Falling gold prices have further dampened equity markets. John Ollett reports on junior miners’ search for debt and how they must improve to obtain it.


For several years, gold was riding high and its price reached the unprecedented level of US$1,921/oz in September 2011. Since this all-time high, there has been a severe decline that has brought the issue of debt versus equity financing for junior gold miners back into focus.

For junior gold mining companies, equity has traditionally been the principal choice for financing their projects. After the global financial crisis, however, equity markets dried up. The generally muted economic environment meant that investors had a far lower tolerance for risk and the rise of new financial instruments, like gold exchange-traded funds, gave them the exposure they desired to gold in their portfolios without having to invest in mining stocks. “The equity markets have become increasingly selective in terms of what they are prepared to fund, with higher expectations in terms of risk versus reward,” Vaughan Wickins, executive of mining and metals at Standard Bank explains to GTR.

The recent gold price-falls have exacerbated this underlying problem. Junior gold miners’ stock prices are now so low that it would require an extreme dilution of directors’ holdings to raise their desired level of equity – even if they could generate sufficient interest. “Small mining companies… they’re a breed which is struggling to stay alive with the reduction in commodity prices,” Glenn Ives, chairman of Deloitte in Canada, tells GTR.

With this source of funding remaining problematic, mine developers are looking increasingly to debt finance as the best option for their projects.

This includes companies like Torex Gold, which is raising the majority of capital for its Morelos gold mine in Mexico through debt. Earlier this year, it snapped up a project finance facility of US$250mn from BMO Capital Markets, BNP Paribas, Commonwealth Bank of Australia, ING and Société Générale. Euromax Resources is also looking to raise US$476mn in capital for its Ilovitza mine in Macedonia, of which US$350mn will be debt.

Up to the task

During the financial crisis, lending across many industry sectors collapsed. Over the past couple of years, liquidity has gradually returned to the market. The capital is there to lend, but banks’ risk appetites have fallen. Borrowers have to do more now to convince banks to lend to them than ever before. This is particularly true for junior miners.

John Bridges, senior analyst of precious metals and coal at JP Morgan, explains to GTR: “Some smaller miners have taken on debt, but not all junior miners have cashflows to support interest payments.”

Banks generally do not fund companies that are early on in the development cycle. Developing a mine can take anywhere from years to decades to complete, as electromagnetic surveys, exploratory core drilling, resource estimations and scoping studies need to be undertaken before a pre-feasibility study – a preliminary assessment of project viability – is performed. A bank usually gets involved once a project has either reached or passed the pre-feasibility and feasibility stages and the asset is clearly defined.

When a bank is considering investing in a project, it puts the company and the mining plan under a microscope, employing mining engineers, metallurgists and geologists, as well as lawyers, to go through everything with a fine-toothed comb. This is often more in-depth due diligence than would be performed by equity investors – one of the reasons that miners have often preferred equity in the past. But if the mine plan and company meet its criteria, then often the bank will lend.

“We maintain that there will always be [debt] funding available for good quality projects demonstrating robust economics and having strong management teams,” Wickins of Standard Bank comments.

Measuring up

Banks also sometimes require alterations to be made to existing studies.

“We look at cashflows very carefully, a project can be designed with a higher net present value (NPV) and higher internal rate of return (IRR) [two measures used by investors to gauge a project’s potential profitability, the rate of growth a project is expected to generate] but have less attractive characteristics for funding,” Paul Miller, investment banker for mining and resources with South Africa’s Nedbank tells GTR.

An example of this would be a project that has a second round of high capital expenditure early in its mine life as it moves from a smaller pit to a larger pit, which would reduce its attractiveness for funding.

However, with some alterations, the mine may be eligible for more senior debt. “Embracing high-margin, low-cost strategies like reducing capital expenditure and exploration costs and focusing on a more disciplined capital allocation might be one of the simplest and fastest ways to add value,” Simona Gambarini, associate director and research analyst for ETF Securities, explains to GTR.

