Yoana Cholteeva (YC): What is the importance of alternative sources of finance in the mining industry?
Alexander Keepin (AK): In recent years, we’ve experienced two strains on debt or equity funding, and so as companies are looking to raise development capital, we find that they use a variety of sources – including a mixture of alternative sources of finance – that may mean adding a royalty or offtake agreement alongside traditional debt and equity.
YC: Could you tell me a bit more about the different finance sources available to a natural resources company?
AK: Mining companies tend to use a few sources. There’s commodity based finance, such as royalty finance metal streams offtakes pre-payments. They use sort of traditional debt finance, which can range from straightforward bank debt and project finance to equipment, leases, operating leases – those things together with any sort of corporate or convertible bonds. Then in addition, there is equity finance, which is typically through the equity capital markets or private capital or capital from private equity funds.
Another method is strategic investments and joint ventures and actually, we’re seeing an uptick in the number of joint ventures at the moment, particularly joint ventures to fund early-stage development. I think generally, people are familiar with those projects which are currently being funded and held by companies listed on the equity capital markets. We’re seeing that more often companies are reaching out to sort of earlier stage, more greenfield projects and entering into joint ventures just to fund the development of those. Another significant source of capital is mergers and acquisitions, where companies are selling projects to finance other projects.
YC: Are there any considerations a listed company should be aware of when looking to secure alternative funding?
AK: I think the key thing that we’re seeing is that for larger fundraisings, people are using a much more varied range of finance product. And with that comes the sort of difficulties in agreeing priorities between those various providers of finance and what security they’ll get and other protections for a number of companies. We see that one of the key challenges when putting in place those arrangements is how they impact on any other sources of finance the company has used in the interim year. For example, if we go back to the 2014 – 2015 period where capital was very difficult to raise, companies may have agreed to certain financing arrangements and now they need to renegotiate in order to be able to raise additional finance.
Also, mining companies are increasingly looking at where they can raise capital protection, particularly through the more traditional routes of depth and equity. And we’ve seen a number of Australian and Canadian companies looking to lift in London in order to access European investors as they seek to raise their equity finance.
YC: What impact can shareholders have on certain financing arrangements?
AK: I think one of the key concerns with shareholders is that they can be diluted by any type of equity finance, which will reduce the value of their investment. They can normally directly impact that in terms of what share authorities they give the company. The more difficult thing for shareholders is that certain transactions around royalties offtake may not require shareholder approval, but may impact the value of their investment. Overall, shareholders are keen to see a project develop and for the company to work out the best way to generate sensible returns for all.
YC: What advice would you give to a company pondering a pursuit of alternative funding for a project?
AK: I think the key is bearing in mind what your future capital requirements are likely to be and how this finance will impact on your ability to raise funding in the future.
Particularly if a company has short term needs to finance, it’s very important that they consider the impact that this funding will have on any sort of future fundraising, for example, for construction finance.
YC: What trends are you currently seeing in mining industry funding?
AK: The key trends that we’re seeing at the moment are around the role of private equity in the mining industry. To start with, private equity activity seems to have been a bit quieter recently. A number of the private equity funds are looking to raise additional capital themselves and have deployed substantial portions of their existing funds. Secondly, a big number of private equity funds are currently in their fifth or sixth year, having been deployed. For this reason, we are expecting to see a bit more mergers and acquisitions activity in the markets driven by private equity funds in the near future, realising investments from their earlier funds.