Spotlight - alternative financing
M&A and capital raising in mining & metals
Alternative financing options being utilized in 2013
Note: Stages = exploration, development, construction, production.
Source: EY analysis
The majors found little difficulty in securing funding through traditional means (primarily the debt markets) in 2013. But with equity markets increasingly taking a short-term view, juniors are necessarily looking for alternatives.
“Alternative finance, while not a new phenomenon, has increasingly become mainstream in 2013. Unsupportive, “short-termist” equity markets have spawned a greater variety of funding structures and capital providers at a time of critical need among the industry’s advancing juniors.”
- Michael Elliott, Global Mining and Metals Leader
Lack of confidence in the industry’s ability to yield satisfactory near-term returns has resulted in a dramatic pull back in public equity funding to the sector. Efforts by the majors to restore that confidence, including through a focus on optimizing existing assets, have resulted in a slowdown of buying or investing on their part, particularly in long-lead exploration.
A lack of clear consensus over the near-term direction of commodity prices – and whether the bottom of the latest cycle has been reached – continues to inhibit the wholesale return of both public equity and industry-led M&A.
This impasse has created exceptional opportunities for capital providers with confidence, patience and financial capacity to take a long-term view on the sector, whether from an investment returns or supply security perspective.
Known brands, new vehicles
In the private sphere, veteran industry expertise is combining with private equity to inject capital into the sector through strategic acquisitions. Examples include:
- X2 Resources, led by ex-Xstrata CEO Mick Davis and backed by TPG and Noble Group
- B&A Mineracao, the venture of Roger Agnelli (ex CEO of Vale) and BTG Pactual
- QKR Corporation, the fund headed by ex-JP Morgan Chase bankers Lloyd Pengelli and Roger Kennedy, with Andre Liebenberg (former BHP Billiton) and backed by a consortium of investors including Qatar Holdings
- Magris Resources, the fund set up by Aaron Regent (ex CEO of Barrick Gold)
Our view is that such “private capital” funds will be most active in the sector. These investors are deploying patient capital, adopting a longer term investment horizon and seeking to establish a robust operational structure that supports margin-led growth, rather than pursuing the strategy of "growth for growth’s sake," which characterized industry growth over the previous decade.
Exploration in crisis
Early stage exploration companies have historically relied on public equity markets. However, challenging market conditions mean that few institutional investors are prepared to risk early stage investment and few companies are keen to issue further shares at such low valuations.
Consequently, there has been both a dramatic decline in exploration expenditure over 2013, and an increase in the pursuit of equity-linked financing options.
Risk capital is unlikely to be available on a large scale in 2014, but there is an increasingly large pool of family offices, private equity providers and venture capitalists that provide early-stage seed funding.
However, access to this group of investors can be challenging, given the private and highly selective nature of their investments.
Funding options are becoming increasingly flexible and innovative in their structure. Streaming agreements form such an example.
While relatively small compared with traditional bank lending, project finance and equity, streaming as a form of alternative finance has become significant, dwarfing the level of investment into the sector from standby equity distribution agreements (SEDAs) or royalties, for example.
| Alternative financing options utilized in 2013 |
Future of alternative financing
Circumstances in 2013 have given rise to an environment of low confidence among the many and high confidence among the few — translating it into the potential for opportunistic buying at depressed valuations.
We expect these circumstances to persist through 2014: the window of opportunity for private capital investment is clearly now and capital is ready and waiting to be deployed, albeit only to the best projects and teams.
There are signals that juniors are adapting and responding to the changing funding environment — from better management of expectations, scaling back of project plans and careful cost management, to better “storytelling.” As a result, in 2014, we expect to see continued strong growth in alternative financing to the industry.