In their latest paper, Fieldfisher explores the different sources of finance available to companies looking to develop, construct and expand their mining projects and analyses how a combination of sources is often required.
Traditional equity and project financing for mine development has dwindled due to a lack of returns and a much-increased risk profile. With current market conditions looking set to continue in the short to medium-term, it takes determination, flexibility and ingenuity to bring a new project to production. Alternative financing has therefore become a key feature of the mining sector as cash-starved miners are forced to think creatively in order to secure finance. As a result, the availability and use of alternative methods of financing has increased to fill the funding gap in the last three years. They include:
- Offtake agreements
- Forward purchase and prepay agreements
- Royalty agreements
- Streaming agreements
- Construction arrangements aimed at reducing budget and timetable risk
- Equipment financing
- Investment by suppliers
Focussing primarily on the financing of new greenfield projects, the paper also examines common themes in the sources of finance currently available to the industry, including equity, production-based, debt and construction financing, as well as highlighting recent examples and trends and discussing issues to be addressed during negotiations.
Jonathan Brooks, Head of Mining and Metals at Fieldfisher and co-author, commented:
"Whilst not without its challenges, capital is still available to finance mining projects. Those prepared to take a long-term view of the sector remain able to offer a number of different funding solutions. Strategic corporate investors, specialist mining private equity funds, commodity traders and streaming and royalty companies are all actively looking for opportunities in a subdued market.
"We are likely to see a continuing redeployment of capital by institutional investors (and possibly even some banks) into production-based financing, either indirectly through investment in the providers of such funding or directly through their own participation in streaming and royalty transactions."
Matthew Hinxman, Partner at Fieldfisher and co-author, added:
"Since 2011, we've witnessed the closure or partial closure of mining desks at a number of banks as they retreat from involvement in the sector. With a shortage of traditional project finance sources, companies are seeking to access additional debt providers during more challenging times.
"An ever-increasing pressure on banks to maintain capital ratios can manifest itself in an unwillingness to extend ‘longer-term’ finance (in real terms, anything over five to seven years). Similarly, there is now a much smaller pool of banks with the capability and know-how to undertake financings in the mining industry. Nevertheless, even with a reduced pool of lenders, there remains a genuine competitiveness between those still swimming in this pool, each one still hungry for a good deal."