BJ3 The role of Banks and DFIs

The global economic crisis has squeezed the lifeblood out of capital access for junior explorers and mine developers, leaving many facing extinction or merger, despite the quality of their exploration tenements and prospectivity. Junior exploration companies are an important part of the resource sector, particularly at the earliest stages of the exploration process. This makes them essential to the ongoing viability of the resource sector as greenfield discoveries add to the stock of proven reserves. For the junior mining company with largely exploration assets, funding options are often limited to private placements, with valuations very difficult to establish and often highly subjective. These days equity, and in particular IPOs, have a far greater role to play in financing projects; with a return to single mine IPOs being commonplace. Securing finance (whether equity or debt) requires all the relevant technical, operational, permitting and financial components to be presented in an integrated and transparent manner. For projects to be able to secure equity funding they normally require the inclusion of a resource that can be placed into one of the internationally recognised systems of classification.

Inferred RESOURCE

M&I RESOURCES

Probable & Proved RESERVES

DFIs

Banks

Once projects have advanced to the stage of a full technical feasibility study, valuations, determined from financial models based on a simple discount rate and a probable reserve, will tend to approach the full

potential NPV of the project. For a single project company this would also tend to be the same as its market capitalisation. Development Financial Institutions (DFIs) will get involved in financing a project from Inferred Resource stage. DFIs drivers are different to those of banks and institutions and it is this development imperative that allows them to get involved at this early stage. Essentially, this intervention finances the process of defining a Measured and Indicated resource which will allow the project to attract a JV partner who will do the full technical feasibility study. The project can then progress through to execution, often with ongoing participation of the DFI in future financing rounds. To take a resource into the reserve category requires the development of a prefeasibility or full technical feasibility study. This would expect to add significant value to a project which might otherwise comprises mainly exploration potential as it permits the generation of a discounted cash flow financial model. Where the NPV and IRR generated can be shown, through sensitivity analysis, to be robust this not only enhances the valuation of the project for the equity market, it can also be used to secure debt or project finance. It is only at this stage of development that Banks and institutions will involve themselves in a financing. Banks are the main providers of debt financing to mining projects. In most cases they do not take straight equity and primarily provide the project finance or corporate finance or a mixture of both. Banks sometimes take small equity stakes at the earlier stages of mining projects and take quasi equity (warrants, convertible loans) but this is the exception rather than the rule.

Brian Barrett is Chief Executive of RBS Consolidated Investments Ltd a boutique investment house that provides bespoke knowledge-based services to select clients in the natural resources sector and a leader in the financing of pre-resource definition and early stage mining projects.