If the company does measure up, then the bank, or financial institution, may even waive some of its traditional requirements. Asanko Gold’s project in Ghana recently secured a project debt facility for US$150mn which has none of the gold hedging provisions, cash sweep requirements or restrictions usually associated with traditional project finance facilities.

Asanko has not commented on its financier’s motivation behind waiving these requirements but, at the same time, it has signed an offtake agreement for all the gold over the life of the mine to be sold to the debt provider at spot prices – a price that will be determined during a nine-day period following a shipment. The company has trumpeted its project economics and its intention to grow through acquisitions as reasons that it merits such an investment.

Also, this year, Nedbank and First Rand bank agreed to provide US$88mn to Aureus Mining for the development of a Liberian gold project, without asking for any of the production to be hedged.

Export credit boost

The importance of export credit agencies (ECAs) in financing gold projects is growing. ECAs help to reduce the risk of a project in the eyes of commercial lenders. When banks are more tentative about their financing activities, ECAs can help galvanise the lending. ECAs often lend to projects that are perceived to be riskier, since their raison d’être is to support exports, rather than turn a profit. The involvement of a government-backed ECA therefore often makes such projects more attractive for other investors.

They are also willing to provide loans with longer tenors. In the current economic environment, banks will typically lend for around five years, says Miller at Nedbank, when a mine may have a development cycle of 10 to 15 years before it begins to generate income. ECAs, however, might lend over a longer timeframe at a lower rate.

For an industry which relies on heavy and expensive infrastructure and machinery, these advantages are essential. ECAs are often, then, involved in the purchase of mining assets. African Underground Mining Services, which designs and constructs mines, in the past has used Australia’s export credit agency Efic to fund the purchase of equipment, some of which was manufactured by Caterpillar in Tasmania, Australia.

“If you make the right procurement decisions [ie purchasing assets that give access to ECA loans or guarantees] during engineering, this can increase the amount of senior debt that the project can bear,” explains Miller.

Aside from ECAs, other development financial institutions (DFIs) may provide loans if they believe a project will provide jobs and economic benefits to the region.

The Mongolian Oyu Tolgoi mine, being developed by Turquoise Hill Resources – which is backed by Rio Tinto and the Mongolian government – has received funding from a number of DFIs as well as ECAs. The EBRD has pledged €400mn and the German and Dutch development banks KfW-Ipex and FMO have also signed up.

The mine will be one of the largest gold and copper mines in the world and is expected to be transformative for the Mongolian economy, hence the involvement of the government and the development banks. But companies from other countries will be heavily-involved in the mining and development of infrastructure, which has encouraged the involvement of the ECAs. For instance, Rio Tinto is part-Australian and one of Australia’s largest tax payers, explaining the involvement of Australian ECA Efic, which announced this May that it will loan an undisclosed sum to Rio Tinto for the development of the mine.

US Exim has also stepped up, authorising a US$500mn direct loan to finance the continued development of a Mongolian mine that, it has said, will support approximately 2,000 jobs across the US. Other ECAs, including Canada’s EDC, have also looked to be involved for similar reasons.

Less traditional jurisdictions

With mitigating factors such as ECA funding and debt-optimised mine design in place, banks are beginning to lend into less traditional jurisdictions.

“We have seen a greater appetite for lending into riskier jurisdictions in the mining space. For example, only a few years ago projects in Sierra Leone would have found it very challenging, if not impossible, to secure debt funding,” explains Wickins of Standard Bank.

Recent projects such as African Minerals’ iron ore project in Sierra Leone, Aureus Mining’s gold project in Liberia or Base Resources’ mineral sands project in Kenya have all secured debt funding. West Africa too has seen an increase in demand for funding with numerous gold projects in development. Financiers would traditionally have been extraordinarily wary of these jurisdictions.

Although the gold price has rebounded slightly since its Q2 collapse, investors’ interest in stocks continues to be low and it is unlikely that it will return to the levels seen during the boom. As such, junior gold miners will continue to attempt to source debt financing as a principal source of financing and must ensure that they measure up accordingly.