Funding Options for Mineral Projects

13 February - 2 March 2012

Background

For the junior mining company with largely exploration assets, funding options are often limited to private placements, with valuations very difficult to establish and often highly subjective. This does, however, allow the investor to link the higher risk associated with investment in early stage exploration with the lower cost of securing a significant stake in the venture compared to more advanced projects.

A listing on the main LSE is not possible for companies involved only in exploration - the company must have at least one project associated with a probable reserve. It is an option that is restricted to companies undertaking or proposing to undertake extraction on a commercial scale. The prospectus must have a technical report, prepared by an independent consultant (Competent Person’s Report), which in turn may include all the elements of a pre-feasibility study. It may not be necessary to have a full technical feasibility study completed if funds are to be used for, say, additional drilling or trial mining.

The development phase of a project would normally involve a JV with experienced operators. Putting together a JV requires a valuation of the assets of the junior as a basis for the determination of the vend-in conditions for the major and a clear set of targets to identify when trigger points are reached. Usually this is linked to the delivery by the major of a pre-feasibility and a full technical feasibility study. These need to be defined with rigour if disputes are to be avoided. In the event that the major decides not to proceed, a claw-back clause is often included in the terms of the original JV agreement.

Once projects have advanced to the stage of a full technical feasibility study, valuations, determined from financial models based on a simple discount rate and a probable reserve, will tend to approach the full potential NPV of the project. For a single project company this would also tend to be the same as its market capitalisation.

For projects evolving into the development phase, project finance becomes an option. Banks exposed to the level of risk associate with a mining project will take a conservative view. They generate an Information Memorandum which incorporates a full technical feasibility study.

Estimates of the grade and tonnage in the full technical feasibility study may be no different from those used for pre-feasibility, but may well include the results of trial mining, bulk sampling and pilot treatment. This level of technical information would not usually fall within the scope of a pre-feasibility study. Permitting and EIS also needs to be in place. A full technical feasibility study will also provide the verifiable cost and performance predictions. These are needed for the Economic Completion Tests when operations funded from debt progress from the resource to non-resource stage.

Major international mining companies act virtually as their own investment banks in setting cost of capital. Projects evolving into the development phase therefore provide a favourable investment environment for a rights issue, exchange listed convertible bonds, high-yield notes and structured
corporate loans.

Course Aim and Structure

The course is spread over three weeks and aims to identify the investment opportunities that are being offered across the whole spectrum of the mining cycle, by relating this to the various funding options in the progression from exploration through evaluation, pre-production development,
development and finally into production. The programme is integrated with the MSc in Metals and Energy Finance course and will be delivered through a series of syndicate and role-playing exercises aimed at enhancing inter-disciplinary communication skills. The programme will be based on case histories of platinum group metal projects and will be supported by contributions by external experts from industry and the financial services sector.