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Analysis

Mining Financing Alternatives Are Gaining Strength

By Paloma Duran | Fri, 08/20/2021 - 16:12

Mining companies around the world have long struggled to finance their development projects. Last year, the market environment created by the COVID-19 pandemic made financing even more difficult. Investors and financial institutions have become increasingly cautious when choosing a project, which is preventing many companies, most of them junior and small, from continuing with their projects. As a result, more alternative financing options are being promoted in mining, such as streaming, net profit interest and asset monetization.

 “Leading miners use the full range of financial levers to manage capital and returns through the cycle, including both traditional and alternative financing. By diversifying the financial portfolio, miners can better maintain long-term-investment plans, ensure stronger balance sheets and likely see more consistent returns and valuations,” said a report by McKinsey & Company.

Globally, around US$8 trillion in assets are being developed with alternative options. However, mining has only 1 percent of the global alternative financing total, which is around US$10 billion to US$15 billion. These figures suggest the huge potential to use more alternative financing in the industry. According to Mckinsey, alternative financing options are expected to increase to 40 percent of the total financing in the sector over the next 10 years, breathing new life into many companies.

 Investors and financial institutions play a key role in mining projects, providing the cash needed to continue developing a project and reducing high-risk issues. Today, the main financing options for mining companies are equity and debt financing. In equity financing, funds can be raised without resorting to debt finance. Mining companies offer equity, which can be shares, giving priority to certain shareholders. Meanwhile, debt funding is when a financial institution is willing to invest in new projects.

Mining is a relatively high-risk sector and, therefore, interest rates can be higher. With the current mining landscape, lagging stocks, high interest rates and difficulty in accessing bank financing, conventional options are being replaced by alternative financing options such as streaming and net smelter returns (NSR), net profits interest (NPI) and asset monetization such as joint ventures (JV). “With traditional equity financing drying up, more companies have been turning to royalty and streaming deals to secure investment that offers less dilution to the overall company than raising equity at depressed prices,” said PWC.

Streaming and net smelter returns (NSRs) are the sale of all or part of a mine's future production at a discounted market price and the sale of a right to a percentage of future mine revenues. Among its advantages is the margin of maneuver for sellers. Agreements are usually structured so that the company does not face any restrictions in how to use the cash and are generally faster as the due diligence takes between two and six weeks.

Alexandra Woodyer Sherron, President, CEO and Director of Empress Royalty, says another benefit of investing in a royalty and streaming company is that they provide a non-dilutive, highly competitive cost of capital, so companies do not have to raise their equity and dilute their shareholders. “We provide the initial capital necessary for a project and flexible solutions that are less restrictive than bank debt,” she says. Empress Royalty is working with the Altaley Mining's Tahuehueto project, which recently secured a US$25 million loan to complete the construction of its mine. Funds came from Empress, Accendo Banco and Endeavour Financial, including an equity private placement of US$8 million, an Empress silver stream of US$5 million and a debt facility of US$12 million with Accendo Banco. Ralph Shearing, CEO of Altaley Mining, said this was the best financial solution as it fully funded the operation. “With this solution comes a total restructuring of our loans. We owe a substantial amount and they (Empress, Accendo Banco and Endeavour Financial) agreed that if we found a solution that fully financed our Tahuehueto project they would allow us to continue working and restructure their loans. This gives us the opportunity to unlock the true value of the project.”

Another attractive alternative in mining is net profits interest (NPI), which is the purchase of a percentage of the mine's earnings in exchange for an upfront payment. This device is more commonly used in the oil and gas sector but it has gained strengthen in mining. Its advantages are similar to streaming and NSR. In Mexico, Xali Gold Corp is using this financing alternative through its subsidiary, CCM El Oro Jales, which has an agreement with the El Oro municipality to recover the gold and silver available at its tailings deposits in exchange for an NPI of 8 percent.

The third most popular alternative option is asset monetization, also known as joint ventures (JV), which is the sale of a portion of the value of an asset in exchange for a revenue stream. The main advantage is that it allows companies to obtain funds without incurring in debt, thus minimizing the impact on market capitalization or debt covenants. The Juanicipio project in Zacatecas, for example, is a JV between MAG Silver and Fresnillo that own 44 percent and 56 percent of the asset, respectively.

Alternative Financing Potential

Overall, alternative financing provides significant benefits to investors, such as a 13 percent annual growth in profits before interest, as well as taxes, depreciation and amortization advantages, reported Mckinsey. Mining companies also benefit from reduced pressure on their balance sheets, especially during recessions or when metal prices are affected.

McKinsey estimates that the 12 projects with the greatest potential for ongoing alternative financing around the world could generate US$1.4 trillion in secondary revenue over the next decade, implying a potential ten-year cash flow value of US$380 million, of which US$175 billion will come from gold projects, US$90 billion of copper and US$26 billion of silver.

Regarding NPIs, the industry's total EBITDA is estimated to be around US$7 trillion within the next decade. According to Mckinsey, NPI deals will not exceed 10 percent of total profits, for which a discounted ten-year potential of US$340 billion is expected. Finally, regarding asset monetization, the greatest potential is with miners’ ports, railway and energy assets. As a result, US$55 billion are expected in discounted ten-year values ​​through ports and railway assets and US$15 billion through energy projects, such as solar panels, totaling US$70 billion.

Experts believe that these alternative options will also play an important role in mining:

  • ESG loans: Green loans that seek to finance environmentally friendly projects, which can be related to increasing energy efficiency, decreasing CO2 emissions or improving water management.
  • Nordic bonds: High yield bonds that are gaining popularity in industries like oil and gas and now mining. These are based on standard loan documentation but can be customized for mining. They are generally structured around maintenance and not incurrence agreements.
  • SPACs: Popular alternatives for UK IPOs, where founders raise money through the listing of a company with the sole purpose of acquiring another.
  • RTOs: A faster way for a company to be listed and gain access to funding, without going through a complex process, which involves a private company taking over a publicly listed company.
  • Crowdfunding: This offers anyone the chance to participate in the development of projects with small amounts of money.
  • Cryptocurrency: This has emerged as a decentralized financing option, which remains attractive because it offers initial capital without diluting equity ownership.

According to a Fieldfisher report, a green trend will continue to grow in the financial sphere, bringing higher demand for alternative financial solutions. “Two major trends have dictated the pattern of mining finance deals over the past two years: ESG and COVID-19,” says Jonathan Brooks, Fieldfisher’s Head of Mining and Metals.

 

The data used in this article was sourced from:  
CAMIMEX, BNamericas, MBN, Field Fisher,McKinsey & Company, Extractives Hub, S&P Global,
Photo by:   Pierre Borthiry
Paloma Duran Paloma Duran Junior Journalist and Industry Analyst