As part of Metal Bulletin’s Next 100 series of articles looking at the future of metals and mining, John Tivey, Rebecca Campbell and Claire Jelbart, from White & Case's mining and metals practice, look at why non-conventional funding methods are back in fashion.
Until last year, mining companies had little trouble raising funds. But, with the boom in commodity prices peaking and passing, the lending markets have become far colder for miners.
A clampdown on lending has descended on miners as their profits have decreased - by up to 49% at the top 40 mining companies, and by even more for many others.
The global equity capital markets are closed to juniors and mid-cap players. Majors have been unwilling to participate at the current multiples. There was not a single TSX (Toronto Stock Exchange) mining IPO (initial public offering) in the first quarter for the first time in a decade.
Investors also now prefer fixed-income instruments rather than equity instruments, and this, coupled with the contraction in bank lending, has seen bonds outstripping loans – both corporate and project finance – in the mining sector.
As a result, some of the non-conventional funding sources that have long been used by juniors, particularly in emerging markets, are now being used by mid-cap and major players too. Convertible high-yield bonds, convertible debt, streaming agreements and forward-sale arrangements are burgeoning.
These financing tools were popular in the late 1990s prior to the mining boom but have emerged in the mining cycle on many occasions. More recently, streaming, convertibles and forward-sale agreements were dusted off after the global financial crisis of 2008, as strong assets or corporates sought to refinance themselves when their facilities were being denied simple rollovers in the tight credit market.
High-yield bonds with restrictive covenants applied to the issuer, restricted subsidiaries and optional repurchase upon certain triggers of investment decline are also coming back into favour – for example, the $500 million bond issue by Hudbay Minerals, which was used to finance the Constancia copper mine in Peru in 2012.
Metal-streaming financing was traditionally targeted at small-cap miners, which had difficulty in obtaining debt financing. Mid-cap and major players are now taking advantage of the less restrictive terms – in particular, the preservation of management control and offtake rights – that are possible under these arrangements.
Miners with projects in hand are agreeing to sell a fixed percentage of future material (usually a precious metal) to the streaming company at a fixed price in exchange for an upfront payment structured as a deposit, instead of seeking offtake deals.
Metal streaming has been used by Vale to fund its $1.9 billion Vale-Silver Wheaton gold stream, and in the Franco Nevada $1 billion precious metal stream from First Quantum’s $6 billion Cobre Panama project (previously owned by Inmet).
For sub-investment-grade miners, which are likely to require further equity investments, convertible debt facilities have been providing some solutions. These usually involve a package of loans – in the form of term loans/revolvers/asset-based loans) and warrants. Coalspur, Astur Gold, Wolf Minerals and EMED have all used convertible debt instruments in recent deals.
For projects in operation, forward-sale agreements are being used in new ways for hedging purposes, as well as for financing. That is, a fixed amount of product is agreed to be sold at a fixed price at a future date, to bring in immediate working capital.
The re-emergence of all these unconventional funding mechanisms will play an important role in years to come, filling the gap created by the evaporation of the equity capital markets and bank-loan markets for miners.
John Tivey is global head of White & Case’s mining and metals practice in Hong Kong. Rebecca Campbell is a partner in the firm’s mining and metals practice in London. Claire Jelbart is a senior associate in the firm’s mining and metals practice in Tokyo.
As part of its centenary celebrations, Metal Bulletin has asked leading participants from different parts of the metals and mining industry to take part in MB’s Next 100, a series of pieces on how the future might unfold.