Many mining enterprises struggle to get ConsolidationNow capital expansion finance. Miners must use all financial levers to unlock an estimated $800 billion in 10 years.
Alternative finance has risen dramatically over the last decade, now managing over $8 trillion in assets. However, mining accounts for less than 1% of worldwide alternative finance. Leading miners utilize a mix of conventional and innovative finance to manage capital and returns throughout the cycle. To better manage long-term investment strategies, strengthen balance sheets, and presumably experience more stable returns and values, diversification is beneficial.
We believe that three of the most promising alternative finance methods may provide the mining sector with $800 billion in funding over the next decade.
The existing and future alternative finance markets
Alternative funding options
Mines have several choices for equity, debt, and hybrid financing.
We suggest three potential alternative funding solutions, particularly if not constituted as firm commitments (in which case they are more likely to accrue as debt, increasing leverage). While conventional loan obligations stay constant, nondebt and debt-like entities with variable repayment may lessen balance sheet stress during downturns. We recommend the following options:
- Streaming and net smelter returns (NSRs)—selling of all or part of future mine output at a discount, and sale of a share of future mine income for an upfront payment. Larger (over $100 million) streaming transactions concentrate on secondary output, whereas NSRs are smaller (under $50 million) and commodity neutral. This alternative to debt has several benefits. As opposed to cash, sellers are only committed to a fraction of future sales or output. They are also usually constructed such that the lender does not impose any restrictions on the usage of funds. Due diligence is usually completed in two to six weeks, and risks are disclosed with the lender.
- NPI—purchase of a predetermined proportion of mining earnings in exchange for an upfront payment, usually after capital expenses. Notably in oil and gas (where operators pay exploration rights holders a part of revenues), this is now emerging in mining. For example, a major streaming and royalty firm just purchased NPI royalties in Canada, Chile, and Turkey. This approach has comparable benefits to streaming and NSR.
- A piece of the value of an existing or new asset is sold in return for an income stream (toll or dividend). One example is mining in Australia’s Pilbara area. Some investment groups have acquired rail freight businesses in the Pilbara. However, this article does not analyze deals as outsourcing arrangements. To get cash without raising debt ratios (net debt, EBITDA), asset monetization is advantageous.
Because of the COVID-19 risk, corporate bond spreads have risen, and many mining firms (particularly juniors) are seeking alternative funding.
Three preferred alternative finance arrangements
Using ten-year predicted income and expenditures, as well as possible tolls, we estimate total alternative financing of up to $800 billion over the next 10 years. This is around 40% of the industry’s expected capital investment requirements over the next decade.
Over the next 10 years, the 12 most streamable by-products might generate up to $1.4 trillion in secondary income. This suggests a ten-year potential worldwide by-product stream value of up to $380 billion, dominated by gold (about $175 billion), copper (nearly $90 billion), and silver (26%).
Net Profits Interest
We predict industry-wide EBITDA of $7 trillion in 10 years, or $5 trillion after discounting. Streaming potential (deduplicated value) and the same set of commodities judged to have streaming potential result in a discounted ten-year prospective mining NPI value of up to $340 billion.
Tolling or joint venture/sale of non-core assets
Tollable assets in mining include ports, rail, and electricity. We estimate discounted ten-year toll values from ports and rail of up to $55 billion using only privately owned assets eligible for nondebt financing. On top of that, we estimate another $15 billion in funding possibilities for alternative energy projects (mostly solar), for a total of $70 billion. This might be a significant opportunity for infrastructure investors seeking lower-risk assets.
Falling prices and instability in the debt and equity markets threaten capital-expansion plans for large and small miners alike. Instead of experiencing the traditional boom-and-bust cycle in the sector, alternative funding may assist many participants sustain their investment ambitions. Alternative financing with variable-payments should lead to a more broad and stable investor base, higher values, and better balance sheets over the next decade.
Work is required to seize the chance. Companies should seek for long-term investors and counterparties with the appropriate risk profile. Structure and administration of such agreements need sophisticated foresight (such as predictive pricing and determining future production of a mine for streaming agreements). Companies that can move to shore up their finance and continue through-cycle investments stand to win significantly.