Current stock-market volatility has affected the ability of a wide swath of industrial sectors to raise money on the market and expand their businesses.
Among those directly affected by that uncertainty are resource-exploration companies.
Although equity issues remain the preferred funding route, as market conditions continue to depress shares, and as credit markets remain tight, cash-hungry juniors are turning to alternative and more unconventional financing options to develop their projects.
One type of financing that is becoming increasingly popular among resource companies is the metals-streaming deal.
Streaming deals are distinct from royalty arrangements.
A royalty arrangement occurs when a property owner pays a royalty holder an amount based on a project’s production.
In a streaming deal, a company gets a right to purchase a percentage of mine production from a resource company in return for an up-front cash payment before the mine is built.
The resource company then receives fixed payments from the purchaser for each bit of metal the mine produces.
In essence, a metal-stream royalty company exchanges cash today for a “stream” of production down the road.
Streaming deals are tax efficient; they avoid equity dilution and are generally more accretive to value than issuing shares.
Such deals are also less risky than traditional debt financing and do not impose tight financial covenants or hedging requirements on the mining company.
At Gowlings, we have noticed that juniors are also exploring strategic investments from major resource firms as an alternative to traditional private placements, which involve a number of investors.
These types of transactions involve a private placement by a single investor – usually a major industry player – for a significant equity position in the junior.
These strategic investors have the cash to fund projects while the junior receives the cash infusion and enjoys the credibility of teaming up with a well-known industry player.
The junior company also only has to deal with one investor, which streamlines the process.
The junior usually retains control, as the major generally prefers to keep its investment below the 20% threshold to avoid additional regulatory requirements.
In addition, the strategic investor may even be willing to pay a premium for its position in exchange for certain benefits.
While these types of investments offer benefits, they also have disadvantages.
For example, the additional rights conferred on the strategic investor may constrain the junior’s future decision-making.
Many Canadian juniors are now also seeking funding outside North American markets and are looking to regions ranging from the Middle East to Asia.
China has been the dominant player in this area during the last couple of years and has made strategic investments in several Canadian resource companies.
In addition, resource companies are seeking private wealth funds as an alternative means to developing their projects, although arguably these investments tend to be more readily available for the mid-sized mining companies.
Of note, China Investment Corp., a sovereign wealth fund, and Resource Capital Funds, a U.S. private-equity firm that invests solely in the resource industry, both opened offices in Toronto recently.
Today’s economic backdrop is forcing junior mining resource companies, investors and their respective advisers to work together to find creative options to support growth and help them achieve their business goals.
Reaching outside the traditional funding arena can be a great place to start. •
