The recent Mergers and acquisitions activity in North America have intensified a number of current trends in the mining industry, especially in relation to the availability of debt and equity for the advancement of mining projects:
- The gold sector is proceeding to entice investor interest, supported by a relatively strong gold price and the spate of recent significant Mergers and acquisitions activity.
- Numerous Australian mid-cap gold companies are presently gearing up to take advantage of the opportunity to acquire what is likely to be spun out by both Barrick and Newmont following their recent transactions.
- Also, the higher quality battery mineral projects are still able to entice investor interest, especially in Australia.
Junior mining sector
Nonetheless, the rest of the mid-cap and junior mining sector still faces a substantial shortage of available capital. There are various explanations for this but one of the major factors has been the decriminalization of cannabis in Canada and various states in the USA, so the risk capital that had formerly been allocated by investors to the mining sector has been redirected into companies developing cannabis businesses, both for clinical and recreational purposes.
Canada and the United States of America market :
In Canada and the United States, the mining sector has handled this shortfall in the availability of capital in two major ways:
Streaming revenue for mining companies
First and foremost, streaming transactions have become an important source of capital for several North American mid-cap mining companies. Streaming is the provision of an upfront payment to a mining company in return for the right to purchase a percentage of production, for a certain period at a pre-agreed, discounted price. Metal streams frequently run for many years, or even the life of the mine. The sum by which such upfront payment is lower than the market value of metal delivered will be credited against the upfront payment. Investors normally negotiate a provision whereby any fraction of the upfront payment that has not been reduced to zero via such crediting preceding the termination of the streaming agreement is repaid to the investor as a means of safeguarding the investor from the underperformance of the mine.
Streaming solution is growing as a trend
Streaming is a prominent form of financing for mines producing precious metals, commonly by-products such as silver produced from a gold mine and, for such projects specifically, is a useful means of extra income, allowing the company to recognize value for its non-core products. Streaming arrangements facilitate an efficient way of securing funding and involve no shareholder dilution.
The standard points of negotiation of a metal streaming agreement will be the amount of the upfront payment and fixed purchase price, the term, the percentage of the entire production and the procedure of delivery. The mining company might negotiate a preference to buy back a portion of the stream and may want other protections in the event of interruption of production. There may or may not be security provided to the investor whereas a financial institution providing financing will always want protection.
Metal streaming agreements are generally covenant-light described in relation to debt financing. Since there will be no adverse pledge, the mining company maintains the option of securing extra funding from different sources, such as commercial loans from banks if required. The arrangement must be structured carefully in order to stay away from unfavorable tax and accounting treatment. In Addition, any creditor preference given to the streaming company must be carefully examined so as not to impact the mining company’s capacity to raise finance going forward if required.
Bring confidence to the investor
The investor depends on the production. Since it is not a shareholder, and consequently has little influence over the management of the mining company, it will place critical focus on technical due diligence of the project, plus jurisdictional obstacles of the host country, such as political instability, when determining whether to enter into a streaming arrangement. The investor will be looking for steady and stable production.
Private Equity and sovereign wealth funds
The next major source of capital in North America over the last few years has been private equity and sovereign wealth funds. Over the past few years, there has been lots of discussion regarding private equity and sovereign wealth funds arising as significant participants in the mining sector. But, they have not yet been as active as some analysts have foreseen. The majority of transactions pertaining to private equity firms have been minority investments in juniors, while the sovereign wealth funds have made minority investments in the larger miners.
There has not yet been considerable momentum in the mining space as the common private equity model has historically concentrated on other areas like manufacturing, services, and retail.
Private equity for mining companies
Mining is a very cyclical business and for much of the last decade, valuations have been at memorable highs. Private equity firms also commonly exit within 3-5 years, which can be an insufficient timeframe in a business where assets can take over 10 years to develop, and tend to utilize leverage in order to improve overall returns, which extensively compounds risk in such a cyclical industry. While sovereign wealth funds gain from longer investment horizons and abundant, low-cost funding, they prefer investments with low volatility.
The last variable is that traditionally, the majority of private equity firms and sovereign wealth funds have lacked the administrative expertise to conduct mining investments independently and have had to instead rely on third parties.
But these entities may be evolving, with select private equity firms making up the important ground of late.
This mix of experienced mining professionals, recently raised buyout funds committed to the sector, depressed market valuations and increased portfolio reviews by the huge miners may lead to materially increased private equity involvement in the area. Over time, it could become more prevalent for mid-tier miners to find themselves contending against private equity-backed miners for operations being auctioned by the majors.
International financing solutions for mining companies
The investment society has awoken to the fact that current periods of significantly high commodity prices have not summarized into correspondingly high investment returns, partly due to cost inflation deteriorating margins, and the widely-held objective, until lately, for mining companies to concentrate on production growth instead of the marginal profitability of additional output. As a result, we are now in an era where the mining industry must clarify its new focus on yielding returns on investment to the traditional providers of capital, who are likely to linger in doubt for a while.
Keep on combining traditional financing solutions and new finance options
Traditional sources of funding are predicted to remain closed while institutional shareholders proceed to scrutinize how miners allocate capital until returns reach levels that are similar to other industries. To fill this funding gap, miners will need to evaluate new options in order to develop projects from development through to production.
Alternative forms of financing are likely to play a significant role in the mining sector for the foreseeable future with enhancing levels of innovation and creativity being applied. To raise funds for your mining project now, please contact your Damalion expert.
