Funding Based on Clear Asset ManagementBy Alejandro Salas | Wed, 02/12/2020 - 13:14
In an environment with no new mining concessions, brownfield projects become crucial for stakeholders. “However, lacking and expensive funding force companies to find ways to mitigate risks and appease investors,” said Alfredo Phillips, President of the Guerrero Mining Cluster and moderator of the Risk Management: Financing Brownfield Projects in Mexico panel, at Mexico Mining Forum held on Wednesday at the Sheraton Maria Isabel hotel in Mexico City.
David Chelich, Head of Business Development Mexico at TMX Group, highlighted that regardless of its nature – green or brownfield – equity is the prime source of funding for any mining project. “Projects are never fully financed with debt,” he said. The problem, however, is that the needed resources are nonexistent in Mexico, according to Javier Reyes de la Campa, Chairman of Accendo Banco. “Capital does not exist in Mexico in the way we need it. Our stock market is not specialized enough and there is much asymmetry in information,” he said.
Although there are development banks and trust funds like FIFOMI available, these players require warranties to their invested capital and do not get involved in risk operations. “Neither FIFOMI nor banks will grant risk capital, which means the country must improve the conditions to access such resources,” said Reyes. “The risk in mining operations is extremely high, even more so probably than hydrocarbons,” said Alfredo Tijerina, Director General of FIFOMI. “Furthermore, bank do not have a specialized area in mining, which means they do not understand this risk.”
Another problem for companies, especially younger ones, is that before needing capital to ramp up operations, players require capital to deliver all necessary studies to get the licenses and permits needed to operate. “You first need a group of private investors to fund your studies in order to access larger financing,” said Enrique Rodríguez del Bosque, Partner at RB Abogados.
Mexican companies have the advantage, however, of being in a good place in terms of investment attractiveness, according to Chelich. “Mexico as a mining jurisdiction ranks fourth globally in terms of investment and 126 companies listed on the TSX and TSXV have operations in Mexico with 366 mining properties,” he said. Companies eligible for investment, according to Chelich, are those with diverse portfolios and management teams experienced in taking projects from discovery to production, while increasing shareholder returns in every phase.
Rodríguez highlighted that unlike greenfields, brownfield projects have the advantage of deriving from a project that was already successful. “There are already assets and production flows that give certainty to investors,” he said. However, for companies to approach possible stakeholders, due diligence is key. “Companies have to do an exhaustive analysis of what they have, not only in terms of assets but also in terms of relationships with the community, with the government and even with the union,” said Rodríguez. Chelich agreed with this statement, explaining that ESG is extremely important for the Toronto Stock Exchange and for retail investors. “Extraction industries are among the most criticized and investors are always reviewing ESG performance,” he said.
ESG, however, is not just about being a good corporate citizen. “Companies that focus on ESG achieve better cost savings and profitability in the long term, which enhances the company’s capability to access capital,” said Chelich. According to Tijerina, FIFOMI’s funding is always linked to permits and clear financial statements. “However, even though we can reduce the requisites for small miners finance-wise, we always maintain our standard requisites in terms of social and environmental permits,” he said.