22 November 2019

Alternative Sources Of Mining Finance - The North American Experience

The recent M&A activity in North America involving the mergers of Barrick and Randgold and the recent merger of Newmont and GoldCorp have highlighted a number of current trends in the mining industry, particularly in relation to the availability of debt and equity for the development of mining projects.

The gold sector is continuing to attract investor interest, supported by a relatively strong gold price and the spate of recent significant M&A activity. Many Australian mid-cap gold companies are currently gearing up to take advantage of the opportunity to acquire that are likely to be spun out by both Barrick and Newmont following their respective recent transactions. Similarly, the higher quality battery mineral projects are still able to attract investor interest, particularly in Australia. 

However, the rest of the mid-cap and junior sector still faces a significant shortage of available capital.

There are a number of reasons for this but one of the main contributing factors has been the decriminalisation of cannabis in Canada and a number of states in the USA. Risk capital that had previously been assigned by investors to the mining sector has been diverted into companies developing cannabis businesses, both for medical and recreational purposes.

Additionally, continuing uncertainty in relation to the global economy, including the potential impact of the China/USA trade war and ongoing uncertainty in relation to Brexit, has seen investors decide to leave significant amounts of capital sitting on the sidelines. 

In Canada and the USA, the mining sector has addressed this shortfall in the availability of capital in two primary ways.

Streaming

Firstly, streaming transactions have become a significant source of capital for many North American mid-cap mining companies. A streaming agreement involves a financing party agreeing to the future purchase of minerals from a project in exchange for an up-front advance payment, referred to as a “deposit”, which is applied against future deliveries.  Additional "top up" payments are usually also made as the minerals are delivered. The price for the minerals is pre-agreed, which gives the financing party exposure to any upside in the relevant commodity price. The quantities to be purchased are often expressed as a percentage of production, which provides flexibility for the mining company in its production schedule and provides it with a measure of protection.

Streaming transactions often focus on minerals that are a by-product of the production process, rather than the main mineral being produced at a particular project. For example, if a gold project also produces quantities of other minerals such as copper or cobalt, those other minerals may be the subject of a streaming transaction. This allows the mining company to retain the ability to sell production into the general market and therefore preserve any potential upside in the gold price, whilst using any copper or cobalt credits to assist in financing the development of the project. Streaming transactions are therefore often found in polymetallic mining projects.

Another significant issue to note is that the financing company in a streaming transaction requires a relatively high degree of confidence in the ore body before it will agree to enter into the transaction. For this reason the project will ideally need to be at, or close to, the DFS stage, or even in production. Streaming transactions will generally not be available in relation to projects at the exploration stage.

Lastly, given that the streaming transaction often relates to by-product minerals, projects suitable for a streaming transaction will generally need to be large in scale.

Streaming transactions have not been as popular in Australia as they have been in North America. This may be partly due to the fact that many of the larger polymetallic deposits in Australia that would support a streaming transaction are owned or controlled by large mining companies that have not needed to enter into a streaming transaction to assist in financing the project.

However, there are many mid-cap mining companies in Australia that own potentially significant polymetallic deposits or which own a suite of exploration projects across different commodities. A streaming transaction on the non-core mineral products owned by these companies may be possible, depending on the stage of development and scale of the project and is an option that should be borne in mind when considering the financing structure and options for the development of the project(s).

Private Equity

The second major source of capital in North America over the last few years has been private equity. Private Equity funds (including venture capital and turnaround funds, distressed debt and direct lending, family offices and high net worth individuals, natural resources funds and sovereign wealth and hedge funds) have been very successful in recent years in raising large amounts of capital and a significant portion of those funds are targeted at the mining industry. According to the private capital tracking firm Preqin, mining focused private equity funds in North America are currently holding at least US$6 billion in unallocated capital. 

Although the returns sought by private equity funds are typically higher than other forms of equity, the significant amount of unallocated private capital available suggests that there will be opportunities here for mid-cap and junior mining companies. In this regard, the North American experience is reflected in Australia, with a number of mining focused private equity funds active in seeking opportunities to deploy their capital in the mid-cap and junior mining sectors.

Some of this capital has been deployed in recent times, albeit in relatively small quantities.  As noted above, the current uncertainty in relation to global growth prospects and relations between the US and China have so far acted as a brake on the deployment of this capital.

What's next?

The appetite of mining companies and Private Equity for the acquisition of new projects is likely to be tested in the near term in light of the recent indications from Barrick that it is finalising plans to sell at least US$1.5 billion worth of assets (with some analysts estimating up to US$5 billion worth of sales). This sales process, and the sale of additional assets likely to follow on the heels of the recent merger of Newmont and GoldCorp, may see some of the significant capital currently locked up in Private Equity funds and sitting on the balance sheets of mining companies put to work in the acquisition of these projects.

Share on LinkedIn Share on Facebook Share on Twitter
    You might also be interested in

    Mining and exploration make a significant contribution to Australian capital markets, at least in volume terms if not absolute value terms. Resources companies make up more than 25% of all...

    16 December 2019

    July 2019 marks 20 years since the Environment Protection and Biodiversity Conservation Act 1999 (Cth) (EPBC Act) was passed by the Australian Government and hit the stage.

    25 November 2019

    The Supreme Court of Victoria has considered whether an insured buyer under a warranty and indemnity (W&I) policy is entitled to indemnity from an insurer in circumstances where it relied on income...

    13 November 2019

    Significant change to rehabilitation requirements for the resources sector is upon us with the commencement of the new Progressive Rehabilitation and Closure Plan (“PRCP”) framework on 1 November...

    06 November 2019

    You may also be interested in...

    Legal services for your business

    This site uses cookies to enhance your experience and to help us improve the site. Please see our Privacy Policy for further information. If you continue without changing your settings, we will assume that you are happy to receive these cookies. You can change your cookie settings at any time.

    For more information on which cookies we use then please refer to our Cookie Policy.