Exploring mining finance

Materials World magazine
,
1 Feb 2017

Katherine Williams found herself with more questions than answers at FINEX’16.

How much do we value geologists? This wasn’t a question I expected to find myself pondering at FINEX’16, held at the Geological Society, UK, in October, but it remained in my head all the way home. I met four geologists at the event, all seeking work, one a recent graduate and one with more than 30 years’ experience. We all know that mining companies have been hit hard over the past four years. But if the industry is to support junior companies and find new resources, surely geologists play a central role? Perhaps not in hard-to-reach areas, though, as Simon Spratley of ATEC-3D, UK, reported, stating that drones can be used to survey remote areas and providing ‘useable data within 24hrs’.

Spratley said the accuracy of drone surveys was comparable to LiDAR (light detection and ranging) ‘but far cheaper'. He gave the example of a project with Walter Energy, USA, where ATEC-3D surveyed 21 coal stockpiles to discover how much coal was in them and the calculation was found to be only 21kg for the total amount of coal sold. The technology can also be used to judge if mine slopes are moving, providing cost effective periodic surveys.

There was a suggestion from the audience that in future all sites should be flown at stage one. Spratley noted that drones can now ‘fit in a pocket and fly for 27 minutes,’ suggesting that they could indeed become a valuable tool for geologists and companies, and ATEC-3D is working with a number of African governments to build regulations for the industry on the continent.

West Africa, as Consultant David Reading reminded us, has long been considered as a global hot spot for gold exploration based on the number of plus-one-million-ounce discoveries that have been delineated from the period 1997–2013. However, the past four years have seen a 67% decline in exploration spend within the region because of the fall in the gold price, lack of investor confidence in the resource and mining sector, a strong US dollar and a massive slowdown in global economic growth. 

Despite this, Reading still sees a great potential for African gold. ‘Not enough new resources are being discovered and at some point we will see a turnaround,’ he asserts. ‘The question is, when?’ With 2013–16 showing significant consolidation in the mining sector, there will need to be a significant rise in gold price to get the exploration money he suggested, noting that ‘grade remains king’ and a lot of potential bulk tonnage projects are not being built.

Speaking in code

Shifting away from Africa to Australia, Louis Rozman AusIMM, Chair of the Valmin Committee, presented the VALMIN Code (2015), an international mining industry code that sets out standards for the technical assessment and valuation of mineral assets and securities for independent and other expert reports. It also provides guidance for valuation of petroleum assets and securities.

Of course, the mining industry depends on financial investments and these rely on how well investors understand a resource or reserves. Hence, Rozman explained that the Code involves a requirement to use plain language and applies to public reports including project valuations and assessments of mineral assets. The latest version must now be used in Australia.

Questions arising from this presentation surrounded the overlap between VALMIN and JORC, and whether practitioners would leave themselves open to any legal action by signing the evaluation. The mining codes were developed to try and bring resource reporting closer together and avoid any of the legislative weakness exploited around 30 years ago. But the question arising now must be, are the numerous codes working together or driving us further apart when it comes to resource reporting?

Show me the money

Mark Tyler, Director at Bardene Financial, UK, a consultancy offering technical and financial advisory services to the mining industry, noted that miners are price takers and are subject to risks. The lenders try to mitigate risk by lending to diversified commodity producers and multi-mine corporations.

So just how do junior mining companies fund their work? They can try turning to a finance structure where the proceeds from commodity sales flow directly to the lender without having to be repatriated to politically difficult countries, or try Limited Recourse Project finance – the Channel Tunnel was financed in this way and the lender only has recourse to the project and its assets after project completion. This, however, is seldom done for new or unproven technology.

Tyler explained, the pool of traditional lenders is getting shallower – although as banks leave, other institutions enter the market, ‘I don’t know if was ever easy to fund minors but now, more than ever, it is easy to finance major miners.’ He warned, ‘Be ready to seek out relatively unknown lenders, be prepared for due diligence and odd conditions and allow time to source finance.'

Christian Schaffalitzky, Managing Director at Eurasia Mining, UK, has experience of funding a project differently. Eurasia’s West Kytlim project in Russia has C2 State approved reserves totaling 2,283kg raw platinum. The company has established a 70:30 split of gross revenue with local mining contractor SKRS. 

This set-up allows Eurasia to de-risk construction and start up, and removes the need for project finance and loan servicing while transferring operational risks to the contractor. However, it is on a fixed percentage income until the project is fully running. SKRS benefits from making use of its surplus capacity. 

Eurasia will retain 55-90% of profits in the first three years of operation and 25–30% at full production. Given that junior mining companies now account for between 65–75% of all new discoveries by number in the western world, Peter Ruxton, Principal at Tembo Capital LLP, argues that finance for them is pretty important. He notes that the last decade has been one of the most prolific discovery periods in history.

Mining is a cyclical business, he says, and there have been five cycles since 1974 – the industrialisation of China playing a major role in the last boom. Ruxton belives that we have just entered a buy/boom cycle on the Lion Resources Clock, noting, ‘The mining sector is seriously undervalued at the moment.’

We may be heading for recovery, ‘Juniors are starting to look for funding now and the resources are still out there.’ Ruxton believes it is the time to ‘be bold – now is the time to raise capital.’

For a feature on crowdfunding, including mining projects see Materials World, October 2016.

To watch a video showing some of the West Kylim project and washplant, download the Materials World app, app.materialsworld.org