Demand is up for metals as stimulus money pumped into economies to counteract the COVID-19 pandemic has companies looking under every rock for sought after minerals. Will the new found demand bulldoze or bolster increased requirements for investing with environmental, social and governance criteria?
BY Mat Youkee
For mining economies that find themselves in a deep, pandemic-induced fiscal hole there is a simple solution: keep digging.
The investment and tax revenues from the industry have become a rare source of economic stability in the region and dozens of development projects stand ready for construction. But following a decade long bear-market for metals and with the industry’s record on environmental, social and governance (ESG) issues under ever greater scrutiny, these new projects are increasingly turning to alternative and sustainable finance to get off the ground.
“Mining is the economic beacon in this turbulent year of economic and social crisis,” said Baldo Prokurica, Chile’s Minister of Mines in October. Chile’s major mines avoided shutdown during the COVID-19 pandemic and the forecast $2.87 billion in taxes and royalties they accrued to the government will go “to finance urgent social programs and help for millions of families.” In Panama and Peru major mining projects were fast-tracked to return to production following lockdowns. In the Dominican Republic, Barrick Gold prepaid $113 million in taxes, providing vital foreign exchange for the Caribbean island’s COVID-19 response.
“Mining is the economic beacon in this turbulent year of economic and social crisis.”
-Baldo Prokurica, Chile’s Minister of Mines
From Mexico’s Sonora Desert to the wintery archipelagos of Patagonia, mining companies are dusting off mothballed projects to take advantage of this new economic imperative and bullish pricing conditions for gold, copper and iron ore. In Peru alone five projects with an estimated total capex of $3.4 billion are expected to begin construction in 2021, according the Ministry of Mines.
China’s economic stimulus, and its voracious appetite for manufacturing inputs such as iron ore, have sent that commodity on a rapid rise to all-time record highs. In early December iron ore futures price on the Dalian Commodity Exchange, used in China for its domestic market, hit a record $141.45 a tonne. Recently, Brazil’s Vale, the world’s largest iron ore producer, said its 2021 output is expected to be between 315 million and 335 million tonnes. Those levels undershoot analyst targets, setting the market up for even higher prices because of feared scarcity issues.
Combined debt and equity offerings for the third quarter surged 80% to $12.9 billion during the third quarter according to Mark Ferguson Director of Metals & Mining Research at S&P Global Market Intelligence. Latin American projects accounted for 26% of the sum that could be reasonably allocated by geographical regions. When it comes to future mine finance, “Latin America will definitely outperform in 2021” according to Ferguson.
However, after an almost decade long bear market, the
share prices of many mining firms are trading far below their peak during the
2010-2013 commodity boom. Equity raises at such prices remain unattractive.
“We’re seeing a bull market
for gold and record low interest rates so we are looking to leverage our
project as much as we can,” says Alex Black, chief executive officer of Rio2, a Toronto Stock
Exchange listed miner developing the Fenix Gold Project in northern Chile. “There
are a lot of financiers and investors looking for yield, but they are
likely to be cautious about the sustainability of currently high metal
prices. I think it’s okay for a miner to consider taking on
expensive debt, as long as they retain an option to restructure it
later as they de-risk the project.”
Traditionally mines were built through a debt equity
split, but with capital markets largely closed to the industry, miners turned
to alternative sources including private equity, offtakers of physical
production and royalty companies. Having put up the capex for distressed
miners, the royalty companies have reaped the benefits of rising metal prices
without ever having to get their feet dirty, but they now stand accused of
holding the sector hostage.
Traditional finance has found a way to work alongside
alternative finance – such as with Lundin Gold’s $350 million financing
for the Fruta del Norte project in Ecuador – but they can be complex, multi
tranche facilities with accompanying gold streams. Other developers are looking
for similar creative solutions.
In October Rio2 engaged Canada’s Scotiabank to
evaluate traditional and alternative financing options for Fenix. The latter
could include a security that acts as an internal gold stream or royalty,
providing yields to holders without the benefits accruing to third parties.
Such instruments could also be more appealing to institutional investors and
pension funds in Chile and Peru which have shied away from direct
investments in mining companies in recent years. “Our preference is
to not go down a traditional debt, equity route and we are
looking at other options
that might provide attractive high yield opportunities
to financiers and lenders,” says Black.
Creative financing options could also help the mining
industry clean up its image in Latin America after a number of high-profile
environmental disasters – including the collapse of two tailings dams in Minas
Gerais, Brazil – and increased grassroots opposition to projects from local
communities and non-governmental organizations.
During the Colombia Gold Symposium 2020, a virtual
conference, finance and legal figures described how mining finance is becoming
increasingly tied to the recipients performance on a variety of environmental
and social metrics.
“We are seeing an increase in…specialized financial
products which finance the transition of the mining sector to a more
sustainable, more ESG-focused industry.” says Cynthia Urda Kassis, lead
industry coordinator for metals & mining at Shearman & Stirling, a law
firm. “There has been for quite some time references to different aspects of
ESG in loan agreements but it’s becoming much more granular and tailored to the
particular transaction or project…you can have a situation where the interest
rate goes up or down based on the companies’ KPIs relating to ESG.”
“We are seeing an increase in…. specialized financial products which finance the transition of the mining sector to a more sustainable, more ESG-focused industry.”
– Cynthia Urda Kassis, Shearman & Sterling
In November Societie General awarded a $125 million
´Green Loan’ to Polymetal, a Russian miner, to be designated to projects
focused on clean transportation, energy efficiency and waste management
projects. A recent streaming deal between Wheaton Precious Metals and Caldas
Gold Corp, operating in Colombia, commits the former to spending on ESG
projects around the latter’s Marmato mine. Major miners including
Anglo-American, Newmont, Vale and Glencore have set out stringent emissions
cutting targets for the coming decades.
The move to clean tech and greater electrification is
expected to cause demand for copper, lithium, cobalt and other metals to increase
between 250 and 500% while energy research and consultancy Wood Mackenzie
estimate that $240 billion will be invested in base metals and gold in the
coming five years. However, with such bullish fundamentals coinciding with
major economic crises and social unrest, miners are bracing for a new round of
tax increases and changes to mining frameworks.
the social movements in Chile have called for increased spending in
health, education and housing and a change in the countries constitution.
In Peru, recent protests have been about fair and representative government”
says Black. “All businesses are likely to face increased taxation globally
due to extraordinary fiscal stimulus generated by the COVID-19 pandemic, but
mining is in the blood of both countries, we need to keep our heads down and
get the projects ready for construction.” A healthy ESG record could smooth