Mining For Dollars: The Challenge of Financing Mining

Finding financing in the mining sector has become more challenging and industry players are increasingly taking a more creative and multilayered approach

Rout. Slaughter. Death spiral. When writing about the mining sector these days, journalists really have to drill a deep vein of gloomy expressions to reflect the state of the global sector.

Since 2011, precious and base metal prices continue to trend downward. That year gold reached a zenith of US$1,923 per ounce and iron ore reached a record high of US$177.90 per tonne. As this article was being written, gold was down to $1,150; iron dipped as low as $61.10 per tonne. Ouch on both counts.

As a result, there’s been a rout – oops, that word’s been overused – let’s try: an exodus of investment capital streaming out of the sector to much safer havens such as energy, health and technology stocks. Running away have been both retail and institutional investors. Add to mining’s money woes the fact that since the 2009 financial crisis, European and African banks, once the main providers of loans to the world’s mining companies, have essentially shut their vaults to them.

Canada is where domestic and foreign companies, majors and minors, come to sell stocks in their mining ventures. In 2013, reports The Mining Association of Canada, 48 per cent of all global mining equity financings were done on the TSX and TSX-V. Fifty-seven per cent of all the world’s mining companies are listed on those two exchanges. This is where the global mine finance game mainly gets played. But here are some other stats that have checked that source of finance right over the boards. On the equity side, just before the 2009 crash, the global industry raised $22.2 billion on TSX exchanges, their best year ever there.

In contrast, last year a mere $7 billion was raised on the TSX. On the TSX-V $1.8 billion was raised (compared to $5.9 billion in 2011). The total in 2014 then: Just $8.8 billion. And though the gold sector enjoyed a spurt of financing deals in February, raising about $800 million over a few days, that was for a few majors and mid-tier companies only. The flurry had the lifespan of a Rick Mercer rant.

At the Prospectors & Developers Association of Canada (PDAC) conference in March, mining analyst John Kaiser told attendees that mining is in “the worst bear market in decades and the retail investor has completely left the room.”

For struggling (writhing? squirming? dying?) junior exploration companies, which could once easily raise decent amounts of capital on the TSX Venture exchange, there seems little left to do but switch off the lights and go live in a basement somewhere.

Or go straight to pot: In what’s been dubbed the “Breaking Bad Strategy,” a dozen-plus Canadian junior miners – who maintained shell company listings on the Venture exchange in the weak hope that equity investors would poke their noses back into the market again – found better prospects in medical marijuana. In March 2014, for example, Affinor Resources Inc. (now Affinor Growers Inc.) bought a controlling interest in a medical marijuana company and, using its mining shell to list the new entity, raised $2 million. Since that time the weed stock has shot up 2,600 per cent.

“For a lot of juniors to survive right now, they are just cutting costs to the absolute bone,” says lawyer Dawn Whittaker, Canadian leader of Norton Rose Fulbright Canada LLP’s mining and commodities practice. “They have curtailed, postponed or cancelled their exploration plans and budgets.”

It’s gotten so bad, mine juniors are sharing telephones and office space and even part-time CFOs. “Anything to keep the lights on,” says Whittaker. “That’s really all they can do. They are not going to get equity in the markets. They maybe won’t even be able to avail themselves to alternative financing opportunities.”


What’s an alternative?

Ah, there’s that hopeful phrase: “Alternative financing.” It’s evolved in meaning as mining’s fortunes have devolved. Just a few years ago it primarily referred to precious metal streaming and royalty companies. Streaming as a financing model was invented by Vancouver’s Silver Wheaton Corp., which since its 2004 inception has grown to become the largest such company in the world. In exchange for upfront payments – usually the last tranche of capital to help get base-metal mining projects into production – Silver Wheaton gets a guaranteed percentage of any agreed-upon silver or gold byproduct for a predetermined time period at a guaranteed price far below market. They can then sell it – if the metals go up in price – at a very nice profit.

Royalty companies, such as Franco-Nevada, in exchange for providing capital to a mine owner or for a property purchase, get a percentage value of minerals or metals produced by that mine.

These forms of once-fringy “alternative financing” were, until three or four years ago, something most mine outfits tried to avoid because they eat deeply into profits. Now they’re the main strand in what few lifelines are still available to mine companies. They no longer qualify for the word “alternative.” And even they are being adapted in order to get deals done now in the current environment, says Michael Pickersgill, a Toronto lawyer who co-leads Torys LLP’s mining and metals practice.

“What’s new is that miners and their advisors and financers have really had to put on their creative deal-making hats,” says Pickersgill. He recently advised Orion Mine Finance – one of a relatively new and still rare breed of private-equity firms focused on mining – in a complex and novel $944-million deal in April 2014. In that one Orion, along with Investissement Québec and the Caisse de dépôt et placement du Québec, financed construction of Stornoway Diamond Corporation’s Renard project, which will become Québec’s first diamond mine. That deal included a unique combination of equity and debt financing, along with a diamond stream agreement; the first streaming agreement ever for that sparkling gemstone.

