A Helping Hand for Small and Medium MinersBy Alejandro Ehrenberg | Thu, 03/19/2020 - 09:16
Q: Why is it difficult for small and medium-sized mining companies to obtain funding resources and how does FIFOMI help them?
A: FIFOMI serves a market segment that does not have access to private financing, development banks or international funds. We seek to create a positive impact on the communities of the companies we finance because as they develop their projects, they create employment and health benefits, improving the overall life-quality of the area.
Many of these projects are located in remote areas with little access to services and have few possibilities for economic development. For this reason, favoring these projects creates opportunities for economic growth.
In general, mining projects are high-risk investments because it can take about 15 to 20 years to find enough minerals that can be sold. This means the stakes are high and plenty of resources need to be invested continually. Private financing does not bet on these kinds of projects unless they are run by big companies with a consolidated market and the support of major investors.
FIFOMI’s added value in this process is to determine if the project is financially and technically profitable. If marketable ore reserves are sizeable, then the project is more likely to be financially profitable. After we analyze a project, we work hand in hand with the company to determine the viability of the project in terms of benefits for all parties involved. We are subject to financial regulations just like any other bank and are even stricter because we are dealing with public funds.
Q: Does FIFOMI finance projects in the exploration stage?
A: We wait for the project to reach a more mature stage, beyond exploration. This is because reports indicate that of every 100 projects, only one or two are successful. Not even development banks can bet on those odds. We are working together with the Mexican Geological Survey (SGM) to develop an exploration program. If the project’s results are favorable, the company would be obliged to pay us a royalty, or it can sell the project, allowing us to recover the investment. If the project does not work, the owner will have no debt. However, to ensure that the result is reliable, SGM will conduct field studies. In addition, between April and May 2020, we will begin a pilot test to support certain projects in mineral processing plants.
Q: How does FIFOMI prioritize which companies to finance?
A: Usually, we operate according to the demand for resources. Although we are the cheapest in the market in Mexico in terms of the cost of capital, we are not as cheap as alternatives in international markets. It is important to point out that to obtain financing from an international entity, you must have a very mature project. We welcome any mining project if it has financially viable reserves. We also give preference to projects with strong ESG indicators. We are seeking to support minerals useful for decarbonization and energy transition, like lithium or copper.
Q: What is preventing more small and medium-sized mining companies in Mexico from going public?
A: It is all about risk. For instance, in Canada there is a high-risk appetite and the industry is understood by the population. Investors there know the industry. They are not afraid to invest in companies because they are aware that although there are great risks, there are also great benefits. Investors are also attracted to a diversified mineral portfolio. But in Mexico, listed companies are focused only on a few minerals.
Furthermore, to enter the Mexican Stock Exchange, corporate governance requirements are strictly enforced. Most small and medium-sized mining companies are family-owned and controlled. Often, the president, the owner and the CEO are the same person. Corporate governance structures are lacking in the Mexican SME mining landscape.
We finance projects for up to seven or eight years. By then, companies have shown that they are reliable. They gain the capacity to seek financing through private banking and international markets. In the beginning, many companies complain about us because they would like to obtain their loans faster, but we are subject to the rules of the National Banking and Securities Commission, and can only grant credit when we ensure that the project is profitable and meets all the requirements. This process can take from six months to a full year. The upside to our rigorous process is that mining companies become stronger and better organized.
Q: How does FIFOMI complement its solutions with other financial service providers?
A: We also finance projects through financial intermediaries. There are two ways in which we complement each other. We work with syndicated loans, wherein we try to participate with a low ticket. Our goal is to increase the number of loans we grant. We usually limit the amount of the loan to US$10 million. We want to diversify our portfolio with small amounts in syndicated loans, where private banks put up most of the capital. We also provide our specialized industry knowledge. We have people specialized in mining who go to the field and determine if there are enough reserves to make the project marketable. Private banks do not tend to offer technical services like this.
Fideicomiso de Fomento Minero (FIFOMI) is a state-owned development bank that promotes and modernizes Mexico’s mining industry. In particular, it aids SMEs through financial loans and other forms of support.