Any company will tell you that panic starts to set in once the confidence of the board or of investors begins to wane. This is precisely the situation in the mining industry. Established mining companies and newcomers alike have been struggling worldwide to deliver the short-term results that their boards want. Mining is, by its very nature, an industry that produces long-term results, but that hasn’t alleviated the pressure facing operators.
As a result, mining companies have sought to make the most out of their existing assets by cutting costs, shedding staff and pulling back on investments like exploration. While most majors have resources to fall back on in hard times, their retreat on spending has left juniors in dire straits.
Pricewaterhouse Coopers reports that the market cap of the top 100 junior miners on the Toronto Stock Exchange fell by 44 percent, to $6.49 billion, in 2013, from 2012 levels.
Furthermore, short-term investments among the group suffered a rather frightening drop to $1.2 billion in 2013, from $1.9 billion in 2012.
This funding spiral is set to continue, as no industry analysts can seem to agree on when metal prices will begin to rise, or even when they will bottom out. However, this has given rise to a variety of “alternative financing” methods taking place between juniors and financial backers of projects. Often enough, these methods were not developed during the current downturn but have risen to the fore in popularity, due to the failure of conventional financing options.
One notable case arose in November 2013 when Silver Wheaton announced it had sealed an early deposit goldstream deal with Sandspring Resources, an exploration specialist, for Toroparu in Guyana. The structure of the deal granted Silver Wheaton the right to buy 10 percent of the life-of-mine gold production at Toroparu for $148.5 million in cash. This sum also includes an ongoing payment of the lesser of $400 per ounce or the market price at the time.
At the time, Randy Smallwood, president and CEO of Silver Wheaton, said that this “model allows us to get our foot in the door on high-quality, earlier stage projects such as Toroparu for relatively little upfront capital. From Sandspring's perspective, these funds will allow them to complete the bankable feasibility study without subjecting their shareholders to excessive dilution that today's challenging equity markets would deliver.” As Smallwood said, such models are extremely enticing for juniors that are starved for funding.
But streaming is hardly a new concept, even though Silver Wheaton traditionally applies to silver instead of gold. Streaming injected $2.4 billion of upfront capital into the mining industry in 2013, but they are being closely followed by a number of options that each have their benefits and disadvantages to the juniors who decide to use them.
Earn-in agreements are becoming increasingly popular as a form of venture capital investment. These earn-in agreements essentially allow a junior’s partner to fund exploration for a fixed time frame in return for a share of project ownership. Although this puts junior companies under a deadline to advance a project, it also means that they can operate fully during the agreed timeframe. But as always happens in tough times, an earn-in agreement stacks the deck in favor of the financial backer. If an exploration project strikes gold, then the backer secures a steady source of income for years or decades to come. If no ore is found, or not enough to satisfy their interest, the backers can pull out at any time, leaving the project on the verge of collapse.
Juniors may also turn to development finance as an option, a model that has already seen success in many industries, albeit often less capital-intensive ones. The forms that these development finance agreements can vary, although the model most widely employed today is one where finance is provided in exchange for a percentage of future revenues or profits, as espoused by the Inter-American Development Bank.
Finally, for those juniors looking to rely less on upfront cash-in-hand, while also cutting initial outlays in other ways, agreements like equipment leasing can have their uses. These can cover operating leases, sale and lease-back, or secured term loans, but they do come at a cost. No junior can afford to be at the mercy of problems in their supply chain, so intensive due diligence is needed on both sides to make this viable.
Despite this variety of options, the market is not an enviable one for juniors. With renowned exploration companies like Landdrill International going bankrupt, any juniors that grew too rapidly during boom times look certain to continue facing a very rough time, no matter how inventive their financial deals are.
Chris Dalby of Oilprice.com