Derisking mining projects: the dance between capital, risk, and expertise
At Projects RH we are well aware that equity and debt markets can be fickle and their view of what is an acceptable risk -and its price- can change quickly over time. To be frank, some risks are simply not “bankable” or “investible”. As projects move toward that end of the spectrum, they also become uninsurable.
The second reality is that the people charged with finding the money are largely rewarded when they are successful. If a project is simply seen as “too hard,” no amount of reward will motivate seasoned capital and debt raisers to wish to invest their time in this. Across the world, the finance of mining is in the hands of pragmatic people. If they were not such, they would not have survived through the fluctuations within the sector.
Mining projects often require substantial upfront capital. Access to debt markets allows companies to secure loans or issue bonds to finance exploration, development, and infrastructure. The need for upfront capital requires the promoter to have very clear and concise measures regarding the risk involved and to understand accurately the cost of operations.
At this point for many new mining companies, they will wish to work with a highly seasoned and well recognized mining contractor who will bring credibility to the project but also to its cost calculations which invariably reflect on the return to the investor.
Having worked for a major international mining contractor, I can say their estimating department was a great contributor to their global success. They understood process engineering and costs. They understood the costings in different countries because they operated in 8 nations and consulted in several more.
Put simply, it is about derisking what you can.
Access to money
Large mining projects need access to debt and equity markets.
Equity financing involves issuing shares to raise capital. It’s crucial for expanding operations, acquiring assets, or funding exploration. It can be done at the parent level or at the project level. At Projects RH we work with a few clients who want equity at the project level. We are asked to prepare documentation often to support a private placement at this level.
Equity investors bear the major risks, yet they seek growth potential, transparency, and alignment with sustainability objectives. This is because they get paid last and are generally in for the life of the project. When equity is involved at the project level, there may be limited liquidity for the investment.
Lenders seek project viability, creditworthiness, and risk management strategies. Before lending, they will review equity and assess project feasibility, cash flow projections, and risk mitigation.
Project finance is often used to support a project and can be a mix of equity and debt provided by an institution or a packager/adviser who will call in on equity, insurers, trade financiers and lenders. Generally, the key party is an offtake partner. Examples of offtake partners such as OEM (original equipment manufacturers) include car companies who will place a long-term supply order.
At Project RH we recently reviewed an OEM placing a 15-year order for Lithium in the US. This lithium was the mine's production capacity for the life of the mine. They effectively underwrote the investment and its return. This significant reduction in the risk of the mine saw a project financing package quickly put into place for a USD 600m project. It is a win for all, and the local community appreciated the jobs.
Community support matters
Today community backing ensures smoother project execution. It influences investor confidence and regulatory approvals. It can see the labor and regulatory process move smoothly. Social license to operate is essential—mining companies must engage, listen, and address community concerns and those that do will get their projects into production quickly. There is nothing more damaging to a good project than being stuck in a series of court actions for 7 or more years as other projects move into production.
Key features for investors and lenders:
When the team at Projects RH works with companies, we consider the following as the key factors for successfully financing new projects:
- Resource Quality: High-grade deposits with favorable mineralogy.
- Cost: Operating costs in the lowest quartile.
- Political Stability: Stable jurisdictions reduce risks.
- Environmental Practices: Sustainable mining methods, including energy sourcing.
- Community: An effective relationship with the local community by employing and upskilling locals.
- Transparency: Clear reporting and ethical practices.
- UN's 17 Sustainability Principles: Compliance with these principles delivers most of the above and demonstrates a commitment to the long-term sustainability of the project, especially when the developer operates outside their host nation.
- Acting locally: Practices like planting trees in another country do not meet requirements. Mine developers must engage with the local area and community.
Advantages of global vs. local mining companies
It really depends on where the project is located. In large mining countries such as Canada, Australia, and Brazil, there is no significant advantage for local versus international mining companies, as the national workforce has the expertise. In contrast, countries in central Africa need not only foreign expertise but also capital. Capital is likely to follow a path with an established track record and global expertise to address any emerging problems. An alternative is to utilize the expertise of global contractors. Almost ironically, major global mining companies will also leverage this expertise, as Rio Tinto did in Mongolia when it brought in Thiess to handle the foundation work for a new mine.
Sustainable mining supports a greener future
Mining, when done sustainably, fuels our transition to a greener future. Balancing economic growth, environmental stewardship, and community well-being is the encore we seek.
To achieve this lofty, but necessary, outcome, money needs to be found and this needs to come from investors and lenders whatever the packaging of the risks and rewards.
What is critical to the process is community support and the project remaining commercial.
Such projects need good and independent analysis. We believe that many companies come to Projects RH because they want to have someone independent prepare the draft of their investment materials so that they say what needs to be said and do not contain noise.
Our process begins with a financial analysis and discusses risks and markets. Investors and lenders need facts and figures, and they will know most of what is in the public domain. They will care about the quality of management and the business model. We do not rewrite environmental studies, bankable feasibility reports or resource studies but happily summarize them and emphasize what the investors want to know.
From a 50–60-page information memorandum making it clear what the Board wants, 12 slides in a pitch deck and a 1-page teaser, most parties can decide whether to proceed or not. Sometimes proceeding will mean due diligence but if investors and lenders engage in this, they are usually serious as this is costly. When investors and lenders get to this point the quality of the team matters.
By Paul Raftery, CEO of Projects RH.
If you have a mining project…
Please send you materials to paulraftery@projectsrh.com and then book a time to speak at https://outlook.office365.com/owa/calendar/PaulRafteryProjectsRH@projectsrh.com/bookings/ Please allow me 24 hours to send a link and read your summary.
Gain Investor Confidence with Projects RH: Effectively prepare your mining project for success in securing the funding you require. Unlock the power of eco mining and join the exciting journey toward a more sustainable tomorrow!
