‘Alternative finance’ has long been a buzz term in the mining industry. The global financial crisis, and ensuing slump in commodity prices, led to an absence of traditional sources of funding for mining companies (read, debt and equity) meaning that a wider net had to be cast to secure financing. Sensing opportunity, a myriad of players entered the market, including royalty and streaming companies and ‘non-bank lenders’, all offering a variation on the typical funding model.
The impact on the industry of the royalty and streaming companies is undisputed; the total value of royalty and streaming transactions globally topped $20bn in 2015. Equally, capital-adequacy concerns and the growing cost of providing project finance debt means that the number of banks providing finance to the mining sector is more limited than before the commodity crunch. There is a growing band of ‘non-bank lenders’, including specialist mining funds. Like all funds, they have an internal hurdle rate which must be achieved before investment is made. Usually this is achieved by offering traditional debt alongside another investment, such as a royalty or long term offtake.
For mining companies based in Africa, these composite financings present a source of potential capital, albeit because of the internal hurdle rate the cost of borrowing from these entities is invariably higher than traditional bank lending and there are other complexities which the mining companies will need to navigate. But how has the industry adapted and how will it respond now as traditional players look to re-enter the market?
There have been recent signs of life in the mining industry: Mining Indaba which took place in February this year had a more positive mood than in recent years; gold has consistently remained above $1200 per ounce; the world’s largest miner, BHP Billiton, recently returned to the black and paid a better-than-expected dividend; and new greenfield mining projects are attracting investment. If recovery is sustained, traditional players are bound to return with traditional forms of finance and lower margins. This means that the dynamics between traditional lenders and those providing alternative finance becomes increasingly important for the sector as a whole.
It will be interesting to see whether growing competition and liquidity in the market forces the ‘alternative financiers’ into new investment strategies. For junior mining companies, this could mean an increased prevalence of alternative financiers willing to invest in emerging markets, or a greater willingness to take construction risk in order to fund new projects.
Regardless of future developments, it is plain to see that alternative finance is here to stay. Indeed, in time it may no longer be seen as an ‘alternative’ source of finance, but rather as a customary part of the financing toolkit for mining companies in Africa. Dangerous words in the world of mining, but this could well be the new normal.