“Diamonds aren’t like gold and silver,” says Pickersgill. “As the Birks ads tell us, every diamond is unique. So in order to figure out pricing and other matters, you had to think a little bit outside the box in terms of how you construct the stream transaction.” Those who cobbled the transaction together had to consider how diamonds get mined and sold — a much different process than gold or silver. As well, a lot of different types of players were brought together at the same time to make the deal. “That led to a lot of very interesting legal issues around the inter-relationships of the agreements and the actual execution of the transaction,” says Pickersgill.

A fear of finding financing is prompting mine majors to forgo the usual multi-stage funding approach done over a number of years and to instead bundle all facets of financing at once. “That’s what the guys at Stornoway did,” recounts Pickersgill. “The CEO said to himself: ‘The only way I can do this is if I get all the pieces lined up at once and everyone believes the thing will actually get built.’”

Pickersgill has spied a couple of trends emerging in mine finance over the past 18 months. One he expects to continue for some time is the further tweaking of established forms of alternative financing that have arisen alongside the decline of commodity prices. “We see streaming transactions really evolving so they can become available to a broader set of mining companies,” he predicts.

Just a few years ago streaming and royalty deals were only available to companies whose projects were nearly ready to go into production. And, often, the mining companies that signed streaming deals to get capital were involved in base metal or mineral extraction; they were looking to sell their precious metal gold and silver production as a byproduct of their main ore. Now more gold and silver companies are looking to raise money by selling off a portion of their core product to streamers, who get cash flow without any of the risk involved in operating a mine.

Pickersgill, who worked closely with a Norton Rose team on the Stornoway deal, called it “probably the most creative stream we have had in Canada last year. We really kind of broke the bank on something that was brand new.”

Also emerging are syndicated streaming deals, in which two or more streaming companies will jointly provide upfront money to a project then divvy up their share of future metal production. They are also negotiating “sidecar” deals where they can sell their streams to someone else. That’s something mine outfits were once reluctant to agree to but now find themselves forced to acquiesce. It means the streaming companies can shift some of their risks. And the added flexibility makes the streamers more likely to invest in a mine project.

Daphne MacKenzie heads Stikeman Elliott LLP’s Banking Group from Toronto. She has gold and silver mining clients herself that are looking for streaming and royalty deals for their core precious metal production right now. “Streaming was niche three or four years ago. I think it is more mainstream now. It’s a sign of the desperation of some of the mining companies,” she says. “Now I have gold companies whose only availability to access funding is selling off a portion of their gold production. That wasn’t really the genesis behind streaming.” The problem with streaming is that it can take away growth from existing shareholders, she says. Some recent deals force mine companies to give up 5 to 10 per cent of their main commodity to a streaming company.


A wider stream

“Typically,” explains Pickersgill, streaming companies “were the last dollar. They would come in where there was a fair bit of work already done. There may have already been project financing or they were coming in concurrently with project financing.”

The study work and permitting on a proposed mine project would have been completed and then the stream dollars would come in as a way to help a company fund the final construction of the project through to production. “Now,” adds Pickersgill, “you see some streams being done on companies that don’t yet have shovels in the ground.”

Where once streaming deals were considered “exotic,” says Vancouver partner Fred Pletcher, Chair of Borden Ladner Gervais LLP’s National Mining Group, now they are often used as a sweetener; the icing on top of a layered cake of equity, debt and other facilities to get a deal done. Echoing Pickersgill, he adds that some stream and royalty financers, such as Sandstorm Gold, are even stretching their reach now into the world of juniors when circumstances are right. Last January Sandstorm announced 10 new royalty agreements, including some with juniors or small-cap outfits, such as its initial agreement to provide US$3 million in exchange for a 0.45 per cent net smelter return royalty to advance Orezone Gold Corp.’s Bomboré project in Burkina Faso.

Companies such as Sandstorm and Franco-Nevada Corp., another Canadian precious metal streaming and royalty company, as they sniff desperation in the mining world, also are acting more like commercial banks. In deals it started doing back in the summer of 2014, Franco-Nevada has demanded, and gotten, fixed repayments in gold for five to six years before its more usual royalty or streaming arrangements kick in. That construction, more like a commercial loan, is bank-like behaviour that didn’t exist two years ago. There are predictions that there will be more joint streaming transactions put together, sometimes bolstered by other institutional investors, to get bigger deals done.

And, as in the Stornoway diamond deal, more streaming/royalty firms are emerging, such as Osisko Gold Royalties Ltd., and branching into commodities beyond gold and silver. “If you look at Franco,” says Fred Pletcher, “they have done copper, oil and gas.”


