from the Top

Doors Open for International Collaboration

Wed, 10/19/2016 - 10:07

Q: Would you agree there's a lack of financing in light of global conditions?

A: Whether or not a company gains access to financing depends on its operative and financial structure, and there are companies that have conservative strategies, which enables them to draw attractive financing from foreign and domestic banks alike. These have been able to withstand the commodity price crisis relatively well. However, we also see companies that have been left exposed. These medium and even large players are in danger because of their corporate finances and the commodities they produce. Basically, companies in iron ore and coal have been left very much exposed as well as other companies producing base metals.

Q: What are Rio Tinto and Minera Frisco doing well in terms of financing?

A: Rio Tinto and Minera Frisco were listed among the companies with the strongest financial structures and reserves during the crisis, and Industrias Peñoles can also be included as one of the most financially stable companies worldwide. When commodity prices began to decline, these companies stopped investing heavily in exploitation and instead opted to develop exploration activities in order to overcome the approaching crisis. Rather than divest their assets and cash in exploitation they looked to exploration as a safe bet. Companies understood that royalty tax in conjunction with commodity prices could impact their corporate finances so they were conservative in new investments and cash allocation. On the other hand, giants like Glencore made aggressive bets on sectors like iron, copper, and zinc in global projects and as a result were left very much exposed to the fluctuating commodity prices. This is one of the reasons why a significant percent of the company’s stock value was lost. In times of crisis, there are companies that are aggressive and others that uphold a more conservative business model when managing their cash and financial assets.

Q: What are the most attractive financing alternatives for mining projects, and how do you help your clients gain access to them?

A: In the current market conditions, private equity funds are extremely attractive and they have become an important source of financing. In addition, the stock exchange has been a solid source of financing, and even the Toronto Stock Exchange (TSX) has played a pivotal role despite the farreaching crisis it has experienced over the past four years. The third most important source of financing are Canadian banks as they remain highly active in financing mining deals worldwide given they have the expertise and sensitivity in managing and dealing with mining crises.

Q: How do you foresee the mining industry will function after the sector stabilizes?

A: In Mexico, many greenfield projects are being sold and it is mainly senior, multinational, or large Mexican conglomerates that acquire them. The main driver behind mergers of equals is scaled economies but other alternatives exist such as joint ventures or joint exploration agreements. From an economic and financial standpoint it can be difficult for foreign companies to seamlessly integrate with local players because both parties have different aims and targets. Mexican companies want to survive the crisis, while foreign players want to make a profit as quickly as possible. A balance must be found between the two parties to see where they can complement each other, and a viable business model would see a foreign company that can contribute technology for exploration allied with a Mexican company that can provide the workforce, mining concessions, and assets.

Q: What are the main objectives Haynes and Boone wants to accomplish during 2016?

A: Mexico continues to be an important and attractive jurisdiction and changes are expected regarding the mining royalty. Amparos have been filed by companies and we see the government is reconsidering the structure of the tax and contemplating an increased number of tax deductions. It is important to stress that exploration already has a broader scope of deductions and these new concepts will be aimed at the exploitation stage. The investment climate remains attractive, especially since new projects have been discovered and these will either be acquired or developed.