SPECIAL REPORT: Private equity groups and credit funds are delivering a diverse range of financing options for mining projects.
Private equity groups and credit funds are delivering a diverse range of financing options for mining projects.
Securing funding is one of the biggest challenges facing companies seeking to develop mining projects.
While commercial banks have limited appetite for mine finance, particularly for specialty commodities, other investors and lenders are increasingly filling the gap.
One company following this closely is Azure Capital.
“We’ve been having a lot of interesting discussions with people about financing options,” Azure partner Matthew Weaver said.
“We’re seeing a lot more activity in what we call the alternative financing space, led by the private equity funds particularly.”
Mr Weaver said traditional funding options, including equity raisings and bank debt, remained an option for some projects, mainly those in widely traded commodities such as gold, nickel and other base metals.
“Anything specialty is much harder,” he said.
The Australian banks were still funding some domestic projects while a handful of European banks, notably Societe Generale, BNP Paribas, Natixis and ING were also active.
“Outside of that group, it’s pretty slim pickings in the bank sector,” Mr Weaver said.
On the equity front, Mr Weaver said volatility in public markets such as the ASX meant private equity could be a better option.
“What these alternative sources offer is the ability to raise money through the cycle with long-term support and certainty that more traditional sources of finance can’t offer,” he said.
The major players in this space include Resource Capital Funds, which has $US3.8 billion of funds under management.
“The good thing about private equity is we can be incredibly flexible,” RCF partner Peter Nicholson said.
He observed that a lot more private equity funds had emerged in recent years.
“People see it as a true asset class and an investible asset class,” Mr Nicholson said.
Mr Weaver said an alternative source of debt finance was private credit funds with a specialist mining focus.
The major players in this space were Taurus Funds Management, Orion Resource Partners, Sprott, and RK Mine Finance
These funds were seeking returns higher than the senior debt from a bank, but were not chasing an equity-style return, according to Mr Nicholson.
Mr Weaver said these funds often combined traditional debt finance, with a relatively high interest rate, with some form of equity instrument such as options or warrants.
Another form of equity instrument was streaming, which typically involves an investor making an upfront payment in return for an agreed percentage of future production at less than market value.
Orion Resource Partners portfolio manager Peter Rozenauers said his group often blended several aspects.
“Along with debt or production-linked investment like streams, we also invest in the equity so that we can achieve an overall blended return appropriate to a PE fund,” Mr Rozenauers told a recent seminar hosted by Azure.
A prime example was Orion’s $US105 million of funding for Heron Resources’ Woodlawn zinc-copper project, which comprised a loan, a stream prepayment and an equity stake.
Azure advised Heron, and is also advising Sheffield Resources, which struck a funding agreement last year with Taurus to underwrite a $US200 million funding package for its Sheffield mineral sands project.
Mr Weaver said Azure currently had three signed mandates to advise on mine finance and expected there were more on the way.
Perth-based Battery Minerals is a notable example of a mining company that failed to close a funding deal.
Battery announced in May it had agreed terms with RCF for a $US30 million debt-and-equity package for its Montepuez graphite project in Mozambique.
Five weeks later, it said the funding agreement had been terminated.
Mr Nicholson said the agreement was subject to multiple conditions, including due diligence, and the company’s announcement was premature.
“The stage of that agreement was very early,” he said.
“The list of conditions precedent was extensive and it was very clear it was not a done deal.
“We would normally expect an agreement like that not to be announced to the market, but the board has to do what they think is appropriate and that’s fine.”
Mr Nicholson said RCF had undertaken a very detailed analysis of the graphite market.
“Fundamentally we’ve got a different view on graphite,” he said.
“Hindsight will tell us is who is right and who is wrong.”