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Mining Project Investment, Funding and Financing.

June 02, 2021 / Admin

Mining companies finance their projects in several different ways. Projects can sometimes be funded by equity sharing or from cash reserves of a mining company debt. The most common type is joint venture which mostly shares the project risk. However, it must be noted that inorder to open a mine, billions of dollars are sourced and this depends on ore grade, tonnage, process plant design, geographical location in terms of accessibility etc.

       1.  Feasibility studies for mining projects as an Investment Decision

The law in some countries requires governments’ approval of mine feasibility studies like in the case of Malawi. Since it is the first line of reference, the government has a responsibility to the public to ensure that environmental health, safety (EHS) and social-cultural risks are properly managed and contained in a manner that serves the public interest. In other cases, government limits approval based on Business Plans and Environmental and Social Impact Assessments (ESIA). A Bankable feasibility study can also be a risk management measure. To demonstrate whether a project is technically feasible and financially sound and viable, some of the questions that can be borne in mind by the minng company on investment risk could include identifying the risks and how will they be managed, is the profit acceptable to the investor in terms of the Internal Rate of Return (IRR)? What will be the payback period? Can this project be done and is it sustainable? All these questions come because mining is a ‘notoriously cyclical industry’ which may deter banks from providing funds.

      2. The role of International Financing Corporation (IFC) in Mining

Some multinational mining companies  involve International Financing Corporation (IFC) , a World Bank Group which has demonstrated massive experience in providing finance and sustainable business solutions in the mining sector and contributes positively to mitigating environmental and social risk, providing advice on community engagement, and implementing shared-use infrastructure and mining projects across the development stage, including construction, production, and expansion, with a focus on impact investing for sustainable economic growth. Their advisory work facilitates such initiatives as supply chain linkages and stakeholder development in line with global best practices.The long-term competitive financing instruments meets project needs, including shared equities, corporate and project-level debt, and third-party source capital investments, ofcourse with some strings attached.

An example where IFC has demonstrated outstanding results is the IFC Report with Commonwealth Development on “Mining Royalties Data in Colombia”-Data at Work for the Voice of the people. It  presented a set of recommendations for governments, industry and civil society aimed at improving data disclosure and use practices of mining royalty data to provide citizens with complete, relevant and actionable information(December,2020).

In another development IFC announced in 2011 that it planned to invest about USD300 million in African mining operations over the following 3 years as from exploration stage to early equity mining stage with an intention to participate in project and corporate financing partnerships, supporting mid-tier mining companies.

    3.  Types of Project Funding and Financing

      (a)  Debt Avoidance

When companies operate at a profit, the board of directors makes decisions on how to use profits after tax. To finance capital projects during the operating life of a mine (LOM), a mining company may generate funds. These funds may be applied to all purposes: funding replacement capital and funding project capital for improvement projects, expansion and even extension of the Life of Mine. .

Financing new mines out of accumulated cash has the advantage of avoiding debt and interest liabilities and of keeping equity undiluted, i.e. no additional shares need to be issued as such a mining company has cash reserves.. However, mining companies discover certain mechanisms that can have an advantage of sharing risk alternatively. Therefore, it may seem very important to provide funding to new commissioned mines so that   other mechanisms can be employed to source the remaining cash requirements. Practically, most mining companies cost of construction does not wholly require resources from the company and must be funded in its entirety by any other means.

     (b)   Joint ventures (JV)

This is viewed as a useful risk-sharing mechanism. It may be a Joint Venture between two or more partners holding mining companies or with other companies, financial institutions or governments. Usually, in addition to funding, each participant provides other resources to the venture, in the form of specialized expertise and/or physical assets.  An example can be a mining company with a deposit, Resource model done, holding a mining Licence (holding primary assets) with feasibility studies done and perhaps a Bankable feasibility study. This primary asset holder usually proposes the structure of the JV, often retaining a controlling interest of 51% or more and another that will have secondary assets and can be a company that will in partnership holding less than 50%.

The structure of a Joint Venture is embodied in a contract legally provided for which may vary considerably. The agreement normally specifies how many executive and non-executive directors each party may appoint Other partners may be required to contribute funds at the initial stage and possibly at later stages of the contract, whilst other partners may have a carried interest, meaning an entitlement to future benefits of the project such as, expertise, grant of mineral rights by a government, dividends etc.

   (c) Debt funding

Banks and other types of financial institutions are willing to consider lending for new projects in Mining, and are, actively seeking investment opportunities .Mining being a relatively-high risk sector, it has two important consequences for borrowers: in that interest rates may be higher than for other sectors of the economy and also that Lenders or Lending Instiutions are likely to exercise caution considering the risks. It is for this reason that Due Diligence is a must meet requirement and is exercised  with caution meaning  financial institutions will take all reasonable measures to assess the risks and ensure that a project is both technically and financially viable before committing  to funds which they really hold in trust for other parties. Thus a feasibility study is of paramount importance at this stage…A financial institution may also engage consultants but typically a mining company will commission an independent review by appropriate experts who will sign off on a feasibility study, business plan or other document supporting a project proposal.

The professional integrity and reputation of the consultants provides all interested parties with assurance that their report is totally impartial, independent regardless of who is paying them, and gives a professional factual assessment of the project proposal.

Financial institutions also exercise care in ensuring that their funds are not applied to projects which may in any way be accused of human rights violations, abuse of the environment or other aspects of life which are likely to attract negative media and Non-Governmental Organizations (NGO) comment. Of interest to note is the Equator Principles of which some countries are signatories which is, an international convention providing a minimum standard for due diligence in risk-based decision-making regarding loans in all formats, covering social and environmental protection, including climate change and in some countries, such as Australia, there are requirements for guarantees of protection of the rights of indigenous communities. Lenders will therefore review the history of a company making loan application, its assets and proven level of competence and will make a decision, and possibly fix interest rates, taking account of those factors.

   (d)  Equity

In order to raise funds without resorting to debt finance, or in combination with it, companies have the option of offering equity, i.e. an opportunity for other parties to participate by investing in shares. A new company just embarking on a mining venture, could be a Junior, might be offering shares or making IPO (Initial Public Offering) .The stock exchange may chose it for listing at the stock market may be in the mine’s host country, the country where the company is headquartered, or another venue, and a listing may be sought on more than one stock exchange. An existing company requiring to raise funds beyond its internal capacity may also offer a special issue of shares, with priority being given to existing shareholders.

The parties investing in shares may be individuals or different organizations, including governments. Other companies or organisations might decide to invest venture capital, i.e. funds invested in a situation where the risk is known to be relatively high and there is anticipation of good rewards and shares may be preference shares which have priority when dividends are declared, and in the disbursement of funds from disposal of company assets.

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