Improving Miners' Access to FinanceBy Miriam Bello | Wed, 08/25/2021 - 19:53
You can watch the video of this panel here.
Financing options available to mining companies will influence their financing strategies and decision making in the coming years, however, development of alternative solutions can introduce a change to companies’ operation strategies.
“I think it is very important that we keep a low cost operation, because you do not want to be in a compromised position in the market,” said Javier Reyes de la Campa, Chairman of Accendo Banco. “If the market senses this weakness, then the company might be forced to take streams or royalties just to keep the company running.”
John Darch, Chairman of Sonoro Gold explained that alternatives for financing strategies have begun to see the light since the global crisis of 2018, “junior companies fortunately have been given financial alternatives, which is the streaming or the royalty and equity.” According to Darch, juries have to consider when they look at financing options, “juniors will have to move along the streaming or the royalty and a combination of equity, although debt is a viable alternative, it has to be of a size that can be easily managed.” For Darch, traditional debt will be used each time less by the smaller companies.
There is also another alternative financing, which Darch explains as an EPC company providing EPC Services all the way through. “Subject to there being performance guarantees, which is good for a junior.” However, this alternative could be more expensive, “but if EPC companies can come forward with arranging the financing, it does become a third,” said Darch.
While these alternatives might exist, these were hard to be put into practice. “Some 12 years ago when we started to have streaming, not many people even understood what that practice was and they were very concerned about losing control of production,” explained Enrique Rodríguez del Bosque, CEO of RB Mexico Law.
“At Sonora, we have been offered these royalties and arrangements, but it always comes back to a balance between risk and reward,” said Darch. Darch explained that while each company can be separated, and this is the way many community companies will move forward, since there are more companies that have a combination of equity in royalty or a little streaming, Darch went on to explain this happens because companies´ worry they would not fall into any debt repayment structure with a bank.
“These financial structures are here to stay,” said Forbes Gemmell, VP Corporate Development of Discovery Silver Corp. “Ten to fifteen years ago, there were three or four companies doing this, but now there is probably 15 to 20 or even more.” Gemmell said that from these companies’ point of view, this is a nice simple model. The structures have a very low operational expense. “They cover the corporate DNA. They get exposure to the commodity price so they obtain spectacular margins, so they are going to be a sort of financing option going forward.”
Rodríguez del Bosque represents some of these royalty companies and he said that in the past eight years, services they provide for royalty companies to structure these royalty agreements have significantly increased. “There is a big amount of money coming from these companies to projects, which is very good in regards to having the opportunity for the companies to develop the project, or to increase the size of the project or finalize it.”
“What I see from Accendo is lots of royalty streaming companies and when you have too many companies pursuing and specific niche, you start bringing prices down,” explained Reyes de la Campa. “I think it is very smart from the royalty and streaming companies to compete in Mexico.” For instance, Reyes de la Campa explained there is at least 30 royalty or streaming companies competing against each other’s prices, which is good for mining companies to start bringing costs down in terms of financing.
In regards to critical success factors for investors and miners in allocating and accessing financing in today’s mining industry, Gemmell, Darch and Rodriguez del Bosque believe management and a good board representation would drive a company to financial success. “Having a company run by geologists or engineers or bankers is almost a recipe for disaster, so you need to have that broadband of knowledge experience and commitment,” said Darch. He added that Sonoro’s senior management team has at least 35 years of experience in successfully developing operations.
A company’s ESG strategy and track record plays a significant role in accessing financing in the present, and most likely, it will continue to play a role in the future. According to Gemmell, effective management of ESG lowers the overall risk profile of the project and the company. “If you manage your social risk management and the government's risk, that creates a better overall platform, instead of going out and trying to finance the project.” Gemmell continued by saying that good ESG management actually opens many more sources of potential capital, and “that is only going to increase in the future.”
“The environment and governance are significantly important because it has to do with transparency ethics, ensuring that there is no corruption or bribery. The social part as well, I think has a very important part to play for companies moving forward,” said Darch. From his experience, a company that has healthy and happy employees is going to have an overall better development financially, and socially.
ESGs are also part of the responsibility of financial institutions, Rodriguez del Bosque said that it is a lawyer´s duty to look at compliance with governmental rules, the rules and principles of the International Finance Corporation, but most importantly, how these companies treat people.