Lack of sufficient financing in the initial stages of mining
setups is choking development of new operations, attendees were
told at the Global Mining Finance Autumn Conference in London
As large lenders have progressively shied away from
investing in mining commodities in recent years, the financial
sector needs to "re-couple" with the needs of the mining
industry to ensure capital is available to prospective
operations, according to Julian Vickers, CEO of Natural
Resources Global (NRG) Capital Group.
Addressing the audience in London, Vickers said that capital
available to mining companies is scarce, but the place that
used to be occupied by large banks as primary lenders is
gradually being taken over by other sources of funding,
including alternative funds and hedge funds.
"Many large banks are not in mining commodities anymore. It
became too costly. So alternative debt funds stepped in and
filled the gap. They are now the [primary actors] enabling
mines to get developed," he said.
While capital requirements increase over time during the
various stages of development of a mine, from first exploration
all the way to production stage, availability of financing is
not following to the extent that is needed.
Early, high-risk stages of development are the hardest to
As Vickers put it, "it is very difficult to fund
exploration". The exploration stage is when both the
willingness to invest and the availability of capital are at
their lowest, he said. It remains "challenging" to fund
appraisals stages – the evaluations of deposits, prior
to the start of construction.
Once the operation reaches development stage, debt financing
becomes more available while equity financing remains
"selective". At production stage, both equity and debt capital
are readily available. This latter stage is the easiest to
This pattern is creating an imbalance between the
requirement of capital and its availability. The consequences
of this can be wide-reaching: they can lead to limited
exploration activity; a reduction of mine developments; and
delays and abandonment of 'non-tier one’
"This is something that has been happening for a few years
already, but is now getting worse," he said.
Equity financing is also risk-averse, and this extends to
the mining sector. There currently is not enough financial
incentive to put equity into debt and take risks, such as those
associated with funding explorations.
As equity has grown significantly in size in the decade
since the start of the financial crisis, this issue is now
becoming more evident.
The financing and mining industries need to redress this
imbalance, to ensure promising new mining projects are
adequately supported, Vickers stated.
This can be done in various ways. In debt finance, changes
in approach to lending are required. The absence of large
lenders investing in mining commodities has to be offset
through other funding providers.
This is happening already to an extent, and funds are one
such device: alternative debt funds in particular have been a
tool of choice in funding new projects.
Over the last couple of years, more capital has been
channeled into funds. We are seeing now "a concentration" of
equity capital in funds, he said.
Growth in funds under management has been running at record
levels: according to projections, total value is going to
triple by 2020. In the case of hedge funds, their value today
is close to $3 trillion – a staggering growth that
"started from almost nothing 20 years ago", Vickers pointed
This means that risk capital is flowing in this direction as
well. Passive funds and hedge funds, in particular, have been
favourite destinations for risk capital.
This overall trend is positive, according to Vickers, as
funds have been "very supportive of mining [projects]" and are
now a primary instrument to get operations the funding they
need – especially during the early, high-risk
Mining remains a profitable industry for investment,
according to Vickers. The nature of mining development offers
"tremendous return from discoveries", including returns at
development stage and once production starts. Additionally,
small companies can increase in size in a matter of years, with
large benefits for investors.
All this points to strong fundamentals for investors to
continue focusing on mining commodities. Redressing the
imbalances related to availability of funding will be a good
way to ensure the two industries continue to work together.