TNM Roundtable: Industry leaders debate new finance frontiers

Industry leaders weighed in on alternative financing at The Northern Miner’s roundtable discussion titled “New Frontiers in Mining Finance,” held in the offices of Newport Private Wealth in Toronto in early October. The roundtable, sponsored by PearTree Securities and moderated by Northern Miner publisher Anthony Vaccaro, augments the Miner’s independent research on this topic that will be published in full next month.

Vaccaro kicked off the discussion by asking about the new realities for mining companies when it comes to raising funds.

“The normal is gone,” said Oscar Jofre, CEO and founder of KoreConX, which provides an infrastructure platform for equity crowdfunding. “You can’t look at the same way you did business before. You have to look at it differently.”

Rod Thomas, president of the Prospectors & Developers Association of Canada, maintains the framework for juniors to access capital is “somewhat broken.” PDAC is urging the Canadian government to encourage investments in the mining sector through continued and more robust tax breaks for exploration companies and investors, among other initiatives.

Given the structurally challenged capital markets, Haywood Securities’ vice-president and senior analyst Kerry Smith says companies will get more creative with financings. “Crowdfunding or these smaller financings, I think, will have to be a way for guys to get capital to be able to commit to a project in the development stage or concept.”

Crowdfunding, which allows companies to raise capital by accessing a large group of people via the Internet, raised $65 billion worldwide in 2014. It’s time for mining companies to capitalize on this opportunity, Jofre said.

But as recent history in mine finance shows, change takes time. Silver Wheaton (TSX: SLW; NYSE: SLW) CEO Randy Smallwood spent a decade promoting streaming as a financing option, with the idea only recently catching on in a big way. “It’s been ten years of trying to convince everyone that this isn’t a magic black box,” Smallwood said. “It’s been a battle.” He lamented the mining industry is traditional in its ways, making it tough to introduce new ideas.

However, once these notions are accepted, people might wonder what took so long.

Referring to crowdfunding, Chad Williams, Red Cloud Mining Capital’s CEO, said that “in some ways, it sort of reminds me of the Wright brothers. Nobody was sure that the plane was going to fly. But when it did, it seemed obvious to everyone in retrospect.” 

However, Franco-Nevada (TSX: FNV; NYSE: FNV) CEO David Harquail was less enthusiastic about short-term financings. The mining sector, he said, needs “long-term, patient capital” brought in by such vehicles as  royalties to develop mining projects through the commodities cycle. He believes pension funds may become more involved in the industry as a long-term source of capital.

Harquail pointedly described short-term capital as “heroin,” explaining that it will leave the industry in worse shape after the initial euphoria, recalling the last time institutional capital flooded into the sector on the back of higher commodity prices, and many companies took on expensive, now-uneconomic projects. “That heroin always leads to bad outcomes,” he said.

Balmoral Resources (TSX: BAR; US-OTC: BALMF) CEO Darin Wagner noted this boom period is over, and the mining industry is back to where “there is no easy money.” But now companies have more financing alternatives.

Expounding on the array of options, Ian Ball, CEO of Abitibi Royalties (TSXV: RZZ; US-OTC: ATBYF), suggested firms could pay more attention to rights offerings as a source of non-dilutive capital, explaining the Toronto Stock Exchange has made it easier to do so. “If you want to go raise a little bit of capital, I think you should go to your shareholders first, who have been supportive of the company,” he said.

Andrew Farncomb, managing partner at Cairn Merchant Partners, says private equity firms will likely play an important role in funding projects, as they will often finance a project to production.

Vaccaro noted the Miner’s new reader survey found participants had the most confidence in private equity, and used this alternative the most in the past 12 months. Respondents expected capital raised through private equity would increase the most after royalties and streaming.  

While firms like the idea of accessing long-term funds from a small group of individuals, David Thomas,  managing director of  the Canadian arm of Resource Capital Funds, cautioned that private equity may not suit all firms or their management teams. He said private equity firms are active investors and often take seats on boards, modify management teams, provide input on budgets and have rights to protect their investments from dilution.

“At the end of the day, there’s not one solution that fits all,” Iamgold’s (TSX: IMG; NYSE: IAG) executive vice-president and chief financial officer Carol Banducci said. “It’s great that you have different opportunities to look at your business, and look at what makes sense for you, whether it’s traditional debt, equity or alternative financing arrangements.”

Earlier this year, Iamgold raised $50 million through a charity flow-through with PearTree Securities for its new Westwood gold mine in Quebec. “It was a great opportunity to access at a very attractive level that marketplace,” Banducci said. 

Quebec-focused junior Balmoral has also made use of flow-through and charity flow-through financings, Wagner noted.

The Northern Miner survey, however, revealed participants thought charity flow-through financing was the alternate financing method least suited for mining, followed by crowdfunding, while private equity and flow-through financing ranked as the best two options in terms of perception. 

Trent Mell, PearTree Securities’ president and head of mining, commented such views are likely due to the lack of familiarity about charity flow-through financing, as also shown in the survey. 

“If you love traditional flow-through, you’re going to love charity flow-through,” Mell said. “It’s the same product but better,” as it benefits companies, investors and charities.  Under this structure, an investor/donor subscribes to flow-through shares, with both the company and donor receiving tax credits. The donor then gifts the shares to a registered charity, which sells them to an institutional investor to receive its funds, and write a tax receipt for the original donor.

Over the past three months, Liam Fitzgerald, PwC’s Canadian mining leader, said he has had over 60 conversations with clients about alternative financings, because they want to understand the different models. “It’s a big education process that we’re going through,” he said, explaining clients want to make sure the method is tax neutral be
fore they get to the advantages.

Another challenge in raising funds is the mining industry’s relatively limited investor base. Demographics play a role in the sector’s current malaise, Red Cloud’s Williams argued. “As baby boomers get older, they are conserving capital and are unwilling to risk capital in more speculative industries like mining.”

Market research on Canadian millennials, currently aged 18 to 35, shows that the group is open to investing in mining, but don’t know a lot about the industry, Williams said. “The bottom line is that millennials are ready. And they are going to be an important part of the funding for mining in the future.”