Junior firms are finding other sources of funding for mining projects, as traditional sources of capital dwindle.

Traditional sources of capital for mining companies have dwindled in recent years. This has particularly affected junior mining companies, forcing them to seek alternative sources of funding.

In its recent report Tracking the Trends 2014 Top ten issues in mining,  Deloitte, said mining companies will continue to face challenging market conditions this year including rising costs, falling commodity prices, supply/demand imbalances, and decreased productivity levels. The key to success, according to the consulting firm, is innovation, which can help companies to lay firm bases for long-term growth and better position themselves for future success.

Many junior companies are struggling to find financing, even for strong projects. In an effort to survive, companies are seeking new sources of funding, including the following options.

Sovereign wealth funds

Although China dominates this market, other countries are entering the game. Indian investment houses are buying Australian coal to secure assets and supply for both electricity and steel. Both Japanese and Korean investors are becoming more active in the sector. The Middle East also represents a significant source of potential wealth. Although these investors have not yet committed, funding from countries like Qatar, Abu Dhabi and Saudi Arabia may not be far off.

Private equity

According to Preqin, a firm that studies private equity, eight mining funds raised US$8.5 billion in 2012 alone. Although private equity firms typically shy away from the mining industry, interest may mount as valuations fall and competition from larger mining companies eases. That said, many analysts still believe the sector is too big – and timelines too long – to sustain private equity interest.

Non-traditional stock options

As liquidity through traditional stock exchanges becomes scarcer, some miners are listing on non-traditional exchanges in Asia (including Singapore), the U.S. and Europe. Hong Kong’s stock market remains open to miners with solid business cases.

Alternative financing

While major companies tap the bond markets with a range of high-yield and hybrid issues, others are seeking different sources of funding through royalty and streaming arrangements, off-take deals, joint ventures and equipment financing. Some Russian miners have had success tapping into the Eurobond market.

Pension funds

Pension funds typically have a long-term liability profile, which aligns nicely with the mining industry’s long-term assets and returns. The sector could see more interest from this quarter as pensions look to mining assets as a potential hedge against inflation. According to Preqin, public sector pension funds accounted for 18% of organisations with an interest in natural resource private equity in 2012, followed by endowment plans at 17% and private sector pension funds at 11%.19

Consolidation

By pooling their capital and resources, some companies may be able to lower their labour and equipment costs sufficiently to ride out current market turbulence. Although transactions are down, companies that can present buyers with a strong rationale for their asset pricing are more likely to attract investor interest. To position for these opportunities, companies must right size their portfolios and ensure that key assets are capable of functioning as standalone entities, both from a financial and functional perspective. They also need to better calibrate their balance sheets in preparation not only for sale but also potential refinancing.

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