The Vicious Cycle of Exploration Financing

Financing for mining in Mexico is notoriously hard to come by. Enrique Margalef, Partner at Vander Capital Partners, says this is because the requirements for private equity funding or listing on a stock exchange typically conflict with the business of exploration. “To list on the BMV or seek private equity, a mining company must demonstrate it has been cash-flow positive for at least two years,” he says. “But the main premise of the mining cycle dictates that there is no return until the mine has been built.”
Margalef says this creates a vicious cycle wherein exploration companies need money to fund their activities but cannot obtain it through a public listing in Mexico. He pinpoints this as the reason why 75 percent of mining companies are listed on the TSXV. “On the TSXV, there is no requirement to be cash-flow positive; as long as a company has the experience and a promising project, it can obtain the funds.”
Vander Capital Partners, an investment firm, began as an exploration company but when the downturn hit in 2012, it had to change strategies to survive. “Since foreign investment was allowed in Mexico in 1992, there have been more than 25 years of exploration, equating to over 1,000 projects,” Margalef explains. “These concessions had been explored over this time and some were ready to be put into development.”
The firm took advantage of this landscape when it came across Telson Resources, a small-sized Canadian company with the Tahuehueto project in Durango. At the time, Vander was working with experienced miners José Antonio Berlanga and Jesus Robles and jumped on the opportunity to acquire Telson. Campo Morado is now in commercial production, while Telson is working on advancing Tahuehueto. “I expect Tahuehueto to reach production within the next year,” says Margalef.
Today, Vander is focusing only on its relationship with Telson, as Margalef says there is still plenty of room for the operator to grow. “Our strategy at the moment is to acquire new mines that are ready to be moved into production in much the same way we did with Campo Morado and Tahuehueto,” he says. “Both also have significant exploration potential and neither are running at full capacity so we want to grow the resource bases at the current properties and search for new mines to incorporate into the portfolio.”
According to Margalef, the next step for the company’s growth is to attract more institutional investors, such as Afores and foreign pension funds. He says the problem with this is that, often these entities are governed by strict investment rules and have a lack of understanding of the intricacies of mining.
This means institutionalization could be a long-term goal, since requirements for institutional investment include a proven track record of cash generation. Telson began making money in 2Q18 but the nature of mining dictates that its EBITDA is still negative since all the revenues it accrues are directly reinvested into the operation of Campo Morado and the construction of Tahuehueto. “If we went the traditional route, we would have to wait until both mines were in production and then wait another two to three years to prove our profitability,” he says. “This would be a three to five-year plan.”
The firm is now in talks with the new stock exchange, BIVA, to evaluate the possibility of this requirement being eliminated. Margalef is hopeful that the new SPACs available in Mexico will help companies like Telson. His goal is to be the first company to use these tools to raise funds for the mining industry. In the meantime, he says Vander alongside Telson will work to prove two to three years of positive cash generation. “When we make it to this milestone, we can return to these funds and prove we delivered on our profitability promises,” he says. “This will then open us up to a wider range of investors that hopefully have a better understanding of the mining industry.”