“2012 is the last of the bad years” says investment community

By Siobhan Lismore-Scott
Published: Thursday, 13 December 2012

Mines & Money panel say that juniors will have to be creative to secure financing


The Panel at Mines & Money: from right: Anthony Desir; John Harrison; Mark Reineking; John Carlesso; Jamie Strauss

December saw the global mining community descend on London for not one, but two important mining industry events. Representatives of the global graphite industry gathered for the 2nd IM Graphite Conference, while a broader cross-section of miners came together for the Mines & Money exhibition and conference.

At Mines & Money, exhibitors and delegates gathered to hear a panel led by Anthony Desir, principal, Selective Asset Management Inc (SAMI), entitled Attracting capital to a mining project: Finding funding in a tightening market.

“There’s some speculation that the markets are in dire straits,” Desir started the conversation, before quickly adding “it’s not a perspective we agree with.”

In a year which has seen a crash in the Eurozone, a tickdown in the Chinese economy and insecurity growing around the US economy, most indications have been bearish for the year ahead.

But for the panellists at this discussion – and the ones that preceded it – the year ahead appears less negative.

  “We have been through the last of the bad years. There is clearly money around for good stories and good management,” John Harrison, executive chairman, London, RFC Ambrian, a specialist resource and energy sector corporate finance and stockbroking group, said.

“Be creative”

Junior mining companies have to now be more creative when looking for funding, the panel agreed.

“For many of the smaller companies in the field we are talking about the fact that the money is there but you need to look in different locations. Your traditional or private broker is not there,” John Carlesso, president of Cervello Capital, a Toronto-based private merchant bank, said.

“There are other opportunities out there; It is a question of being creative and it’s a question of  finding the right kind of assets,” he added.

For Chris Berry, founder of market research firm House Mountain Partners, who was speaking at IM’s graphite conference, junior miners have definitely got to be creative when looking for funding, but they must also be prepared to fail. Berry believes that the present drought in funding community is akin to the “Sahara desert”.

“Things look bleak in this sphere,” Berry said.

“Equity finance is not in a drought, it’s a Sahara desert... But the good projects will get built,” he added.

New forms of financing

Juniors will have to look for new ways to raise capital

New ways of finding financing were discussed at Mines & Money, with different solutions offered up. Most were in agreement that the days of “rocking up to the conventional fund market” were over.

“There will be periods of volatility and in that time people will be able to raise capital for their projects and stay alive and some of them will sustain themselves that way. In terms of sourcing for funding and in terms of the alternative sources of funding that we’ve seen is the stream financing models,” Mark Reineking, founder and MD, Tempest Funds, a Vancouver-based investment fund and portfolio manager, said.

Stream financing companies, such as Sandstorm Gold and Sandstorm Metals & Energy, Canada, have become popular for the alternative way they offer financing to juniors.

“Sandstorm (...) provides mining companies with a form of financing whereby an upfront cash payment is exchanged for a commodity stream,” the company explains.

The commodity stream allows Sandstorm to purchase a specified percentage of a mine’s production, at a fixed cash cost, for the life of the mine. Sandstorm then resells this on the spot market.

“A lot of these companies have really good assets that are trading at a fraction of their net asset value, so if you’re trading at .4 of your value a stream company, such as Sandstorm can come in and pay you .8 or .9 of your asset value, which is created to shareholders. This is one form of financing I have seen and what that does, typically, is increase the equity,” Reineking said.

Other factors discussed were the prospect of diluting ownership, by issuing additional common shares on the market. This reduces the company debt, but means they have less control of the company.

“The big issue for a lot of companies is dilution and I think dilution is in the eye of the beholder,” Jamie Strauss, partner, EU consultancy Strauss Partners said.

“Do you want to have a mining operation in two or three years time with a cash flow, or do you still want to be scrabbling around for money, hoping your stock will go up?” he asked.

Acquisitions and off-take agreements – many of which have been seen in recent times — were also discussed, with Carlesso saying that he believed this would be  “source of capital for the short term, through 2013”.

Desir agreed, saying he believed that “offtake strategies are key”.

“Spin off the assets, put them in a separate company and at some point you can realise a greater value by creating an offtake structure and selling that off to another party. That actually creates more value for your shareholders,” he said.

“One thing we have observed with the China model is that, although China says they are doing a lot of investment in the African market, in fact it is just an off-take strategy,” he added.


Acquisitions, such as Galaxy’s takeover of Lithium One earlier this year, will become more commonplace

Good management is key

For the Mines & Money panel, good management was absolutely key for investing in a project.

“Institutional and hedge fund markets are closed but mining companies with a track record and an excellent management team — both at the top and throughout the geological mine building side— have an open opportunity to go to a wide area of non traditional funding,” Strauss said.

“I agree there’s funding available for really good assets and management teams,” Reineking agreed.

For Harrison, a good management team was key, but also preparation when approaching the financing community.

“Junior companies have to realise that the conventional fund management community doesn’t need to own their shares,” he said.

“You don’t just rock up to the conventional fund market and say here’s your lucky chance. You need to come in off a long run. You need to prepare, know the investment community and present your story at a time when you don’t need money to get ready for the time that you do. And over and over again people don’t seem to want to do that,” he added.

For Bert Doth, director of Denham Capital, management teams are key when it is looking to invest in a company.

Denham Capital is a private equity firm focused on energy and commodities.

“It’s about people for us; assets do not make money on their own,” he said.

“It really depends on the quality of the people behind the venture and whether they have made it successfully before,” he added.

Australia and Canada eye investments

Recent news items have also agreed that the mining community is not in as much trouble as expected. Jeffrey Wilson, a fellow of the Asia Research Centre at Murdoch University, Australia, said in a recent report that “much of the rhetoric around the supposed mining bust rests on dubious analysis”.

“By looking at the mining sector as a whole – and considering the three distinct stages which mining projects pass through – we can see that the reality of the sector today is more nuanced than simply being a boom or a bust,” Wilson wrote in an article for Australian academic journal The Conversation.

The three stages are set out as being the design stage, the development stage and the operational stage.

The Australian mining sector, Wilson argues is moving towards the operational stage.

“The resource boom is not turning to bust. Rather, the investment- and employment-heavy development stage is winding up. Announcements of new capital expenditure by mining companies will become less frequent, while cost saving exercises will become more common. But this is hardly the alarmist scenario that some in industry and the media have portrayed,” he says.

In Canada, the Financial Post has said that 2012 “will go down as the year the Canadian mining industry fully embraced the high-yield debt market”.

As more junior miners turn to the bond market for financing — thus exercising the ‘more creative’ ways to find funding discussed earlier — the debt market has responded by offering more attractive deals for development stage projects.

“There’s never a more attractive time to access the bond market for a mining company,” Randall Oliphant, chairman of New Gold Inc., told the newspaper.