Most large mines require substantial investments in infrastructure for the success of a mining operation. In the wake of the widespread financial crisis however the mining sector is experiencing overwhelming capital constraints, and investors and financiers are looking for investments with lower risk profiles and reliable investment returns. Simultaneously, new mining projects are in increasingly remote regions resulting in larger scale and more complex infrastructure requirements. Finally, there is increased pressure from local stakeholders to move past infrastructure development solely for mining to develop multi-use/multi-purpose infrastructure in order to amplify value from mineral resources. The combined outcome of these trends makes it exceedingly difficult for mining companies to secure the capital needed to invest in projects with crucial infrastructure requirements. Considering all that, the context of this article aims to understand how mining companies can improve access to finance for infrastructure development.
Mining Companies structure better access to Finance for Projects with Large Infrastructure Requirements
Based on thorough research across the mining sector, the finance community, and desk-based study, the overarching models for mining companies to access finance for projects with vast infrastructure requirements have been identified. Additional findings propose that while there is capital available, investment is being impeded by unattractive risk-return profiles and unclear roles and responsibilities for asset finance and development. This is especially true for projects where the infrastructure is intended to be multi-use/multi-purpose as these projects are generally more complicated, mostly have higher finance requirements, and are frequently in regions with high sovereign risk, and weak legislative and regulatory frameworks. All of these factors combine to aggravate the financing challenge.
The main overarching models for mining companies to fund projects with large infrastructure components are:
- Solo: Some mining companies finance, build, operate and sustain their infrastructure independently.
- Contract: Mining companies can partially or fully invest through the Solo model and partner with a third-party service provider(s) who accept(s) obligation for building, operating, and maintaining the infrastructure component of the project.
- Sovereign Financing: While creditworthy countries have been able to raise capital from the capital markets to sustain their mining infrastructure, less developed countries lacking favorable credit ratings have relied on concessional funding from multilateral agencies such as the World Bank, and other institutions to fund their mining projects, either through direct lending or credit enhancement.
- Corporate Financing: In corporate financing, financiers make a loan to the project sponsor, which uses the revenue to fund the project, generally through a local subsidiary. The advantage of corporate financing is that it often is extended on better terms than limited recourse debt, as the sponsor’s entire operation is the source of repayment.
- Project Finance: In project finance, financiers look at the cash flows of the project itself (in this case, the mining infrastructure), as the source of the repayment of the debt, instead of a corporate or sovereign entity. It is also described as a “contractually based” financing technique because the responsibilities of the different project participants are outlined in several contracts. Financiers make their funding decision based on their examination of the project company’s technical and financial ability to perform under these contracts.
- Special Purpose Vehicle: An investor, or group of investors, can finance, construct, own and operate the infrastructure asset through an independent financing vehicle.
- Public Private Partnerships: It refers to medium or long-term contracts between a public sector authority, a mining company, multilateral development banks, and potentially other private companies whereby infrastructure financing and responsibilities are bundled across the design, build, operation, and maintenance of the project.
Any of these models can effectively finance a project with large infrastructure requirements, and it could be used in combination or individually, depending on the nature of the project and the risk profile and necessities of the parties involved.
How to improve access to capital for infrastructure development.
To facilitate access to capital for investment in infrastructure, mining companies need to diminish the risk profile and define the roles and responsibilities across asset finance, build operation, and maintenance. It is unlikely that any infrastructure investment models will fix these issues. Rather, companies, host governments, and investors need to consider how to improve existing models to overcome the challenges. Outlined below are the efficient methods for doing this:
- Minimizing the risk profile of infrastructure investments
- Managing expectations
- Mobilizing a new class of investors
These approaches can be used independently or in conjunction to increase access to capital for infrastructure development.
Risk Management
Currently, one of the factors impeding investment activity in the mining sector is the presence of significant investment risks. The fundamental problem of mining companies is a thorough study of investment projects, risk assessment, and investment risk management.
When formulating distinct measures to reduce investment risk and the uncertainty of attaining premeditated economic results, one should consider the organization’s ability to transfer risk to an insurance company; redistribution of risks between all participants of the investment project, and self-insurance.
if you are a mining company looking for your infrastructure project finance or investors, please contact your Damalion expert now.
