This panel discussion was recorded at our 121 Mining Investment New York event from 23-24 October 2023. For more information about the event and those who participated, click here.
Tim Mister, Head of Credit & Royalties, Appian Capital Advisory
David Kaplan, Partner, Lascaux Resource Capital
Miranda Werstiuk, Founder, Fuchsia Capital Advisors
Miranda Werstiuk: We are currently at a nexus point in the industry where capital is extremely difficult to find, especially for early-stage explorers and developers. The challenge is how do we find capital and where is it coming from? How do we engage with the right companies, management, and projects to make sure that capital is deployed sustainably, correctly, and with a vision to build solid projects going forward? As the planet continues to grow, with the population tipping 9B by 2030, we are trying to figure out where we are going to get the metals and minerals to be able to support infrastructure growth and the growth of humanity.
So, how do we attract capital in the current high inflationary environment?
Tim Mister: It’s not just inflation, the equity markets right now are also very challenging. I think it’s an advantage that we don’t sit in public equity markets as private capital. We cannot be short-term thinkers. And so, we’re seeing more interest in private capital solutions. That could be in the form of private equity, a partner that can stand behind with the capital raised and ready to deploy, or on the private debt side where we can structure things in a way that’s floating for our investors (which they seek), but also floating for borrowers, such that if interest rates come back down, they benefit from those reductions. It’s a good time to be a private capital provider on the public side. I mean, it’s a cyclical industry, so that will always have gyrations.
David Kaplan: Inflation hits everything at the same time, equally. So, I can sell my commodity at a higher price, but my input should go up equally. It should be the same, but it’s the cost of capital that’s a bigger factor. The other thing to think about is, in our lifetimes, we’ve seen super high inflation. What we’re seeing right now is almost normal rates of inflation. It seems expensive, but it’s not, particularly for the kind of risks we’re taking on by building these projects.
Miranda Werstiuk: We see a gap of US$2-US$50M in market cap where companies are really struggling to find capital, whether they are explorers kicking off, in development, or moving into production. People come to lenders and say, okay, we need another US$10M. We’ve got enough to get the project across the line, but we need a buffer. And that’s tricky. That’s difficult capital to deploy looking at new projects, development timelines, and the impact on sourcing capital. Last week, I had the opportunity to speak to a small group in Toronto who conduct study work for projects, from PEA to feasibility. The vision was: you shouldn’t be looking at projects six months before production, you should be funding these projects 24 months before production. But that also speaks to when entities look for their ROI.
David Kaplan: In the last 10 years, the world has seen the need for those types of studies and long timelines, particularly if it’s a greenfield project. It always takes longer than you think. It always takes more money than you think. It will be late; it will be over budget. So, the question is, do you have patient capital for that? If you’re using equity dollars, that works. If you’re going to use debt, there’s going to be gates, timelines, and barriers. And so, I think the private solution works better.
Miranda Werstiuk: In Canada, we’re struggling with that equity gap too. Trying to raise capital in the equity markets for early stage and even development projects is very difficult right now.
Tim Mister: The equity markets aren’t always open and it does speak to the private capital markets. Independent of all that, at the end of the day, it comes down to what is the appropriate form of capital for the given risk in each project. Every single one is different. They’re in a different phase or stage, and in some cases the money is being used for exploration in study, and that tends to lend itself more to an equity-like risk. In some cases, it’s in the last mile, in which case, it might be a better fit for debt capital. It’s hard to generalize it, but essentially, the public equity market is very cyclical and goes through swings, while the private capital market can be a little more long-term driven.
Miranda Werstiuk: This connects well into Deloitte’s 2023 trends, which are all about this nexus point we’re in with the energy transition. Can you comment on mining’s role in the energy transition and how we can source diverse pools of capital for that?
David Kaplan: I think that’s where this sector can move back into the forefront of people’s minds, because I do see the equity markets as closed, particularly for mining. What resonates with investors is: are you actually doing something that’s going to help us 20 years from now rather than making a dollar tomorrow? If you don’t pass those ESG standards, you’re not going to get those caps and then the mines aren’t getting that money.
So, where are all the metals that are going to go into those great transition technologies? All of those factors are what the next 20 years of mining investment is going to be focused on. How do we get them funded? Getting that message to the capital allocators is a challenge, but I think that is where we’re going to find ourselves back in the money, so to speak. If we need a billion electric cars, where are they going to come from? Where are we going to get those batteries? It’s going to come from out of the ground and you can’t recycle all of that.
