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Solutions for mining’s funding dearth

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Coal operations are finding it increasingly difficult to source funding for new projects. Image credit: Leon Louw for WhyAfrica

Solutions for mining’s funding dearth

New financing options such as royalty arrangements and streaming, together with blockchain and crowdfunding, are emerging as alternatives to traditional funding mechanisms.

By Rashaad Carrim and Shirleen Ritchie. 

The mining industry is a pillar of global economic development, providing essential raw materials for various industries while also actively participating in the drive towards a circular and sustainable global economy.

In today’s world understanding the role of mining companies in the global economy is crucial in navigating the many legal and economic intricacies and hurdles to ensure that these companies continue to operate responsibly, sustainably, and profitably.

Accordingly, this sector operates in a complex legal landscape, characterised by evolving and increasingly stringent regulations, environmental considerations, and community concerns while at the same time having to navigate the ever-present need and often scarcity of funding.

Alternative funding options: fuelling growth and innovation

Historically mining projects relied on capital investments such as equity, debentures and shareholder loan funding, joint ventures, and lucrative offtake arrangements to secure capex and to meet additional project funding needs.

Investors and third-party funders, such as banks and investment funds, are increasingly facing pressure to disinvest from the mining industry in favour of “greener” investment options.

This is specifically present in those mining sectors that are perceived as being inescapably linked to fossil fuels (coal companies and the like).

While there is still a diminishing bucket of investors who continue to invest in these entities, the equity and debt capital markets have insufficient will or depth to sustain the capital expenditure necessary to progress mining operations generally and, in particular, with respect to “out of favour” commodities.

Furthermore, banks and funding institutions are similarly limiting their exposure to mining operations to such an extent that the leveraging options available to mining companies are presently few and far between.

Innovative funding mechanisms  

Newer (and in some cases revived) financing options have started emerging as viable sources, such as royalty arrangements and streaming together with blockchain and crowdfunding (particularly for smaller mining companies or projects with a strong social impact narrative).

These innovative financing mechanisms offer greater access, flexibility and benefits to mining companies, including balance sheet optimisation, which in turn increases the ability to provide investors with real and meaningful returns by means of dividends.

Royalty and streaming arrangements offer many unique advantages to mining companies. In essence, streaming and royalty agreements are contracts concluded between the streamer (purchaser) and the mining company (seller) and can be efficiently implemented within a short space of time, as these arrangements usually do not require complex engagements with equity capital markets and shareholders.

It also often allows mining companies to optimise the sale of non-core or secondary commodities using more competitive pricing. However, the allure of these avenues should be balanced with an acute understanding of the regulatory, exchange control and tax implications as well as the overall cost of funding for the mining companies.

In addition, many tax jurisdictions will, at first blush, tax the receipt of funds earned on at corporate income tax rates, which would make royalty and streaming arrangements prohibitively expensive.

Coupled with income tax are the often-present value-added taxes that need to be considered. South African tax laws, for example, would tax the receipt at corporate income tax rates but for the application of certain smoothing provisions that allow the profit associated with streaming agreements, in particular, to be recognised over the term of the agreement do offer solutions that make this viable.

To this end, although commercial expediency and ease of implementation may be the first attraction, it is critically important to consider the legal and tax landscape of the mining company early on in the negotiations or this will not yield the desired results.

In this ever-changing world, the mining industry will continue to be tested, however, tapping into the power of these previously underutilised and novel sources of funding together with the guidance of strategic and experienced advisors is fast becoming a necessity for large, mid-tier and junior mining houses alike, to demonstrate to their stakeholders their continued ability to secure the ever-present need for capital and resilience in general.

Rashaad Carrim and Shirleen Ritchie are both partners at law firm Webber Wentzel

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Solutions for mining’s funding dearth

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Solutions for mining’s funding dearth

   

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AgricultureEnvironmental Management & Climate ChangeEnergyESGInfrastructureMiningPolitical EconomyTourism and ConservationWater Management