Creative Financing

Canada’s mining-savvy capital markets are the destination of choice for many global explorers and producers. But these days – even in Canada – mining for capital can be as challenging as extracting ore from the ground.
Creative Financing

Canada’s mining-savvy capital markets are the destination of choice for many global explorers and producers. But these days – even in Canada – mining for capital can be as challenging as extracting ore from the ground.

While banks, syndicates
and large investment funds are still doing financing for proven Toronto Stock Exchange producers such as Barrick Gold, Teck Resources and Goldcorp, it’s a sharply different story for the more than 1,200 juniors listed on the smaller TSX Venture Exchange. They are finding financing much tougher to come by, especially those that are not a gold play.

 “The big guys have been cleaning up their balance sheets and doing pretty much what they have to do, so they’re in good shape,” says John Sabine, counsel to Bennett Jones LLP in Toronto. “They’ve got the traditional sources of lending plus the equity markets to support them.

“But the small guys? The small guys have got problems, they’re scrambling pretty hard.”

Widespread reports that over 500 micro and junior mining companies on the TSX Venture Exchange are limping along with share prices below 5 cents and less than $200,000 in working capital provide a clear indication of how badly they’re hurting.

“For them it’s really been a struggle to do financings,” says Derrick Auch, a partner in the Calgary office of Davis LLP.

Junior explorers are considered the lifeblood of the mining industry, and Canadian regulators have been trying to help them ride out the challenging market conditions, say lawyers who work in this area.

The TSX Venture Exchange, for example, relaxed some of the requirements needed for a discretionary waiver to the provision that bans companies with a share price below 5 cents from doing financings. The waiver permits them to do a rights offering, issue special warrant or convertible debt of up to $500,000.

In March, the majority of Canada’s provincial securities regulators also introduced a prospectus exemption allowing TSX Venture companies to sell securities to existing shareholders without an offering document, making raising capital much cheaper. The exemption limit is $15,000 per shareholder unless they have received suitability advice from a registered investment dealer.

The amounts may be small, says Auch, but a lot of micros and juniors are living hand to mouth.

“These are the real junior explorers out there that do a drill program, then they raise their next round of money and do another drilling program.

“So they’re doing these offerings of $200,000 or $300,000 just to get some money in the door to keep the lights on and make their assessment payments on the properties. They’re trying to keep everything operating until they do their next financing or they find something.”

Sometimes that “something” is not in minerals in the ground, but a life raft in the form of a company formed under the TSX Venture Exchange’s Capital Pool Company program.

The program, which the exchange says is the only one of its kind, was set up to incubate new companies. It permits a small number of investors with suitable business and public-company experience to put money into a blind pool, which is then listed as a Capital Pool company. It will then have two years to complete a qualifying transaction.

Not every Capital Pool company manages to make an acquisition, says Auch.

“Some of these companies end up with no project and stranded cash. So what some of the micro and junior miners have started doing is to contact them to try and do a deal. They say: ‘You can invest in us. We’ll give you shares. You really don’t have any other assets anyway.’

“So the company winds up and distributes the shares that it got to its shareholders. I think of it as a kind of shelf-company private placement.”

Slightly larger juniors, those that can afford to produce and file an Annual Information Form, have actual shelf prospectuses available to them. And an increasing number are using them.

 

Short-form base shelf prospectuses are a capital-raising technique originally developed in the US for the biggest of the blue-chip issuers. But it drifted across the border into Canada, was used by large corporations here and has gradually been adapted for use by smaller publicly traded companies.

All TSX-listed companies are required to file an Annual Information Form; TSX Venture companies are not. But those that choose to are eligible to file a shelf prospectus at the same time.

“The filing of shelf prospectuses is one of the most interesting things I’ve seen in junior issuers in the mining space,” says Gordon Chambers, a partner at Cassels Brock & Blackwell LLP in Vancouver. “Right now many are quite desperate for cash, they need to do a $500,000 or a $1-million financing to keep the lights on and keep the drill rigs turning.”

There are several advantages of using a shelf prospectus over a traditional private placement, he says.

A shelf prospectus requires only a one-page pricing supplement, which incorporates the AIF by association. The securities are immediately free-trading unlike shares issued under a private placement, which, in Canada, have a four-month hold.

The process is also much faster than doing a full prospectus offering, “which can take three weeks or longer,” says Chambers. “If you’ve got a shelf on the shelf, you can do it in three days.

“So in a volatile capital market, if you want to make yourself stand out from the competition, being able to offer free-trading securities in three days is pretty powerful.”

He says while the use of shelf prospectuses in the smaller end of the mining market is not yet routine, “we’re starting to see more of it, and there’s one particular client in our office that’s been using it to great effect.

“Not very many mining companies are yet picking up on it, but for those that do, it’s actually quite a powerful financing technique.”

 

At the higher end of the market, even with traditional forms of project finance more difficult to come by, mid-tier and large producers have additional options available to raise cash, says Kathleen Keilty, a partner at Blake, Cassels & Graydon LLP in Vancouver.

The divestiture of non-core assets has been popular because it also cleans up the balance sheet and makes the company more focused. Private-equity deals are also becoming more attractive to miners than they were in the past.

 “The reality is the private-equity players have slightly different expectations of what they’re going to get for their money,” says Keilty. “They may require a seat on the board, some pre-emptive rights. They’re taking an equity position in the company, which a lender wouldn’t have, so it comes at a price in the sense there’s more direct involvement in the company and the governance.

“There are different deal terms that come attached to private-equity financing than project finance.”

Another popular financing technique being used these days is commodity streaming, she says; for example, a gold company that sells off the silver part of the mineralization.

“Say you have a company that is really interested in producing gold, but there also happens to be silver in their ore. Because they don’t want to spend their time or energy producing the silver, someone out there willing to buy that silver may come to them ahead of time and say, ‘We know you’re not producing yet but you’ll be producing someday. We’re going to pay you ahead of time to deliver all the silver that comes out of that.’

“It’s a fantastic way of financing because the gold company was never really focusing on the silver to begin with.”

Sabine says miners – especially those that need money to finish off development and move into production – may also opt to forward sell part of their core production to a royalty streaming company that will pay them upfront for the right to buy some or all their production later at a fixed cost.

“It’s been a very good tool for miners to use to be able to raise funds,” he says. “But this is just for higher-end and higher mid-cap. People aren’t going to put this kind of money into Moosepatch — they’re going to put it into something they see as good that just needs an extra push to get its production in place.

“For lower mid-tier companies and bigger juniors, they’re frequently going to convertible debt.”

Sabine says he’s not a big fan.

“The thing you forget about debt is you’ve got to be able to repay it, and if you’re a junior, unless you get into production, where are you going to get the revenues? That’s the problem. But that’s what’s available at this point in time.”

Even then, the borrowing rates are not particularly good, he adds. “They’re pretty expensive rates, generally. This is not a place for weak-hearted people.”

Auch says lawyers who work with micros and juniors that lack the cash to retain financial advisors can often help the company with decisions like which financing route to go.

“We can help guide them through, and tell them the process. You can help with that. These shell-company stranded-cash private placements, the existing shareholder exemption and the 5-cent waiver haven’t been used a ton. They’re pretty new. But everybody’s looking for alternative ways to raise capital.”

 

Sandra Rubin is a freelance legal affairs writer.

Lawyer(s)

John W. Sabine Derrick K. Auch Gordon R. Chambers Kathleen P. Keilty