Alternative Financing

Money’s tighter but finance options have widened for an industry in need of creativity

It’s like online dating for the mining industry — not so much PlentyOfFish as PlentyOfGold. If you have a nice figure (in terms of mine data about a potential deposit), post it on their website and Abitibi Royalties Inc. might do a little smelting with you.

It’s part of the desperate and creative alternative financing measures happening now in the Canadian mine sector: cash-strapped junior and intermediate mining companies – unable to access capital through the usual suspects of issuing equity or borrowing from lenders – are trying new ways to hook up with financing for projects, or to just keep their companies alive.

Last June, Abitibi Royalties president and CEO Ian Ball launched Royalty Search, through which junior mining companies are invited to send data on existing mineral assets or possible new claims to Abitibi, one of the smaller, newer players in the metals royalty game. If Abitibi likes what it sees, it will spring for the mine company’s claims fees and taxes long enough to keep the company going until it finds a partner to help get a project to production.

In return, Abitibi takes a small percentage on the company’s net smelter returns for the life of the project. In its first month, Royalty Search netted three deals. On July 8 Abitibi announced the third: in exchange for paying the annual $5,000 claim fee due in 2016 for Nordic Minerals Ltd.’s property claim near Flin Flon, Manitoba, Abitibi gets a 2 per cent net smelter royalty (NSR) once production starts. For each additional annual payment Abitibi makes over the next two years to cover Nordic’s claim fees, Abitibi gets an extra one per cent NSR.

It’s a dark sign of the times in mining that a junior company with a promising find can’t cough up $5,000 to maintain its claim. But that’s become a common story since 2012. There are 2,340 companies listed on the TSX Venture Exchange. About 1,400 of those are junior mining and exploration outfits. Perhaps 500 of those are in a virtual coma — so-called zombie companies barely able to keep on their lights or meet listing requirements.

Depressed commodity prices triggered an investor flight from mine stocks. Last year the amount of capital raised in the mining sector was about half what it was in 2011. Except for a handful of major and proven companies such as Teck Resources or Barrick Gold, banks and other lenders have shunned mining companies. Mix in the summer’s instability caused by Greece’s problems, along with stock meltdowns in China and a continuing slowdown in Asian growth, and confidence in metals and minerals has eroded even further.

That doesn’t mean there aren’t some deals to be done. “There is mining money out there for the right projects,” insists lawyer Mike Pickersgill, who co-heads Torys LLP’s Mining and Metals Practice with colleague Michael Amm. “The challenge is it often resides with different types of investors. So you need to broaden your field in order to get your project financed. Doing that may mean you look at folks who are investors in high-yield debt, folks who are providers of more traditional credit facilities, folks who are equity providers, and then the streamers and royalty companies.”

It’s a kind of financial sustenance keeping some mining outfits going when hope was nearly gone. “What has changed in terms of the availability of capital,” says Michael Amm, “is it has moved closer to the production stage. When money runs dry, in general, the money tends to congregate and be more readily available to people who are closer to production, because then your risk is reduced.”

Not so long ago, TSX-V-listed exploration-focused juniors could rely on speculative, risk-taking investors who would pile into their penny stocks hoping to score when a new discovery was sold to a bigger mining company that had the capital to put an asset into production. Now, says Vancouver lawyer Alan Hutchison, Co-Chair of Dentons Canada LLP’s mining practice, it’s “the patient, sophisticated investor who is going to dominate the space.”

A question surviving juniors are asking is whether those investors will include private-equity (PE) firms or not. Currently, low mining company valuation and their desperation to sell assets or equity to stay alive can mean bargains for those willing to brave depressed prices and volatility in the commodities market. Some private-equity funds have begun kicking the mining industry’s tires. But so far few notable deals have been made.

“I am seeing a little bit more private equity,” says Hutchison. All the significant mine financings he’s done in the past six months have been done through private equity. “Not that there’s been a lot. But there are a few [private equity] funds that are starting to write more sizable cheques.”

Collectively, many private-equity funds raised billions over the last few years. “Now they actually have to deploy that capital,” explains Hutchison. “And I think there is a sense among them the costs of assets won’t get cheaper.”

“These private-equity guys are no dummies,” agrees Simon Finch, a Toronto partner with Blake, Cassels & Graydon LLP. “This is the time to be shopping.”

Several mine-focused PE funds have popped up in recent years. For instance, Mick Davis, former head of the Swiss multi-national miner Xstrata, raised US$5.6 billion in his private vehicle called X2 Resources for a fund focused on acquiring mid-tier mining assets.