Finance fruitcakes

Five years ago in the mining world, says Jay Kellerman, Managing Partner of Stikeman’s Toronto office and co-head of the firm’s Global Mining Group who works often with Daphne MacKenzie, companies could still get mine project financing from one source. “But these days, it seems to me, to come up to that same bottom line – the total amount of capital to build the same project – you are looking at multiple tranches of smaller pieces to get to the same result.” What he describes sounds like the finance world’s version of a fruitcake: “You will have a piece of equity — if the equity markets are open. You’ll have maybe a piece of traditional debt,” although it’s been a long time since Kellerman has seen that. “There might be a public debt component or some other financings from the likes of Caterpillar or other equipment suppliers. And you layer all of that. And fundamental to that layering, in everybody’s calculus, is a piece of stream financing. The pools of capital just aren’t there in the quantities that are needed. You have to be more creative and go find smaller pieces to get to the same place, if you can even do that!”        


Private equity to the rescue?

But what about private equity? They have pools of capital … oceans of it in some cases. And they need to deploy it somewhere. Weren’t they touted just a couple of years ago as the mining industry’s potential?

“There was definitely once lots of hope for the private-equity market to get interested and involved in the mining sectors,” agrees Whittaker. “But my sense from what goes on here and talking to our colleagues in the area of mining is that private equity has not jumped into the sector as enthusiastically as people hoped they would.”

Trouble is, mining is a complicated, risky business. It takes a special kind of expertise to conduct proper due diligence on a prospective mine. Whittaker says PE firms rarely have the patience for the long timelines needed to develop projects. That means junior exploration and development miners are off their radar — the stakes are too high and they are just too far away from production. When PE money is invested in the sector, says Whittaker, it’s usually in conjunction with others. “If you look at recent acquisitions,” she says, “there will be a consortium made up of a strategic investment with another mining company that has the staff, the expertise, and is already established in the sector and is going in to purchase something divested from another company. Or perhaps a whole company.”

According to Thomson Reuters data (Thomson Reuters publishes Lexpert), global private-equity mine deals have declined. Last year $5 billion was spent on 66 deals. Back in 2010, there were 83 transactions totalling $6.7 billion.

Says Kellerman: “There has been a lot of noise about private equity being the great white hope for this sector in the context of a source for capital, structured however it may be, whether joint venture, debt or equity.” But he says the examples of private-equity investing in the sector are limited, and focused only on already operating mines. “Private equity thinks of this stuff in terms of returns and relatively speaking, in my view, short-term goals with terms of five or 10 years as opposed to 20.” To conclude, Kellerman doesn’t see private equity becoming a factor in the mining sector.


Call mom and dad?

If private equity is indeed melting away from mining, where else can miners find money other than calling mom and dad?

Kellerman says, though they’ve been around in the past, he’s seeing financing from heavy equipment manufacturers such as Caterpillar Inc. come back into vogue. “They want to sell trucks. And the only way in a diminishing market they can sell trucks is to get new mines online.”

By helping to finance mines, it drives their fleet contract business. In addition to entering into lease credit facilities, explains MacKenzie, “We are also seeing [heavy equipment companies] provide a tranche of a project finance facility, providing something more like a loan to complete a mine project. You might see Caterpillar, in addition to a lease credit facility, be more part of a syndicate in a more traditional project finance package, albeit their monies will be typically dedicated to the equipment financing costs of the project.”

For his part, over at Torys Pickersgill is seeing growing use of high-yield debt, a trend that started soon after the commodity cycle began its long dip. Vancouver-based Imperial Metals Corp. went to market last year with a US$325-million offering of 7 per cent senior notes. The money will be used to pay off prior debts and fund capital expenditures for its Red Chris copper/gold project in BC.

“There is an example of someone being creative, putting together different pieces of the debt puzzle to come up with an amount to make an acquisition, and high-yield debt was part of that,” says Pickersgill.

Other, more radical ideas, are being touted for mine finance. At the Prospectors and Developers Association of Canada conference, junior miners packed a session on equity crowd-funding. The Internet-based fundraising mechanism has primarily been used to get funding for bands, filmmakers or high-tech upstarts producing things like drones in exchange for rewards like t-shirts or a future discount on a product once it hits the market. The investors are typically everyday people coughing up a few hundred bucks or less because they think an idea is nifty. Mines, with their environmental issues, seem unlikely to strike many as nifty. But rules proposed by the Ontario Securities Commission in 2014 would allow entrepreneurs – possibly including mine outfits – to raise up to $1.5 million over a 12-month period without the expense of an IPO on a Canadian exchange. Retail investors would be limited to $2,500 on a single investment.


The hub is still here

One might think, with all the bad news out there, that Canada’s role as a centre of mine finance has been eroded. But that doesn’t appear to be the case. By virtue of the clients he sees, their reach into the global mining world, and the legal, technical and financial expertise we have, says Pickersgill, “we remain a fulcrum for foreign capital from many different sources.”

Whittaker at Norton Rose agrees, but her assessment is tinged with a hard reality: “To the extent there is still life in mine finance, it’s here.”