junior to mid-cap mining sector in Australia is grim. While
the investment grade producers have taken advantage of
unprecedented demand from the US bond markets, the junior to
mid-cap sector has seen a critical demise in risk capital which
will no doubt lead to many more calling in the administrators
before the year is out.
While for the junior end of town the focus remains on
preservation of capital and simple survival (as opposed to
pursuing growth initiatives), some hope remains for an ever-
optimistic industry. Capital from less risk averse, more long-
term focused strategic sources is available for the more
advanced projects with well respected, proven management
teams. Hedge funds, private equity and even sovereign wealth
funds have shown an appetite for certain preferred commodities
in favourable jurisdictions such as Australia, and many juniors
have been actively pursuing these alternative sources of funds.
Historically, Australian junior miners with advanced
projects ready for development have sought project finance debt
for funding. Banks typically will not fund 100% of any project
through debt, and consequently rely on equity support with
bank debt typically the last money in and the first money out.
Increased regulation on the banks through the implementation
of the Third Basel Accord requiring banks to allocate more
capital for each dollar lent, combined with traditional equity
capital all but nonexistent at the moment, has led to the
banks’ risk appetite for the sector to diminish – again amplifying
the critical shortage of capital situation.
Just like equity, bank debt is available for the most advanced
and robust projects. However the focus on certainty of cash
flow returns has never been stronger. Banks are focused on
the downside risks and have limited participation in the
upside. Consequently, risk mitigation is essential and while
historically equity markets have sought exposure to the upside
of the underlying commodity prices to access debt, the banks
will want to ensure a level of price protection is in place
through hedging.
Increasingly those with projects looking for funding accept
that hedging may be required to access capital, with the
appropriate use of derivative risk management structures to
satisfy the requirements of banks plus provide certainty of
returns to shareholders.
With traditional sources of risk capital increasingly seeking
more certain and robust returns through higher yields rather
than capital appreciation, and bank debt more difficult to raise
as a consequence, we are seeing a changing paradigm in the
development funding for junior mining companies.
For the junior end of the spectrum, alternative sources of
funding can be limited, complex and expensive. However they
provide a legitimate source of capital that, with appropriate
advice, should not be ruled out. With the emergence of hedge
funds, sovereign wealth funds and private equity into the
sector, we are seeing an increasing use of commodity price
linked structures such as streaming, pre-payments and royalty
streams. These structures provide an upfront payment in
exchange for rights to production (with the exception of royalty
streams) and remove price participation for the producer on a
proportion of the future production sold, which can result in
them being significantly more expensive on an all-in basis
depending upon where prices go.
The mining industry is going through a significant period of
change where traditional sources of funding can no longer be
viewed as the only source of capital and equity cannot be relied
upon. Junior to mid-cap mining companies must adapt to the
new environment to maximise their chances of survival.
Companies need to empower themselves with the knowledge
of the different types of funding available, their all-in costs, and
the short and long-term implications and accept that there is an
increased focus on risk and how to manage it. Juniors need to
accept that mergers of equals or sale of assets may be the best
course of action. Above all, juniors need to employ the use of
experts and advisors to help assess their options and maximise
their chances of accessing a limited pool of capital.
WEST AUSTRALIAN
GOLD DISCOVERER
›
Tenements along the highly prospective and
productive Bardoc Tectonic Zone
›
Extremely low discovery costs at $10/oz
›
Two major deposits 300m apart hosting
980,500
ozs gold resources with potential
for growth and amendable to open pit and
underground mining
›
Multiple satellite deposits offer a near term cash
flow opportunity
›
Range of potential treatment options due
to location and existing infrastructure
›
Kalgoorlie experienced exploration and mine
management team
Zoroastrian high grade gold vein sample
EXC _ 0001
Companies need to
empower themselves
with the knowledge of the
different types of funding
available, their all-in costs
...
and accept that there is
an increased focus on risk
and how to manage it.