Issue link: https://digital.shearman.com/i/1300408
23 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 ten to 15 years. FOCUS ON ESG AND RESULTING IMPLICATIONS FOR RAISING CAPITAL BY THE MINING INDUSTRY Capital markets are an attractive source of financing for mining companies, as they provide access to significant liquidity in the form of equity and debt instruments, as well as hybrid debt instruments, and allow for the diversification of capital structure. This diversification can take the form of debt instruments, which, among other things, offer issuers with longer tenors, fixed interest rates instruments and covenant flexibility, as compared with traditional bank financings. Green Bond Issuances as a Source of Capital for Mining Companies An interesting form of financing that some mining companies may increasingly look to take advantage of is green bonds. Functionally, green bonds are bonds where the proceeds are used to finance projects that result in positive environmental effects. These new kinds of bonds allow mining companies access to a different investor group. Green bond issuances have been on the rise for a decade as a meaningful source of liquidity that many issuers are starting to consider more frequently. While mining companies are not typically considered a "green" sector, mining companies can issue green bonds, but they should be aware that they are likely to be subject to greater scrutiny from investors due to the nature of their operations. Therefore, mining companies that choose to issue green bonds must be proactive about disclosing ESG-related information to their investors, conduct robust sustainability reports with KPIs and potentially facilitate a third-party audit of a relevant project so that there is robust reporting in place in connection with the green bond issuance. EFFECTS OF TAILINGS FACILITIES RISKS ON CAPITAL MARKETS TRANSACTIONS The tailing dam collapse in Brumadinho once again put a spotlight on tailings facilities globally, highlighting the potential for catastrophic humanitarian, environmental and financial consequences in case of a failure. The risks associated with these failures have had an impact on capital markets transactions, manifesting themselves in the form of detailed diligence of potential exposure and disclosures of risks associated with tailings dams. ASSESSING ESG PERFORMANCE AS A FACTOR OF MINING COMPANY SECURITIES ISSUANCES While ESG performance is not the key driver determining whether a mining company is able to successfully issue securities, it is an increasingly important factor for future investment opportunities. The ability of a mining company to access the capital markets depends on a variety of factors including credit worthiness in the case of debt securities, as bond investors will focus on the ability of issuers to generate cash to service the instruments. When evaluating an investment opportunity, investors will, however, also take into account other considerations, including environmental and health and safety compliance. This is especially true of funds that have certain ESG investment criteria. Mining companies have become aware of this and hence have faced pressure to act. MITIGATING ANTI-CORRUPTION COMPLIANCE RISKS FOR MINING COMPANIES Examining the Nexus between Mining Industry Participants and the U.S. Government While most mining does take place outside the U.S., the jurisdictional reach of the U.S. Foreign Corrupt Practices Act (FCPA), the U.S. anti-corruption statute, is quite extensive. All U.S. issuers, including foreign companies whose stock or ADRs are traded in the U.S., automatically fall within the purview of the statute. Additionally, any foreign company that transacts business in the U.S. is subject to the jurisdictional reach of the FCPA. Indeed, the U.S. enforcement authorities have taken the position that any bribes paid in U.S. dollars create a basis for liability under the statute (by virtue of being routed through U.S. correspondent banks), even if the company has no other ties to the country. There have already been multiple instances of non-U.S. mining companies being charged with FCPA violations and having to pay steep fines as a result. Recently, a Chilean mining company with no operations in the U.S., whose employees allegedly paid bribes to Chilean government officials while in Chile, was charged by U.S. authorities with violating the FCPA. That company paid $100 million in penalties and was subjected to a U.S.-imposed compliance monitor. Such enforcement risk and attendant penalties extend beyond the company itself and to the individuals involved, who may face imprisonment. What Has the Mining Industry Stopped Talking About? (cont.)