Global Mining Finance: Investors must ensure access to capital

By Davide Ghilotti
Published: Friday, 13 October 2017

Mining continues to offer ‘tremendous’ profit opportunities for investors, but the current risk-averse and conservative approach to lending is creating a scarcity of capital available to new projects.

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 12 October.

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 finance.

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 finance.

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’ developments.

"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 out.

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 stages.

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.

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