Mining and Energy

Benefits of different financing strategies

The most obvious advantage for the junior company in a joint venture is economic
Tue Dec 11, 2012 12:01am PST

In today’s volatile economic climate, it is challenging for companies to obtain financing for mineral projects. Opportunities for equity financing are rare, and it is can be difficult to raise money through more traditional project or debt financing. Consequently, mining companies are considering new or unconventional ways to finance the exploration and development of mineral projects.

Three increasingly popular alternative forms of financing are

•metal stream;

•royalty; and

•joint-venture financing.

Buy and sell

Metal stream financing is essentially the purchase and sale of mined materials. Generally speaking, the financier pays the miner a significant deposit up-front and receives the right to purchase an amount of metal, typically a byproduct metal and not the primary metal being produced, determined by production from the mine.

The purchase price for the metal consists of the substantial up-front deposit, which can be used to develop the project, and an additional fixed or predetermined price per ounce of metal purchased that is substantially lower than anticipated market prices, paid out over time as metal is produced and delivered.

The financier structures the terms with the objective that the deposit and the ongoing purchase price for metal will add up to less than the market value of metal purchased over the duration of the contract.

Attractive aspects of stream financing include:

•it can align the interests of the miner and the financier;

•the miner maintains control over operations;

•there is no dilution to shareholders, and the financing is project specific;

•the miner makes no payments or deliveries until the production begins;

•negotiations are streamlined as financers are familiar with mining opportunities; and

•there can be positive tax outcomes compared to other forms of financing.

Streaming transactions have become complex and have been applied to a broader variety of projects, including those operated through a joint venture.

A piece of production

Royalty financing arrangements are in some ways similar to stream financing deals in that the financier provides a sum of money to the miner up front. In exchange, it receives a percentage of mine production –in product or sales.

That percentage may vary depending on the amount of money paid for the royalty and the rate can change throughout the term of the agreement once a specified level of repayment has been met.

The benefits of royalty financing are similar to those under a stream financing arrangement: the miner makes no payments until production begins; the mine owner maintains control over the project; and there is no dilution to shareholders.

The financier gains access either to metal or to a percentage of sales revenue and may benefit greatly from successful exploration or development while confining its obligations to the project.

Partnering for profit

A joint-venture arrangement combines the resources of two or more parties for a limited period of time or for a limited purpose – such as for mine development and operation.

Since junior mining companies often have difficulty raising sufficient capital for mining projects, they often seek to partner with a major mining company through a joint venture.

The most obvious advantage for the junior company in a joint venture is economic: the partners share costs, the junior company may obtain direct financing from the major company, and external investors will be more likely to participate in financing if the major company is bringing its technical and operational expertise to the project. The major company benefits by gaining access to a potentially lucrative mine without carrying the full risk of development.

In recent years, there has been an increasing number of Canadian miners in joint-venture arrangements with international companies or state-owned enterprises, particularly those from China, South Korea and Japan, as a means of obtaining financing. Often offtake arrangements are negotiated as a part of such deals.

The primary difference between joint-venture agreements and other financing methods is that under a joint venture, typically both parties jointly manage the project.

The level of control and dilution of the miner’s interest in a project depends on the terms of the joint-venture agreement. If a junior company is partnering with a major mining company, the management split will generally be the ratio of the value of the existing project to the value of the major partner’s contribution. To protect its interest in the project, the junior company must be careful to meet its portion of project costs.

Tags: China, South Korea, joint venture, metal, state-owned enterprise, mining

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