Canadian public markets may not be where financing for mining companies is coming from, but there’s money available to invest and innovative ways to do it, including through joint venture partnerships, says lawyers who work in the sector.
“The Canadian public capital markets still remain quite challenging for mining companies at all levels,” says John Wilkin, a partner in Blake Cassels & Graydon LLP’s Toronto office who specializes in mergers and acquisitions. “Where companies are successful in raising capital, they’re doing it with multipronged financing packages, and some are quite complex.”
Modest amounts are being raised in the public capital market, and that is often accompanied by financing provided by mining finance companies such as Orion Resource Partners, Triple Flag, Resource Capital Funds and others, “in the form of, quite often, streaming agreements, royalties, off-takes and options. And there is some private debt available,” says Wilkin.
“There’s a lot of money out there in the system, particularly U.S. dollars, because of quantitative easing in the U.S., and it’s chasing a relatively small number of opportunities,” says Erik Richer La Fleche, a partner in the Corporate Group at Stikeman Elliott LLP in Montreal, who advises on M&A transactions and large capital projects.
“What I’m seeing, abroad as well as in Canada, is a bit of everything” in financing in the mining sector, Richer La Fleche says. “It really does depend on the size of the borrower, or the investee, and the type of mineral it is trying to produce. Because the world is very different than it used to be. It’s not the whole industry that is necessarily doing well; it’s parts of the industry. It is not the whole world that is doing well; it is geographically different depending on what you’re looking for. So, it’s a bit of a smorgasbord.”
The mining transactions he performed in 2019 “involved everything from bank loans to private equity to stream financing,” Richer La Fleche says, although not public markets.
“One of the general themes is that development-stage and expansion projects are finding capital much more easily than early-stage or later-stage exploration projects,” Wilkin notes. “That risk capital that 10 years ago was available on the public markets much more readily for those earlier-stage projects [is now] more often being found from strategic or other private sources.”
The precious metals sector has been the most active in terms of financing, he says, noting that he has also seen financing packages for development-stage copper projects and expansion projects for “bulks” such as iron ore.
And there’s a good chunk of change being invested in mining.
Although year-over-year new listings for mining companies in 2019 were down by about 20 from 2018, in Canada (and excluding exchange traded funds from these numbers), the highest level of equity capital raised was in the mining sector, she says, to the tune of about $12.5 billion on the Toronto Stock Exchange, says Leanne Krawchuk, a partner in Dentons Canada LLP in Edmonton and the Canada co-chair and a global lead for Dentons’ Mining group. This showing was followed by real estate at around $8.5 billion.
“There’s still a fair amount of activity for equity capital overall,” Krawchuk says, noting that mining stock was at the highest level of liquidity (again excluding ETFs), with around 18.5 billion shares traded last year on the TSX Venture Exchange and another 22 billion or so on the TSX.
And in the month of December, 70 per cent of the top 10 TSX Venture financings were mining issuers, including two public offerings of between $25 million and $30 million and about five private placements between $11.5 million and $19 million, Krawchuk adds.
“There is a lot of activity in Canada, in the mining sector in particular,” she says, noting in particular Katanga Mining Limited’s year-end public offering of $7.7 billion. Katanga Mining has its headquarters in the Yukon and operates a major mine complex in the Democratic Republic of Congo, producing refined copper and cobalt. “It’s a strong note to where we’re going in 2020.”
The two international listings (one from Argentina, one from Australia), were down from six in 2018, she says. She also sees the juniors lagging, with more of the money going to equity producers. However, with the once-hot sectors of cannabis and crypto-currency waning, ”competition may be declining there.”
For the publicly listed companies, larger mining houses have been taking equity positions and meaningful stakes in smaller companies, says Wilkin, such as Australia’s Newcrest Mining’s investment of $79.6 million in Canada’s Lundin Gold in early December, and BHP Limited’s announcement in November that it would boost its stake in SolGold, an Australian gold- and copper-mining company that is listed on the Toronto and London stock exchanges, for US$22 million.
Richer La Fleche also sees a strong interest going forward in the “high-tech minerals” such as lithium that feed batteries and the technology industry. “That’s coming,” he says. The U.S. has already launched an initiative, and the Japanese are also looking to make strategic investments in the rare earth mining sector. And although at one time various industries, including the automotive industry, “were throwing money” at the mining industry, he now sees “a lot more focused and more concerted action.”
Financing by development banks will be a trend, he says, investing in “a new industry: a non-Chinese, high-tech, battery industry.” The United States is trying to develop this at home, partly owing to the national security element regarding high-tech instruments such as personal computers, smartphones and, of course, military equipment that requires satellites and uses rare earth minerals for batteries such as lithium and palladium.
Joint venture trends
Joint ventures exist between technology and mining companies, says Krawchuk, noting the December announcement by Apple Inc. that it had bought the first-ever commercial batch of carbon-free aluminum from a joint venture between two of the world’s biggest aluminum suppliers. The metal is being made by Elysis, a Montreal-based joint venture of Alcoa Corp. and Rio Tinto, which was announced in 2018 with $144 million in funding from the two aluminum companies, Apple Inc. and the governments of Canada and Quebec. Krawchuk calls the joint venture “novel” and sees it as a possible trend in reducing costs for manufacturers.
JVs are also occurring with states, she says. Resource nationalism has been on the rise in sub-Saharan Africa, and, in January, major producer Barrick Gold entered into a joint venture with the government of Tanzania to oversee the company’s future gold mining operations in the country. As part of that, the government has a 16-per-cent interest in the Tanzanian operations. “That’s a JV with government.”
Considerations for investments in Africa, China and Latin America
Krawchuk is seeing governments in sub-Saharan Africa demanding a larger share of profits, as well as a requirement that a part of the mine is owned by the state. Tax regimes have also changed for the mining industry in the Democratic Republic of Congo, Zambia, Tanzania and Madagascar. “The Barrick-Tanzania deal is a bellwether,” she says. In October 2019, Barrick Gold signed a deal to settle a long-running tax dispute between the Tanzanian government and Acacia Mining, which was acquired by Barrick in a US$1.2-billion buy-out deal approved by a British court in September.
In China, the country’s new foreign investment law came into effect on Jan. 1, which aims to further open its market and improve the country’s ease of doing business. “China’s trying to open up its domestic market, which creates more of a level playing field for foreign businesses in the market,” Krawchuk says. As long as a resource isn’t on a “negative” list for investment, the new law will provide foreign investors with the same treatment as domestic Chinese companies in that same sector.
The increased investor focus on Environmental, Social and Governance issues by investors is important in the mining sector in emerging markets and developing countries, and it affects investments in those places, says Wilkin. He points to high-profile problems in South America with tailings dams, which are temporary repositories for spoils and waste from the mine’s mill stored behind earthen walls. There have been a couple of projects in Brazil where a large earthen wall holding the waste into place has failed.
“When you’re doing the ESG piece, an important part of that piece is how companies have been addressing that in their disclosures,” Wilkin says, adding that “a lot is driven by institutional investors asking that question.”
Richer La Fleche also points to the political instability in South America, including the civil unrest and protests that began in Chile — once considered the most stable of all the countries in South America — in October, and which are ongoing. And although Brazil has a government that is open to mining exploration in the Amazon, “I’m not seeing much action” there.
Overall, he considers Canada to be the best jurisdiction for investing.
“Canada is doing well, Quebec in particular, because it’s stable.”