The robust demand for most commodities and the uptick in prices, particularly for precious metals, has seen a number of minerals and metal producers flagging project expansion initiatives.
SA Mining recently caught up with LEX Africa’s network of law firms in South Africa, Zambia and Guinea for insight into the different funding options available to miners and the appetite for innovative funding.
“There is a renewed interest from funders and funding institutions for financing projects in Africa, due largely to the upturn in commodity prices. Importantly, governments, such as the South African government, have recognised that mining companies have contributed greatly to revenue collection even through the difficult times of COVID19 and appear to be shifting their focus to promote mining investment rather than hindering it,” says Chris Stevens, director of Werksmans Attorneys in South Africa.
Moreover, increased policy certainty in countries like Zambia has led to improved confidence in the mining sector and subsequently a greater appetite for funding new projects.
“There is a noticeable buzz in Zambia to restart a number of key projects that had been put on the shelf,” says Charles Mkokweza, senior partner at Corpus Legal Practitioners in Zambia.
Even the COVID-19 pandemic, which has been wreaking havoc across the globe, has had little impact on the financing of mining projects in Guinea, says Amadou Barry of Thiam & Associés in Guinea.
“In fact, two major transactions – the financing of Compagnie des Bauxites de Guinée (CBG) and the Tri-K mining project – that were ongoing when COVID-19 hit, were finally closed in November 2020 and early 2021.
“These two projects involved respectively $800-million and $122m in financing. This is largely due to improvements in the mining sector in recent years and an attractive debt environment (low interest rates for instance).”
As Africa’s mining sector plays host to numerous international players developing local projects, the array of funding options are plentiful – be they the tried-and-tested traditional models or the more recent innovative models, such as streaming and royalty transactions.
According to Mkokweza, while the traditional forms of funding are still commonplace, there is a definite shift to the new forms of funding given the flexibility that the newer models offer and the inherent fairer distribution of risk and rewards among the stakeholders.
With an increasing number of mining companies expected to struggle to gain finance through traditional methods, Stevens anticipates that the innovative arrangements (royalties and streaming) will become more popular.
“Another advantage that will drive interest in the uptake of innovative options is that mining companies are able to gear off their reserves upfront which often enables projects to come into production quicker at a lower cost. The entity providing the streaming funding will acquire access to the physical production with less risk than a normal equity or funding arrangement.”
Further to this, the benefit for financiers taking up the innovative funding options is the larger profit margins, lower exposure to risks, and diversification while remaining key players in the mining industry, says Mkokweza.
The new funding options allow more African miners, in particular junior miners, to get access to larger funds and financing instruments, says Barry, who expects to see the emergence of “different types of lenders” investing in the African market in the near future.
“For instance, some Chinese lenders are even more interested in accompanying Chinese mining companies in their African projects.”
However, despite the interest in the more innovative options, many African countries still have undeveloped mining sectors, so most investments are currently through foreign investment such as Australian, Canadian and South African mining and exploration companies.
“Due to limited access to capital and a low level of available funds in the local financial system, African-owned companies often look to international markets and international funding institutions to raise funds.
“However we find that these institutions are reluctant to finance projects held by African companies due to the perceived risks and a lack of strong track record compared to their international counterparts.
“As a consequence, many African companies are forced to partner with an international technical entity which, in return, assists with negotiating and finding large banks and financial institutions to finance the project,” says Barry.
As for miners in Zambia, whose mining portfolios are largely owned and operated by international companies, funding is generally generated from off-shore funders.
South Africa, with its more sophisticated mining industry, has over the years shown a decided preference for the more innovative funding models.
Aside from the traditional sources of funding such as bank finance, private equity, state institutional funding and listings on the Johannesburg Stock Exchange and other foreign exchanges, South Africa has an appetite for the new innovative ways of financing, such as streaming transactions and royalty transactions, says Stevens.
“In South Africa, because of the indigenisation requirements under the Mining Charter, new financing methods have been developed in regard to the acquisition of such equity stakes through government institutions such as the [Industrial Development Corporation] as well as through vendor funding.”
An example of a project in Zambia that has gone the route of innovative financing is the acquisition of Mopani Copper Mines by the state-owned investment company ZCCM Investments Holdings, where part of the acquisition costs were funded through a form of royalty financing.
In South Africa, Pan African Resources recently accessed funding by receiving a loan of physical gold from a local bank over a 12-month period, with physical gold used as the funding instrument.
Another example of innovative funding is that of Royal Bafokeng Platinum, which entered into a streaming agreement with Triple Flag Mining Finance Bermuda for gold delivery over the life of mine from its Styldrift operation. The company received an advance payment on the closing of the agreement, says Stevens.
Examples of large multinational mining companies operating in Zambia that have opted for innovative funding options include Mimbula Copper Mine and Lubambe Copper Mines.
Unpacking the associated challenges
Although the sector is experiencing better times, it continues to face some serious headwinds related, among others, to sovereign risk, policy uncertainty and nationalism or nationalisation, as well as community and environmental issues.
In Zambia, the key challenge for mining companies relates to sovereign risk. “Zambia has embarked on an ambitious countrywide infrastructure programme mainly bankrolled and implemented by China. While this has triggered strong internal diversification of the economy and a long-term platform for growth, the amount of sovereign debt coupled with policy instability has created a domestic headwind,” says Mkokweza
However, the main challenge faced by companies operating in Guinea relates to “the strength of collaterals provided by borrowers and the limited capabilities of local funding institutions”.
“We have noted that the size of the financing to be raised does not allow local funding institutions to align, given the low level of capital at their disposal. Moreover, prudential regulations imposed on local funding institutions force them to comply with certain ratios (i.e. solvability ratio) resulting in funds being set aside by banks as a coverage for their risk exposure.”
In South Africa environmental issues, in some instances, have hindered the development of mining projects, and environmental groupings, or nongovernmental organisations, have through litigation hampered the process of mining operations or applications as a result of serious environmental concerns, says Stevens.
He also cites the proposed Mineral Sands project in the Xolobeni coastal area of South Africa where community issues have prevented the development of the mine and the Tendele Coal Mine in South Africa which has been associated with community issues that have led to litigation.