Tim Mister: It’s really starting to go mainstream. I think a lot of our investors, folks who provide capital to the private capital providers, are starting to see these themes. It’s not just inflation, but now in some cases, pivoting away from the oil and gas space to get commodity exposure. And typically, they like to see that with an ESG focus or an energy transition tailwind to that.
Miranda Werstiuk: You both mentioned this ESG-driven mandate. When you look at a potential investee company, do you have ESG rigor around that?
Tim Mister: It’s a must have. People in the private capital space have been doing that since day one. It’s the kind of thing where if you don’t, you’re not in business very long. It’s not just permitting in communities, but also health and safety. It’s literally the whole value chain. It’s absolutely critical and every one of our investors focuses on it a lot.
David Kaplan: I think it’s a paradox because people look at mining as a dirty business, but the reality is, to operate anywhere, to get a permit, to keep a permit, and to keep employees; you can’t hurt anybody, you can’t hurt where you are working, and you can’t pollute. Mining has to be focused on ESG and always has been. I think the message probably wasn’t getting across properly. Obviously, coal seems bad, but that’s still a huge part of our resource base and that’s what we’re using. It’s not easy to say, “I’m ESG and this guy’s not ESG.” I think to be in mining pretty much everyone has to be focused on that. And to attract capital, you have to be focused on that.
Miranda Werstiuk: I think the industry also has to do a better job of communicating who we are and what we do. In order to function, we need to pull these materials out of the ground. I remember having a conversation with my older daughter who is just finishing a degree in engineering, and she was adamant, “Mining, why do you fund that? What’s wrong with you?” I got her a couple of summer jobs working in the field, so she would get her hands literally dirty. Now, her fourth-year thesis is about real time data from drill holes — the math and physics around drilling into specific types of rock, which could be quite transformative to the industry. I helped her across the line because we need to bring young, bright people into this business.
Looking at these early stage projects and the best type of capital for that, let’s look at joint venture structures and other types of creative funding.
Tim Mister: The right type of capital is a function of risk most often. So, for very early-stage stuff, the risk is so high, and the natural funding is typically the public capital markets. Once a project has a resource that you can understand, underwrite, and analyze (and maybe you’ve got a PEA), you will start garnering more interest from the private capital providers as well. That’s where you have a choice. You can continue to fund the development along from a definitive feasibility study (DFS) through to a bankable feasibility study (BFS) and build it yourself. That will require raising a big equity ticket alongside bringing in banks or private debt providers.
That’s one route you can take, which does bring market uncertainty with it. Will you time the market right, will the project be the right size, have the right backing, and the right momentum?
However, you also have an alternative in private capital. If you were to partner with a group like Appian, RCF, or someone else on the private side, what would that look like? That way, if you want to sell the project, you can. If you want to joint venture (JV), you can, and keep the upside to the end product as well.
Miranda Werstiuk: It’s about managing risk and finding the right strategic capital at the right time to develop those projects.
Tim Mister: That’s right, but a lot of it comes down to things like financing risk. Are you going to be able to build this? Can you source the capital? Taking some of those risks off the table has a lot of value as well.
David Kaplan: I think the JV model is important. I heard the tail end of the Sierra Metals presentation. They’re good miners, they make money every year, and they’re actively mining. They have projects that are so big, but they’re going to look to JV, and that’s how that model works. It should be in production, but they don’t have the capital or the wherewithal to do it themselves. So, they’ll partner up to get it into production. In this type of JV, you help them on the first project with an option on the second one. Now you’re a JV partner in a big project. I think particularly for the juniors, that’s the appropriate capital. They just can’t do it on their own. Technically they could pull it off, but they need a lot of money to do it.
Miranda Werstiuk: Majors aren’t necessarily spending a lot of money or devoting capital into that exploration development phase So, by partnering with somebody who’s a little further down the line and de-risked, there’s an opportunity to identify projects to move forward with. That’s also a benefit of the industry. If we’re looking for metals and material to support global growth, we need to have those projects move forward.
Let’s look at royalties and streaming as another piece of creative funding.
Tim Mister: I think a lot of people are familiar with royalties and streaming. In short, a royalty is typically a percentage of the top line, either gross revenue or net smelter, and a stream is an actual sliver of the metal itself, which can then be traded thereafter. Often, those who are interested in the stream actually want to trade the metal itself and find value in that, while a royalty tends to just be a financial product. It is a non-dilutive solution, which is helpful in times like today where cost of equity is very high. There are some downsides to royalties and streams, which is it tends to live there forever. It tends to be life of mine, which means it also captures mine life extensions going forward, and it can sometimes be seen as a detriment to selling the asset going forward.
