Thursday, February 4, 2016


Corporate versus project financing

In a world where financing for a mine is a tough, one needs to take a step back and look at the various areas of financing and where they are appropriate.

The first one is the obvious corporate equity financing. A company goes out and issues new paper (shares) for cold hard cash. The treasury may have run dry and the company needs new dollars to move forward. This cash will be used to pay fixed expenses (rent, phone services, and salaries) and also to pay for variable expenses (exploration drilling, bulk samples, consultants, etc.). The list of where this money is needed is quite extensive and varies from company to company.

Project financing becomes an option only when a project is developed to the point where it becomes its own entity and is independent enough to bring in some cash into the project (by various means) to progress the project to the next level. Project financing can occur at any time from first drill-hole to just before a decision to construct a mine is made. The biggest question is whether the project is economically robust. The economic side of the equation can occur quite early in the project development, but the robustness of the project is developed stronger and stronger as the project matures. A project with 1 drill-hole is clearly not robust, but if it is a high grade hit (20 grams per tonne of gold) over a big intersection (>50 metres) it may still be construed as economically tantalizing.

Is corporate equity financing necessary during project financing? The answer would be no, but most likely yes. Why is this? If the project is robustness enough to stand on its own and get very lucrative financing terms without touching equity financing, that usually becomes reflected in the market value of the company. If the market value of the company is at an all-time high because of the robust project, then an equity financing will not actually dilute current shareholders very much and hence becomes a very useful tool that probably will be used anyway.

What are the various options for both corporate equity financing and project financing?

Corporate equity financing:

Private placement to new or existing investors. Usually comes with a 5 or 6% fee unless it is non-brokered (where insiders do most or all of the placement)

Rights offering - Go to the existing shareholders and give them the right to buy a new share at a certain price (discounted) and they have the option to exercise or not.

Options or Warrants - Usually comes as a by-product of some of the above. Can be useful if the stock is on a rise...otherwise, a lot of these will just go and expire.

Project financing:

Can still do an equity component as above. This may create an excessive amount of dilution and too much will not be approved by the regulators. This may not be a reasonable or practical option.

Issue debentures - Basically corporate bonds at a certain interest rate. Sometimes these would be convertible into shares. This usually goes to the public market.

Insider Loan - Sometimes one of the key shareholders will loan a big sum of money to a company to help a long a project get to an even more robust level. (usually an interim step).

Bank Loan - A long term bank loan at prime or LIBOR + x%. One bank does not usually like to take all the risk, so this is usually part of a bigger group package of financing options or multiple bank scenario.

Line of Credit - Similar to a bank loan, but not necessarily used. Sometimes this can be just a  contingency for a project. There have been creative cases where the project needs to have an environmental bond posted, so instead of making a cash deposit, they take out a line of credit and fix it to the environmental bond. No cash actually gets transferred, but the environmental bond people have absolute access to the funds because it now rests on the backs of the bank who guarantee it. The bank is taking responsibility for the risks of the project...not the environmental bond.

Royalty agreement - A 1 or 2% royalty can be sold to help move the project along. This can happen early in the project development or quite late.

Streaming agreement - Historically, this is usually been based on a by-product metal where the project basically sells the by-product metal now, even though it delivers the actual metal at the time of production. Recently, there have been some agreements where a big % of the primary metal is streamed off. That is a big sacrifice and is usually needed if a project is not quite as robust as it needs to be.

Marketing agreements - If a project will produce something unique (eg. pink diamonds), there could be a one time payment from a company who wants to have first rights to buy that portion of production. This potentially gives that company an edge in marketing of those goods as it may have a larger supply advantage over its competitors.

Equipment financing - Equipment is a big part of the capital equation and at the same time, the equipment manufacturers really, really want to sell as much equipment as possible. There has been recent occasions where the equipment is sold to the project on a loan basis and paid back (with interest) over a long-term basis.

Deferrals - Governments who like to see jobs created (etc.) may be willing to forego (temporarily) some tax or government royalty revenue into the future. This doesn't necessarily reflect the economics, but may help other financing entities hit the green light as they know they will get their money back sooner than the government will.

Synergies - This is the case where another entity (usually a government) will help build some sort of infrastructure as it will not only help the project proceed, but also will be used by other stakeholders in the region that are completely independent of the project.


It would be nice to go from equity financing one day and the next day, just turn on the project financing. This usually doesn't happen for many reasons. One of them being that a company might be a great explorer, but does not have the expertise to actually mature a project based on the technical staff it employs. A lot of times, this is where a partnership comes in. A larger partner will usually have the expertise to mature a project and may even have the cash liquidity to capitalize the full project as well. This assumes there exists larger partners that are not already struggling on a day to day basis. This has been the case more often than not and it has been a huge struggle for small companies to start maturing projects that show big signs of economic robustness. A lot of times, a project will need to just sit on the sidelines year after year and wait for the world to become more liquid for financing of projects or wait until the commodity rises in value.

Who are the stakeholders here and what do they mean to financing?

In the case of corporate equity financing, the main stakeholders are usually the largest shareholders.
Sometimes, they are insiders and sometimes they are not. In most cases, they would like to see the company develop projects and need to see cash does get utilized appropriately. These main stakeholders would want to see their % ownership in the company rise as cheaply to them as possible. Smaller stakeholders must make note (be very aware) of what happens during each financing otherwise they may find their position in the company has decreased without doing anything.

In the case of project financing, there are multiple stakeholders involved. The shareholders are just one of those stakeholders. Now you have the government, future employees in the area, long term jobs for company employees, community members (benefits/concerns), finance entities (banks, brokerages, funds). All this plays into making a project go forward. So, the question is who is negotiating for which stakeholder? Multiple negotiations are going on and the small shareholder may be worried that they can do nothing and that may end up being the case. Do they have good representation? The Board doing the negotiation is theoretically elected by all shareholders, but it also has a mandate to make the project go ahead as that is to the benefit of all shareholders. The question is what sacrifices will the board make to give the green light on the project? A company with insiders holding a huge % of stock will be negotiating to get the best return possible for those certain insiders. The little shareholders will probably benefit the most in this scenario. A company with insiders barely holding any stock will put the little shareholder at a risk. They may be more willing to sacrifice to ensure they all have nice jobs that pay very well (maybe even better then they get paid currently).

In the end, the small shareholder must be aware of where the project is and where the company and/or project can raise money from.

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