04 Oct The future of junior finance?
Raising capital or dealing with a contemporary capital-raising landscape has become a fixture on the lists of industry headaches published each year since commodity prices turned down in 2013.
From a Mining Journal perspective, our research arm has seen access to capital or a derivative thereof featuring as a top-five risk in two separate surveys over three consecutive years. The World Risk Report, due to be published next month, will place Access to Capital second to only Regulation in the hierarchy of business risks rated by industry.
For a brief period shortly after the onset of the downturn, the industry dared to hope. The term ‘White Knight’ was regularly used to describe the increased activity among royalty/streaming firms and the introduction of private equity (PE) to mining – still often termed collectively as ‘alternative finance’. For many optimists, these more flexible models were a better fit with resources companies than commercial debt and public equity. The number of firms in the space and the capital on offer, some said, would grow to replace those traditional avenues.
In reality, these alternative forms of finance have served only themselves.
Royalty/streaming has always followed a counter-cyclical investment model, offering relatively expensive finance when traditional providers have retreated during the base of the cycle and then enjoying the fruits during the upswings. PE or alternative banking models are generally more flexible and offer a range of options from debt to equity to streams but also at a relatively high cost.
What they both have in common is their selectiveness. Both sources of capital require high rates of return from low-risk opportunities in safe jurisdictions. This initially involved helping major miners restructure depressed balance sheets by buying ‘non-core’ assets (PE) or providing streams on world class deposits (royalty/streaming). It then moved to funding brownfield expansions and providing development finance for the cream of the project pipeline. Several funds and royalty/streaming groups have since put aside a small, dedicated pool of capital for early-stage development plays.
The assets that qualify for alternative-finance attention are few. Those left out in the cold are the good-but-not-great development projects and the sea of exploration equities that represent higher-risk propositions – something for which the mining sector is well known.
They’re asking to be paid for a service that can be supplied by a platform
Many assets and junior management teams have rightly been starved of capital and faded, though still arguably not enough. But those genuine exploration outfits on which the industry is built have also suffered and continue to do so.
By Mining Journal’s estimations, around 90% of the listed market is comprised of junior equities. At a time when there is little competition from public equity or commercial banks for access to mature, world-class assets, alternative investors have no need to trawl through the thousands of juniors for the diamonds in the rough. There has been no ‘White Knight’ for them.
But as mining continues to test itself with innovation – digitisation, remote operating centres, automation, highly-sophisticated CSR programmes – some of that thinking may be starting to spill over into resources finance and could mean at least a partial solution for the dearth of capital in the junior space.
We started looking at crowd funding a few years back when it was first thrown up as a solution to the junior finance conundrum. On the face of it, it was a good fit: small resources companies unfit for public life are often forced into initial public offers too early because of the steep capital demands of exploration. Meanwhile, regulators were increasingly tying the hands of financial advisors in supporting such speculative ventures. Staying private and putting the hat around for the US$1-2 million needed in a crowdfunding exercise perhaps made more sense.
But the lack of regulation was a sticking point. Exploration and development require technical understanding to evaluate an investment and there are, sadly, too many unscrupulous operators alongside the genuine articles who are happy to fleece investors. There has, therefore, been little to show for the brief hype around crowdfunding to date, but the concept has not altogether vanished.
A finance ‘platform’ has raised its head above the parapet this year, run by a firm called Minexia, a group of technically proficient mining professionals with finance backgrounds. Its NR Private Market vehicle is the first platform-based finance solution dedicated to the mining sector.
The concept is essentially a hybrid of crowdfunding and regulated financing, which is based on the now well recognised technology used by global success stories such as Uber.
Minexia chief executive Richard Lloyd told Mining Journal the disruption of the fee-hungry broking profession was a logical step for resources finance and was simply part of a “platform revolution” already well underway.
“The world has evolved to a point where brokers are being forced to pull their socks up – and that’s not just equity brokers but insurance brokers, mortgage brokers or travel agents,” he said. “That’s not to say broking won’t have its place but it has to offer more – they’re asking to be paid for a service that can be supplied by a platform.
