Energy & Infrastructure Insight - Issue 3

Issue link:

Contents of this Issue


Page 21 of 29

22 ALTERNATIVE SOURCES OF CAPITAL FOR THE MINING SECTOR "Alternative Financing Sources" is a term often used as a shorthand reference for streaming or royalty financing. The concept, however, encompasses many more forms of financing, such as private equity funding, commodity trader facilities, and other pools of capital and investment instruments, all of which have primarily developed over the last 10 to 15 years. THE ONGOING DEBATE Prior to the onset of the COVID-19 pandemic, there was significant debate as to the direction in which mine finance was trending, primarily due to the mining industry's rapidly increasing and steady use of alternative sources of finance. Specifically, there has been much discussion as to whether their popularity had peaked and whether the benefits that these sources were expected to provide (discussed below), and if these promised benefits were proving true. Mining companies were chafing at the consequences of dealing with the implications of having alternative sources of finance in their capital structure and more generally at the challenges of having more complicated capital structures, both of which had impacts on their ability to evolve and grow their business, which the companies had not anticipated. The other side of the debate insisted that alternative sources of finance were here to stay, but it recognized that the three traditional sources of finance remained important sources and, in truth, those traditional sources never really exited the industry. In fact, development financial institution activity increased after the 2008 financial crisis, and now again during the COVID-19 pandemic, to address market disruptions. The bottom line is that today the sector needs capital from both the traditional and alternative sources to meet its needs. Creating a well-trodden roadmap for the different sources to co-exist within a company's capital structure is where the focus needs to be and largely is. EFFECTS OF THE PANDEMIC ON BORROWERS OF ALTERNATIVE SOURCES OF CAPITAL The pandemic has proven to be a testing ground for some of the newer sources of capital. First, we would caution that how a source of capital reacts in the face of distress brought on by a global pandemic, when every company is affected in some form or fashion, is not necessarily a predictor of how it will react to a particular company's, country's or region's distress. Second, we are only beginning to witness the resulting effects of this pandemic, with the economic fallout of COVID-19 likely to span over a significant period of time. That being said, this period of uncertainty has already confirmed some expectations, such as the benefit of streams where there is no "payment default" if there is no production/revenue generation—due to an imposed shutdown or otherwise—or the challenge of commodity- linked, short-term working capital lines in the same circumstances. It has also confirmed that sector-focused sources are generally better equipped to deal with distress, and therefore are more predictable and practical. ESG-LINKED SOURCES AND INVESTMENT INSTRUMENTS RELATION TO MINING Ordinary people, ESG financing sources and products are not top of mind as being available to finance mining projects. These sources are, however, often available to mining companies, and likely will become more readily available as time progresses. ESG-linked sources encompass everything from green, social and ESG-linked bonds, as well as transition facilities issued in the capital markets and/or borrowed from commercial bank facilities, and funds established for impact investment. As the mining industry moves to modernize and "green," these changes present opportunities, as mining companies require significant capital expenditures that could qualify for such funding. For these reasons, ESG financing sources are certainly capital that mining companies should consider accessing. What Has the Mining Industry Stopped Talking About? Like other industries, the mining industry has grappled with the COVID-19 pandemic and governmental responses to it for much of 2020. We seek in this article to revisit what the mining industry has stopped talking about as it has navigated these uncertain times.

Articles in this issue

view archives of Energy - Energy & Infrastructure Insight - Issue 3