Having a resource capable of becoming a mine and finding the money needed to finance its various stages of development are the twin pillars of success in the mining business. After that, all you have to do is sell what you produce at a profit. Over the years, mining companies and their advisors have shown considerable ingenuity in financing projects by a combination of: equity based financing; corporate and project-level debt; and strategic partnership monetization techniques at the various stages of project and corporate development whereby:
- initial access to the capital markets is achieved through equity issues
- convertible debt is used to finance projects
- once stable positive cash flows have been achieved straight debt can be used to lower the cost of capital and reduce dilution
- increased stable cash flows can be used to reduce debt
- finally, the capital structure can be managed to achieve the most cost effective financing structure
The underlying principle being that the types of financing available at a particular time are linked to the stage of the company's projects which require financing.
A recent presentation on mining financing made by Fasken Martineau identified the following factors among those that impact potential financing sources:
- project development stage
- technical risks
- jurisdictional/political risks
- market conditions
- ability to hedge
- balance sheet strength and size
- voting rights/board seats
The presentation focused on a number of case studies which illustrate the way in which the various techniques can be made to work. Of these, the most interesting and challenging to execute are probably strategic partnerships. As shown on slide 1, strategic partnerships are sought for a variety of reasons including funding, operating/management expertise, off-take and de-risking; investments may be made for control or for a minority stake and financial support can be provided in various forms; and a significant number of considerations related to governance; ongoing support, financial controls and further investment rights all need to be considered to structure an arrangement that achieves its objectives.
The transaction whereby Hochschild Mining acquired a 35% stake in Lake Shore Gold, increased that stake to 40% and entered into a strategic alliance agreement with Lake Shore that remained in place until October 2010 when Hochschild sold its ownership position is a good illustration of a successful strategic partnership. As will be seen from slide 2, its features included a standstill, pre-emptive rights, ROFRs, board representation and some unusual terms which all contributed to a successful outcome.
Access to pure project debt is often restricted to large cap mining companies, depending on market conditions. In what was a first in December 2011, Uranium One successfully issued 5-year unsecured bonds in the Russian bond market and swapped them into US dollar pay obligations, being the first time that an international company has directly issued securities into the Russian market. Slide 3 shows how it was done.
Miners and their advisers have needed to be innovative over the years in their efforts to find the money required to finance their projects through various development stages in good times and bad. This time next week, somebody will probably invent yet another technique to finance a project. Whether it proves to be a flash in the pan or something that stands the test of time will probably depend on whether the investors get what they bargained for.