“Take Airbnb as an example. If you look at a chain like the Hilton, Marriott or Sheraton, they have to buy land, build a hotel kitted out with 200 rooms, bar, restaurant, gym, pool etc, and they have to fill that, say, 30 weeks a year to make it work. Airbnb doesn’t own a single room yet are in the same marketplace with a platform – they take a small cut for putting a person who needs a room in Twickenham because they’re watching the rugby with a person who has a room to let in Twickenham because they’re away for a week watching a game of football in Barcelona.
“These platforms are bringing investors together with issuers; a user or subscriber with a provider. It’s the same service as a travel agent or broker but without the overheads, which is cheaper for the issuers and fairer for the investor – the fees for financing on a platform can be around 4% compared to up to 6-7% plus a warrant at the same rate currently in Toronto; while people who only want to invest $10,000 in a deal are welcome on a platform but would be squeezed out by a broker.”
Practically, Minexia has the technology to digitally host, market and close transactions. It has a self-accreditation system for investors who want to join the platform that explains the risks and includes the standard anti money laundering and ‘Know Your Customer’ (KYC) checks.
Around one in 10 deals assessed by the Minexia team makes it onto the platform
It is a similar situation for juniors looking to place deals on the platform. Company directors do the same KYC and laundering checks then, while not recommending any deals, the Minexia team assesses the proposed transaction based on its four-C criteria: commodity, country, corporate (management/governance) and concession. Those that have merit proceed to the platform to be assessed by the investor community.
Minexia is covered by FCA regulation as an ‘appointed representative’, similar to a broker, and so the laissez faire nature of crowdfunding is bypassed while maintaining the open access and efficiency of transaction.
“One way to think of it is sophisticated crowdfunding,” Lloyd said.
“Yes, we’re regulated and that is necessary and important for any financing business that is potentially dealing with people’s savings and pensions but, for us, our assessment process and the quality of the deals we present to our investors will also dictate whether or not we grow the platform.”
Around one in 10 deals assessed by the Minexia team makes it onto the platform.
“At the moment, we’re working on deals in the $1-5 million space,” he said. “There are bigger ones we’re looking at but that’s generally our bread and butter. And investors are looking to put in $10,000, $25,000 or $50,000.”
Since the June quarter, Minexia has participated in raisings worth around $7 million across three deals for Canadian-listed juniors, including an oversubscribed $4.73 million placement for Mongolia-focused explorer Kincora Copper in June. A London-listing for an Australia-focused copper-gold junior looks set to close shortly and the firm is in the midst of its own modest raising.
Minexia is not altogether alone. Privately-held junior Cornish Lithium this week closed a $1.7 million raise through Crowdcube, a general crowdfunding platform. Though not resources specific, Crowdcube is also a platform-based financier regulated by the FCA.
For Cornish Lithium chief executive Jeremy Wrathall, crowdfunding provided an opportunity to open up the project to locals and build on community support.
“We could have raised money from our original shareholders again, but we had had 600 people write in and ask to invest – a lot of them local,” he told Mining Journal last week before the deal had officially closed. “And we wanted to give them the opportunity to invest in a project that’s on their doorstep,” he said. Cornish Lithium has introduced some 1,200 new investors to its register.
Wrathall said he saw crowdfunding as a “really interesting possible new avenue” for resources companies “as long as it’s done carefully”. This is in step with Minexia’s prudency and also its view on providing avenues for local funding.
“We have a domestic deal coming on soon, which I quite like,” Lloyd said. “It’s in the same vein as Cornish Lithium and Strongbow Exploration in terms of UK-focused projects with locals given the opportunity to invest – I like the idea of a domestic deal raising local money.”
If confidence builds in the platform model and it is used by a greater pool of investors then, much like Uber or Airbnb, the ability to service the market will also expand. A $1-2 million raising today may be a $10-12 million raising in three years. If done responsibly, things could snowball from there – there is, after all, nothing stopping institutions from joining the platform.
The ‘alternative finance’ of 2014 has not been the lifeline quality junior resources firms have needed, but platform financing just may be the ‘new alternative’ that does.
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