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How to finance early-stage mining projects

Project financing has taken on a new urgency, say some experts
Pretium Resources developed the Brucejack mine with a stream it was able to buy back from Orion Mine Finance, though experts advise against early-stage streams.

Early-stage mining projects should keep financing simple to avoid later entanglements, experts told a conference in New York this month.   

Raising capital through share issues is the easiest path despite the lure of trying to beat high interest rates and inflation with borrowing, selling future output in streams, royalties or derivatives, or offering stakes to private equity investors, the eighth annual Trends in Mining Finance Conference heard.  

“I like to keep things as simple and straightforward as possible in the early stage of the project, i.e., equity,” Justin Anderson, vice president of the Americas at Trident Royalties, told the event organized by the Society for Mining, Metallurgy & Exploration.  

“Debt, obviously when you’re pre-revenue, is a very terrible decision,” Anderson said. “With regard to streams and royalties, at that stage you really don’t understand the value of the project, don’t understand what you’re giving up with that instrument. And those also can provide significant complications down the road when you try to raise other financing.”  

The panel noted the surprising downplay on royalties by a royalties company: “Pretty compelling,” said Oliver Wright, partner at global law firm DLA Piper. Fellow panelist Matthew Rosales, mine finance and investments manager at New York-based commodity trader Hartree Partners, also agreed with Anderson.  

Project financing has taken on a new urgency as some conference speakers said institutional investors first want to see signs of rare, large deposits while hundreds of exploration companies vie for limited talent and dollars and take more than a decade and a half in the U.S. to bring projects to production. Others said a recession began with last month’s bank failures and lenders are restricting loans.  

The U.S. Federal Reserve may cut interest rates to 3% by the end of next year while annual inflation falls to 3-4% but non-bank lenders such as private equity will charge 10-15% interest, Peter Boockvar, chief investment officer at Newark-based Bleakley Financial Group, told another conference session. Meanwhile, Washington’s budget deficit will weigh on the U.S. dollar and help gold.  

“We’re seeing what will be a dramatic credit contraction called a credit crunch,” Boockvar said. “In the 1980s, people were whining about the budget deficit, but now the worries are going to start getting reflected in the dollar, so that means that there is a great setup for the precious metals.” 

Stagger projects

Against that backdrop, this week Hartree’s largest shareholder, distressed securities investor Oaktree Capital with US$172 billion of assets under management (itself controlled by Toronto-based Brookfield with US$725 billion in assets) led a US$400 million loan to Iamgold (TSX: IMG; NYSE: IAG) along with Värde Partners and CI Global Asset Management, Canada’s largest money manager with $391.6 billion in assets. 

It’s another example of the rising trend of asset managers investing in mining following New York-based Orion Resource Partners with US$8 billion under management last year backing Sabina Gold & Silver (TSX: SBB; US-OTC: SGSVF) with $375 million and the Ontario Teachers Pension Fund with $247 billion in assets advancing $200 million for Foran Mining (TSXV: FOM; US-OTC: FMCXF).   

Hartree’s Rosales told the conference it’s important to properly define projects and include financial partners in engineering discussions. A capital cost of $2 billion requiring three years of construction instead could be redesigned as $500 million in initial building costs and the rest in a series of expansions because it’s easier to finance.  

“The overall net present value might be lower, but that’s actually a financeable target,” he said. “You can put together a mix of streaming, royalty and debt and actually come up with $340 million with the rest being equity.” 

Micheal Samis, principal at Toronto-based financial consultant SCM Decisions, said analyzing a financial plan by using a dynamic cash-flow algorithm of risk factors versus a static model can reveal surprising results.   

Samis found Orion’s funding of Sabina (now part of B2Gold (TSX: BTO; NYSE: BTG)) through a combination of an offtake agreement, prepaid metal deliveries, senior debt and an equity investment showed lower risk and higher returns than Wheaton Precious Metals’ (TSX: WPM; NYSE: WPM) $145 million streaming and equity funding. This turns on its head the industry rule of thumb that streaming usually brings higher returns because it has higher risk.

“If I was streaming, I wouldn’t want to be going out to investors saying ‘twice the risk, half the return to private equity’,” Samis said. “Dynamic models can help identify inconsistent risk-return relationships in a financing structure, i.e., where returns decline with risk.”  

Embrace flexibility

Robert Quartermain, now co-chairman of Dakota Gold (NYSE American: DC), recalled in another session how Orion showed flexibility and trust in his plan to develop the Brucejack project in British Columbia into Canada’s fourth-largest gold mine, owned by Newcrest Mining (ASX, TSX, PNGX: NCM), by allowing his company to buy back the $150 million streaming rights in the financing package.  

“Their position was ‘if you’re right in your analysis, you should be able to pay us back in a few years’, so they gave us that option,” Quartermain said. “I give them credit for that, how they said ‘you can have a repurchase price and in 2018 and 19 we will get our cost of capital back and then we’ll take that stream off’.” 

Wright, the lawyer with DLA Piper, said streaming and royalties can cost three or more times in legal fees to adjust later when senior debt is sought closer to production. And he said most traditional banks don’t want to push bankruptcies, to which Anderson of Trident Royalties recounted a negotiating tactic.  

“We had a company that had a significant debt and the bank would make lots of threats and we’d throw the keys on their desk,” Anderson said. “And they’re like ‘whoa, let’s talk about this some more!’ because banks don’t want to run a mine. They’d usually come to the table pretty quickly after that.”