Taking stock of the mining sector
Tal Lomnitzer, Senior Investment Manager in the Janus Henderson Global Natural Resources team, discusses the drivers of change in the mining sector.
We live in strange and turbulent times. 2020 has been a humbling reminder of just how quickly our fragile world can shift. Recognition that invisible natural forces can pose indiscriminate danger to society, regardless of their race, creed or country seems to be amplifying existing societal trends, particularly the trend towards sustainability.
In a world that is increasingly sustainability-focused, and quite rightly so, there is a hidden danger that primary industries, such as resource production, fall by the wayside in the eyes of financiers. The impending EU Green Taxonomy (which is, in essence, a classification system for environmentally sustainable economic activities) will be an important litmus test as it attempts to define destinations for capital that are aligned with sustainable development goals. Resources companies need to ensure that their planning, transparency and reporting satisfy the increasingly complex demands of capital providers to ensure that money flows to new projects.
Resources provide the essential and fundamental building blocks of economic development. Whilst demand for some commodities, such as coal and oil, seem likely to plateau and decline as the world decarbonises, demand for other commodities will continue to grow and even accelerate. The green tinged stimulus from OECD governments in reaction to the COVID-19 pandemic promises a wave of investment in renewable energy which will require copper, lithium, cobalt, nickel, iron ore and silver to mention but a few. As the world strives towards a digitised, electrified and fossil fuel-free future, resources have an integral and essential role to play.
When it comes to global mining finance, the availability of capital may be considered through various lenses.
Management teams and bank lending teams tell us that financing is very much available to the bigger companies, which are ironically choosing not to access it, even at very attractive costs of capital. Big companies have repaired their balance sheets and are holding onto capital discipline to avoid causing a replay of the 2015/16 situation when their cost of financing exploded. It’s tempting to conclude that a good way of getting cheap financing is not to want it! That will be of little solace to smaller companies developing new projects.
Clearly the nature of the commodity is an important determinant of the ease with which capital can be raised. Financing constraint is more evident around developing or trading some fossil fuels. Meanwhile, pure plays in other commodities like copper have been able to raise and upsize facilities, as evidenced by the likes of Freeport-McMoRan or First Quantum, retiring 2021 and 2022 maturities at attractive terms.
Single asset, pre-production companies face different pressures and a higher burden of proof that their projects work at an economic, legal, environmental and social level. ESG factors are growing in importance. In future, having a bankable feasibility study alongside government approvals and environmental permits will be just as important as they are today, but a project will also need to show its ESG credentials. Quantifiable and auditable standards on ESG parameters, similar to JORC or 43-101 reserve/resources measures, safety, anticipated emissions, Scope 1, 2, and 3 carbon emission disclosure (see glossary), a pathway to net zero emissions and adherence to international and national standards for human rights, and safe tailings management are all necessary commitments that should be hardwired at the inception of a new project. Junior companies that set themselves on the right path to incorporating and reporting non-financial factors should find that this will yield benefits as they seek development capital.
Country and risk exposure are real challenges for junior miners taking on big projects in tough jurisdictions.
Finding money to spend between discovery and the bankable feasibility study can be tough once the excitement of blue-sky resource growth has subsided. However, it is at this stage that we would encourage companies to think creatively. In these cases, alternative financing may be needed, such as minority stake sales to large companies or prepays/offtakes. We believe that we will see more big miners get involved for a small initial joint venture stake, with options to increase based on milestones. As an equity holder, we would prefer to see this happen at the project level, rather than the corporate level. Streaming is an increasingly common form of raising capital, but one that we would consider carefully unless it has re-purchase provisions.
When it comes to mining finance, one should be careful what one wishes for. Whilst we all want good projects to attract finance, it is important to recognise that the point at which the mining industry becomes too easily financeable is usually the point at which commodity prices start to wobble. New supply often means lower prices in the future for commodities – the lithium boom of 2014-2018 and subsequent bust is a recent reminder. Consider the difference between an industry like technology, where more financing can create its own demand by creating products people did not know they needed, against mining, which relies largely on derived demand.
Financing does not create new demand. It is incumbent upon the industry to maintain discipline when financing is freely available, offering forward only the best projects and avoiding the temptations of the past to overbuild because finance is available. Unfortunately, this is a lesson too often forgotten, which only serves to highlight once again the importance of a project’s longevity and low operating costs if it is to survive through the cycles.
Interestingly, whilst there is growing availability of capital for exploration in mining, and we have not yet seen interest from equity providers to fund large development projects, it may well be that the best way for a junior to proceed is to partner up with a senior company with deep pockets, but a skinny pipeline of new projects. By working together there is a greater chance of ensuring that the right projects come to market at the right time, thereby avoiding the sins of the past. It may be slower, but as the African proverb goes, ‘if you want to go fast, go alone, if you want to go far, go together’.
First published in Mining Journal Intelligence’s Global Finance Report 2021 and reproduced here with permission.
JORC: The Australasian Joint Ore Reserves Committee (JORC) code sets minimum standards for the reporting exploration results, mineral resources and ore reserves.
43-101: National Instrument 43-101 is a national instrument for the standards of disclosure for mineral projects in Canada.
Scope 1 emissions: Direct carbon emissions from a company’s owned or controlled sources.
Scope 2 emissions: Indirect emissions from the generation of a company’s purchased electricity, steam, heating and cooling.
Scope 3 emissions: All other indirect emissions that occur in a company’s value chain.
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