COMMENTARY — Banking on the mining industry

Major Canadian banks have had a long tradition of financing mine development to commercial production in Canada. The banks’ interest gained momentum in the 1950s with the development of Canada’s uranium industry, and again became prevalent in the 1960s with the development of its potash industry.

Throughout the last 50 years, banks have been a leader in the development of Canada’s base metals industry. And mining represents about 5% of GNP and 20% of exports.

In the 1970s and 1980s, Canadian banks often loaned directly into mining projects without recourse, in many instances to the sponsoring company. Such loans were based on an independent feasibility study to support the viability of the project.

Today, independent feasibility studies permit a bank to gain a reasonable estimate of ore reserves, recovery rates and capital costs. The major unknown is metal prices. While a bank pays attention to where such prices are in the commodity business cycle, it also gains comfort based on where the project is positioned on the global cost curve for the particular mineral commodity. Obviously, a project that is highly cost-efficient relative to global competition and can sustain cash flow well beyond the bank term will provide a fairly high measure of assurance as to the long-term viability of the operation.

Banks the world over have long been associated with mining clients in developing global mineral opportunities. Canadian banks are no exception to this global activity. One important exception is the exclusion of Canadian banks in lending to those South American countries that have restructured loan obligations with Canadian banks over the past decade, and these are numerous.

There are federal restrictive provisions on such loans which virtually make it impossible for Canadian mining companies to borrow from Canadian banks on a project loan basis, unless there is recourse against the mining company. These restrictive provisions, for the most part, do not prevail against other international banks competing in the global marketplace.

The need to be creative is never more prevalent than when the client is interested in bringing the mine into production in adverse cyclical times. — Bill Redrupp is a partner with Price Waterhouse in Toronto.