Azure Capital’s panel of industry experts discuss alternative mine financing strategies
- 150 resources executives, industry participants and advisers attended the forum hosted by corporate advisory firm Azure Capital featuring representatives from Resource Capital Funds, Taurus Funds Management, Orion Resource Partners, the Export and Finance Insurance Corporation (Efic) and Sheffield Resources.
- Resources projects, particularly those with non-LME commodities, in “frontier” jurisdictions, will have increased exposure to non-traditional forms of project financing.
- Established players in this market include credit funds, mining-focused private equity funds and government bodies with widened mandates on funding mining projects, such as Efic and NAIF.
- The products straddle the full spectrum between senior debt and equity, including offtake and royalty financing, streaming and government or export credit supported funding.
- The key benefits of considering alternative funding are becoming increasingly apparent to miners of non-LME commodities, including speed of execution, larger ticket sizes, ability to consider longer tenors, sophistication and the flexibility to step in and cornerstone equity.
- All the above can assist to provide the required momentum to see a project through to construction in a shorter timeframe, which in the context of a fundamentally cyclical industry with windows of opportunity, can in itself be a significant driver of shareholder value.
- Copper, lead, tin and zircon singled out as key commodities to watch out for in the near future.
- Companies should consider the full range of financing options available to them, whether traditional or alternative, recognising that every project is unique and shareholder value is not likely to be best served with a “one size fits all” approach.
Over 150 resources executives, industry participants and advisers crowded into Perth’s newest five-star hotel, the Westin Perth, on Wednesday night to listen to a distinguished panel demystify the myriad of funding options that now span traditional debt and equity sources when financing a mining project.
The forum, hosted by corporate advisory firm Azure Capital and featuring representatives from Resource Capital Funds, Taurus Funds Management, Orion Resource Partners, The Export and Finance Insurance Corporation (Efic) and Sheffield Resources, focused on the changing dynamics of the funding landscape as traditional routes for financing mining projects have become increasingly challenging.
Azure Capital partner, Matthew Weaver, opened the session by pointing out the recent depth of transactions in the alternative mine finance space, asking the panellists why companies are moving towards these forms of funding. According to Adam Davidson of Resource Capital Funds, which has US$3.8 billion of funds under management, a private equity partner adds value to a project beyond the contribution of its capital investment. Having private equity affirms that the project “stacks up”, and provides long term support. “We have a long runway, not like a hedge fund, and we stick in there and work it through with management when the going gets tough. We’re a patient source of capital and have the ability to go into more structured solutions” said Mr Davidson.
Drew Totterdell of Taurus Funds Management, added, “Certainty of capital, speed of execution and the ability to write larger deals, can be a key deal feature.” Taurus manages ~US$1.3 billion across its various wholesale strategies. Totterdell pointed to their recent US$190 million funding of Teranga’s Wahgnion Gold project, as an example of these factors in being selected as the preferred lender.
The panel members discussed what they look for in an investment. “We prefer to be the leverage in transactions however along with debt or production linked investment like streams, we also invest in the equity so that we can achieve an overall blended return appropriate to a PE fund. One way of describing how we assess opportunities is through the 4 C’s of basic metrics. These are assessments made of Cashflow, Collateral, Capacity and Character,” said Peter Rozenauers, Portfolio Manager of Orion Resource Partners, a US$4.5 billion mining fund manager based in the US.
Mark Di Silvio, Chief Financial Officer of Sheffield Resources, provided a project owner’s perspective: “Traditional banks find funding non-LME commodities that cannot be hedged more challenging. For Sheffield, we also wanted to take advantage of and get recognition for a very long reserve tail on our project”. Sheffield is presently developing the Thunderbird Mineral Sands project located in the Kimberley region of Western Australia and, assisted by Azure Capital, has recently mandated Taurus to provide a US$200m debt facility to fund the project.
Mr Davidson noted that streaming, which typically involves an investor making an upfront payment in return for an agreed percentage of future production at less than market value, has traditionally been transacted on by-products, such as gold in a copper project, is now evolving into a more mainstream product. Rozenauers agreed. “Any commodity can effectively be streamed. Even diamonds and lithium. If a project is low on the cost curve and you don’t destroy material shareholder value, this can be a useful form of finance that sits subordinated to debt, but on top of the rest of the cash flows. The clock doesn’t tick away on it like debt. Our investors are also increasingly seeking exposure to the underlying metal, which we achieve with the stream.”
On the topic of funding mining projects in challenging jurisdictions, Efic stands in a gap that is quite different to the other lenders, supporting Australian companies in frontier markets. Jan Fuchter, Director of Efic, explained that Efic is Australia’s export credit agency, providing Australian exporters with specialist finance solutions globally. “Our mandate has also been changed very recently. Given Efic exists to support Australian exporters, and resources is Australia’s largest export, we have now extended our coverage to support resource projects located in Australia. It is never really too early for a resources company to approach Efic, as agency funding can be an option, and we operate very much in the same way as a commercial bank. But with the the Australian government as our shareholder, we have a heightened sensitivity to reputation risk including environmental and social issues, particularly where mines are located close to communities.”
All panellists agreed. Totterdell noted that “the reputational risk arising from [failing to address] such issues will erode value in the long run, and would impact attracting investors on future funds.” Di Silvio stressed that environmental, community and social engagement and responsibility had to form a fundamental part of the business model and project, as it does for Thunderbird.
It is clearly daunting for a resources developer to line up the optionality, undertake comparisons and benchmark outcomes where they may be very different. When asked how a company should assess all the options, Simon Price, Partner and founder of Azure Capital explained that every project is different and will call for different solutions. “There is still a role for traditional senior debt and equity to play. But ultimately, one of the key measures will be the impact of the funding package on shareholder value and NAV per share, because the company will have to issue equity, which needs to be factored into the dilution assumed, in order to fund the project. This is overlain with risk that a Board is willing or otherwise to take on. With all the different options available, we are focussed on what is going to get the best result for the client. Our experience helps to unpick the complexity of what is being presented, understand the trade-offs and having one of the largest teams on ground gives us the ability to run these processes in parallel,” he said.
Totterdell concurred that "it is important for a company to have a trusted adviser to be able to accurately compare the various options that you may be presented with”. Moreover, the range of options now on offer from mining specialist investors are here to stay, and so what is now considered alternative is fast becoming traditional.
In undertaking the analysis, the panel agreed that companies needed to remember it is also usually more value accretive for projects to be “up and away”, with speed of execution being raised as a key advantage of going down the alternative route. “People tend to forget that projects are less sensitive to interest rates, than fundamentally, fluctuations in commodity prices,” said Fuchter, and Rozenauers agreed. “Being able to build your project, say one year earlier, could see you take advantage of a year of higher prices and value creation.”
Copper, lead, tin and zircon stood out as key commodities to watch out for in the near future.
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