There is a healthy royalty and streaming public market led by the big three, Franco-Nevada, Wheaton Precious Metals, and Royal Gold. There’s also a whole host of mid-tier and smaller tier royalty companies who are providing a really relevant function. They’re a source of capital for some of that early-stage work because they’re creating a portfolio of royalties and they don’t need all of them to be producing at any given time. A lot of them have option value. That’s good, but it has some downsides too.
Our approach when it comes to royalties and streaming is a little different. We tend to not be as interested in the small, super early-stage royalties, but try to attach a royalty as part of an overall non-dilutive solution. We might say, “We’re going to provide a debt facility to you as non-dilutive capital,” and maybe we can actually attach a small royalty or a stream to that to increase the amount of non-dilutive capital and decrease the amount of expensive equity. So, we take a modestly different approach, but there’s lots of ways to structure them. It lends itself to a lot of creativity.
Miranda Werstiuk: It seems as though some real creativity needs to be put in place here in order to be able to fund projects.
David Kaplan: I agree. What’s interesting, is that everyone’s done royalties on gold, silver, and even some of the base metals; but now that we’re looking at these strategic metals — is that going to be the next wave? Is someone going to start graphite streams or royalties, or will someone do that for only battery products? I think that’s where that new capital might come from. The established guys are doing what they’re doing, but they’re only doing projects that they want to be in for the next 50 years. Can we find a company who will put together a portfolio of 20 mines, because that’s much more powerful than just having one exposure.
Miranda Werstiuk: The last question here is about political risk. These projects all function in their own independent jurisdiction, so how do you manage political risk?
David Kaplan: There are certain no-fly zones for us from a jurisdiction point of view. Our promise to investors is that we’re going to vet and no matter what, we’ve got you covered. That’s harder to say today.
In a way, conflict is only good for noting how we’re going to need more metals to sponsor these activities. But in terms of following ESG and being in a place and having multiples on your earnings, it’s harder to guarantee that now. If you look at geopolitical events (not just war), we’ve had a new government in Peru every year for the last five years. If you want to put billions of dollars to work, that’s not going to be so easy. Juniors can say, “I’m going to take a risk. I’m going to be in this country in Africa that no one else wants to be in,” but it’s going to be hard to find dollars to sponsor that activity.
Miranda Werstiuk: What kinds of quantum of capital do you look to deploy? We were talking about the US$10M to US$50M range.
Tim Mister: It’s definitely one of the primary considerations in every deal. People may say jurisdictional risk, but what does it mean? It means permitting, interaction with the government tax regime, workforce, ability to get a product out of the country. All of those things are important. It is a primary consideration. We look at every opportunity on its own. Not every part of a specific country is the same, just like not every state within the US is the same. We have to look at it for those considerations. There are also other tools you can use. There’s political risk insurance or credit insurance that you can use as ways of managing it. Nevertheless, I know a lot of people are insurance skeptics, that the underwriters are way better at writing policies than we are at reading them, but there are some tools out there to use
If you’re a lender, making sure you have the right sponsor that’s backing a company, the right management team — it just becomes elevated. There are some areas where we just won’t go, but otherwise we try to take a creative look at it. I also think it’s a slightly different consideration on equity versus credit. With equity, you have to be able to exit. You need someone to have a view that they want to purchase this asset from you. In credit, you need the mill to keep turning, and so it’s a slightly different risk profile, but it’s a big consideration.
David Kaplan: We have three criteria. One, will I visit it? If I hesitate about going to visit, I don’t want to be there. Two, is there a rule of law? Is there a tradition of foreign companies or investors being able to come over and seize ownership/has that happened before? Finally, three, is there a tradition of mining? For instance, a lot of people are putting money to work in Ecuador, but that’s new pasture. They could change the law and your permit’s gone tomorrow. I don’t want to be in that exposure. I want a long history of traditional mining where the infrastructure’s built and there’s a tax base and everyone knows what that means.
Tim Mister, Head of Credit & Royalties, Appian Capital Advisory
David Kaplan, Partner, Lascaux Resource Capital
Miranda Werstiuk, Founder, Fuchsia Capital Advisors