Mining projects are capital-intensive and a mining start-up is seen as a very risky venture, which makes investments in early-stage projects somewhat difficult. These factors pose challenges to mining entrepreneurs when they seek to raise seed capital for their mining project. This post from Justinian Lawyers Thailand Delegation gives a short and incomplete overview of structural issues on how to
- get the exploration phase to be financed by an investor
- get the mine to be developed by an investor,
- agree on a joint venture during the exploitation phase, and
- identify high-quality operations and projects with attractive valuations, but also
- how to identify and select a favorable junior mining project to provide it with financing and other support.
How to understand the legal structure of a mining project
To diligently structure a mining investment, it is essential to have a clear understanding of how the mining business is legally structured. Each case is different, but in the center of an ongoing mining operation stands the project entity, typically a corporation set-up under local legislation. Shareholders are the project developer/entrepreneur and the investors’ side. Their internal relations are covered and regulated by a joint venture agreement.
The main players in the big mining game are (i) the claim owner, (ii) the engineers and workers, (iii) the suppliers, (iv) banks, (v) the government and (vi) the buyers and brokers under a sales agreement. Important tasks to be covered are apart from mining the development, processing, and marketing. The following overview shows the very simplified structure of a typical mining project:
Apart from mining claims on privately owned land, local mining legislation traditionally gives certain groups of citizens the right to locate a lode (hard rock) or placer (gravel) mining claim on public lands open to mineral entry. Minerals are gold, platinum, silver, copper, lead, zinc, uranium and tungsten. Local laws may limit the maximum size of lode claims and regulate the price for the placer claim.
Experience shows that the local law firm often concentrates just on one or some legal aspects of the overall structure without connecting the dots to see the full picture. This keeps the foreign developer blissfully ignorant about the economic consequences of the legal structure.
How to manage the various restrictions on foreign mining titles
The most favorable mining countries protect their domestic businesses by certain restrictions of foreign business activities, especially rights to undertake any mining operations (“mining titles”). The careful analysis of local legislation is essential to structure the land acquisition process by foreign investors, how to generally do business and particular foreigner restrictions to explore mineral resources.
These restrictions typically require the set-up of a local subsidiary which has to meet specific requirements regarding foreign shareholding, profit participation, voting rights and the level of foreign domination which is allowed or at least tolerated under local laws and industry practice.
Apart from foreign ownership restrictions, local laws may set out local content requirements for the procurement of goods and services for mining activities which are designed to promote the development of local businesses and know-how. This requires an increasing local participation in mining operations and providing of local employment and technical training. Other legal aspects may be the protection of specific ownership rights by indigenous persons or entities.
Additional restrictions might occur from foreign exchange control. And there might be even restrictions on the export of minerals when minerals are considered sensitive under specific export control regulations.
How to get a mining project fit for financing
The whole project needs to be financed. The legal project management has to implement the right financing tools to attract big money carefully. Financing by shares (going public) can be done by setting up the public company in the home jurisdiction, by setting up a public company in another mining country with preferable legislation or by setting up an offshore company. For financing through a venture capital company, the overall return on investment requirements have to be taken into consideration apart from particular VCC requirements.
In the case of financing by banks, the developer has to identify appropriate banks ready to finance a mining project. It is never wrong to dressing up the bride and to invest in corporate and technology PR to support bank financing. Typical financing aspects include
- Local legislation giving governments a right to receive a xx% free carried interest in the share capital of the project operating company
- Rights to conduct reconnaissance and exploration cannot serve as security. Mining concessions, though, can be subject to pledge to raise finance.
The financing by a joint venture with a big mining company could be a marriage made in heaven — or sleeping with the enemy.
How to chose the right financier
Mining financing is no one-size-fits-all solution. It first depends on the life-cycle status of the mining process, the prospecting, exploration, development and exploitation phase. Closure and reclamation of the mine site is a necessary part of the mine lifecycle. Each stage needs a special financing architecture and typical a different type of investor:
- Type A investors to finance the acquisition of the mining concessions, the drillings to test, the preparation of the ground, the purchase of equipment and the employment of professionals.
- Type B investors to develop the mine.
- Type C investors for junior mining companies.
A basic overview regarding the dependencies between mine and investor shows the following chart:
How to get the mining project licensed
The different licenses might be the most significant milestones in a mining project. Under local legislation typical license types are
- Reconnaissance license — which may not involve any geological work
- (Exclusive) exploration license- which includes test drillings
- Exploitation license — large-scale, small-scale or artisanal
- Retention license
The next chart shows the outline of the common licensing framework, subject to any specific legislation:
How to build a robust cash flow model
The cash flow model as the most important criterion for the investor’s decision. It should cover, above others, the following:
- Overall geological reserves and resources in the deposit
- Exploitation (production) rate, limited by (i) geologic conditions, (ii) characteristics of the deposits, (iii) technology, economy, and (iv) health and safety
- Exploration and development costs
- Capital costs
- License fees/royalties
- Mining costs per ton, processing cost per ton
- Total revenue over the lifetime of the investment
- Breakeven market price
- Each investor has specific requirements and a minimum return of investment rate
How to learn from the failures of others
Typical stumbling blocks for the successful financing of junior mining projects include the following considerations:
- Are there any data from drillings during recent times, from field tests or historical documents?
- Resources are not reserves
- Are there skilled professionals with extensive expert knowledge of the geographical region?
- Will the project utilize modern technologies to achieve the highest efficiency while preserving the environment and protecting its workforce?
- Is a robust business plan in place in a manner and with content which allows a positive investment decision?
- The trend of mineral resource nationalism
How to do it right the first time
A mine is a hole in the ground owned by a liar. (Mark Twain)