In New York, Finch’s colleague Geoffrey Belsher, a managing partner at Blakes, gets a close-up view of the world’s largest private-equity funds. “Some people say private equity can’t run away fast enough from this [mining] space right now,” he says, adding private equity has issues with commodity price risk and the longer life cycles of mining investments. And they’re largely avoiding investments in publically held mine companies.

 “We are seeing though, in this marketplace, private-equity firms making equity investments in smaller private companies,” Belsher says. And some are making high interest loans to miners at rates such as prime plus 10 per cent or more. Yet so far private-equity funds have largely remained on the sidelines when it comes to mining. So miners are grasping at other financial concoctions to get them through hard times.

Melanie Shishler is a partner in the Mergers & Acquisitions, Capital Markets, Mining and Corporate Governance practices at Davies Ward Phillips & Vineberg LLP. She recently worked on an innovative arrangement for one TSX-V-listed client, Roxgold, which struck a shares-for-services deal to develop its Yaramoko Gold Project in Burkino Faso. In exchange for up to $15 million in discounted Roxgold common shares, African Underground Mining Services (AUMS) will undertake preproduction underground development work for Roxgold. The deal, explains Shishler, helped cut out middleman banker and brokerage fees it would have incurred had it tried selling a $15-million bought deal in equity markets.

It’s the first shares-for-services deal Shishler has heard of in the mining space. Besides saving Roxgold the money it would take to raise capital, “you effectively make your key contractor in your development program into your partners.” In other words, the contractor now has real skin in the game — an incentive to do their development work as cost-effectively as possible.

“I think people who see this deal may very well be approaching some of their contractors, for something similar,” predicts Shishler. But, she adds, to pull off such a deal a mining company needs a high-grade asset, not to mention a particularly good relationship with their contractors. “Contractors are not in the business of taking equity risks with their [mining] clients.”

Over at Dentons in Vancouver, Alan Hutchison is seeing something else new in junior mine finance; the emergence of complex multi-party deals. Last June, Osisko Gold Royalties brought five juniors together through a company Osisko founded, OBAN Mining Corp. The deal, financed with $65 million cash, brought some consolidation to the Canadian mining scene, merging four small companies: Temex Resources, Ryan Gold, Eagle Hill Exploration and Corona Gold under OBAN’s banner.

“I have had clients and people ask if you can even do a three- or four-way merger easily and my answer is always ‘No!’” says Hutchison. “It’s just pulling teeth, very, very difficult to do. But I think this was a sign of some desperation in the market where these companies realize [they] have no other option...”

That Osisko could pull off a five-way merger “is pretty remarkable actually,” says Hutchison, and could trigger similar deals.

Though not new, royalty and streaming deals are becoming more flexible. In a streaming deal, a company such as Silver Wheaton Corp or Franco-Nevada provide upfront capital to get a mine closer to production in exchange for the right to buy a percentage of future production (often gold or silver that is the by-product of, say, a copper or nickel mine) at a deep discount to market prices. They can then sell those precious metals at a profit. In return for their investment, royalty companies take a percentage of future net smelter returns from a mine.

At Torys, Amm and Pickersgill noted in a 2015 Mid-year Capital Markets report they co-authored that royalty and stream financing has been evolving and increasingly combined with traditional debt and equity to “bridge the funding gap for both project development and M&A transactions.”

Streaming companies have been expanding their usual repertoire of silver and gold streams into new minerals, such as chromite, diamonds and potash. And they’ve been coming in with money at earlier stages of mine development, though in exchange for that risk they are demanding, and getting, better streaming deals.

In October 2014, Toronto-based Lundin Mining Corp. bought an 80 per cent stake in the Candelaria copper mine in Chile for US$1.8 billion. To finance the deal Lundin raised US$600 million in an equity issue; issued US$1 billion of senior secured debt and stuck a US$648-million streaming agreement with Franco-Nevada. It gives Franco-Nevada rights to buy 68 per cent of Candelaria’s gold and silver by-product at a discount.

Such deals aren’t easy to nail together, says Amm. It’s difficult to align the interests of parties putting up financing in different ways. For instance, a company producing copper might concentrate digging in a high-grade copper area of the mine where little silver or gold by-product is produced. That could frustrate a streamer’s interests, so ways have to be found in contracts to ensure everyone’s investment returns are protected.

As in the wild, where a shortage of food kills off the weak, making the remaining members of a species healthier, the scarcity of mine financing should improve the future health of the industry. Belsher says the owners and executives of juniors are now willing to give up control of their companies, even merge and walk away from their positions, in order to see them survive.

“We’re seeing that for the first time. That’s a very healthy thing because the market has been over populated,” with too many publically listed junior mining companies. “So this is a healthy thing people have wanted to happen for three, four, five years. It’s just starting to happen now.”