The beginning of an exploration firm’s life is always the riskiest point in its existence. In most cases, the company has a promising property in a previously untouched location and needs money to conduct exploratory drilling. At this point, the management team’s experience and track record count for a lot, but even with proven veterans in the lead, the company is still a very high-risk investment. Most firms at this point in their life turn to the stock exchange to raise initial capital. In recent years, and especially since the mining boom, the exchanges have restructured themselves to accommodate this type of young venture. The LSE AIM (London Stock Exchange Alternative Investments Market), for example, has exempted junior companies from a profitability clause, mandatory for listing on the London Stock Exchange itself. With the same goal in mind, the TSX Venture exchange gives Venture-listed firms more time to file financial statements than TSX-listed ones.
Alternatively, a junior company may seek to enter into a joint venture with a senior firm, who will fund all or part of the exploration costs in return for a direct ownership interest in the project or the junior itself.
Once initial drilling and assays are complete, and assuming the results warrant it, a company will generally seek further investment. At this stage, the deposit size and grade are usually still unclear. The ore body might be worth ten thousand or ten million dollars, and only time (and more digging) will tell. At this stage, the firm may attract private investors willing to take on the risk for potentially high returns. Another equity fundraising round may be undertaken at this point.
An alternative to the stock market is a private partnership, such as the one formed between Aber Diamond Corp. and the jewelry retailer Tiffany & Co., during the early stages of Aber’s Diavik project. Such an arrangement ensures funding and an off-take agreement for the junior firm, and provides the junior’s partner with a guaranteed supply of the mined resource, at favourable terms. The off-take agreement is vital if the junior firm later seeks bank financing.
Jim Fitzgerald, national manager for derivative products for ScotiaMcLeod, explains that for a banker, one very important consideration is to see an established market for the product once it’s out of the ground. One way to do this, Fitzgerald said, is “to be able to establish a market for [the product] by selling it forward (hedging) before it’s even out of the ground. That [hedging] is one step towards giving bankers comfort.”
Once the size and grade of the deposit have been established, the junior firm is no longer a high-risk investment. At this stage, major financial institutions may be convinced to take an interest in the company. However, a bank would only be interested in financing a project if the deposit is sufficiently large. “Whether you look at a small deposit or a big deposit,” says Jeff Kowal, director of risk management, Foster-Kowal Group at ScotiaMcLeod, “you’ll find that a lot of the expenses on the bank’s part are going to be pretty similar. So it just doesn’t make economic sense to get involved in a smaller deal, even though the prospects of being repaid are sound—it just diverts resources from the bigger deal.” For a major bank, a project must be worth at least $100 million, and frequently even that may prove too small.
But even if the size is sufficient to attract a bank’s interest, great importance is placed on the firm’s ability to service its debt even if the mine proves less profitable than expected. If he were a mining executive applying for financing, Fitzgerald said, he would “want to be able to demonstrate continuity of cash flow, irrespective of the boom/bust nature of the business.”
It should be mentioned that at many points along the way, the junior may prove sufficiently attractive to one of the senior firms and receive a buy-out offer. “That’s often how the ecosystem works,” said Ungad Chadda, director of listed issuer services, TSX Venture Exchange. “The juniors are trying to be the prettiest gal at the dance so that the seniors come and buy them. Some will go to production, but many are hoping a major will come out and write them a cheque and take them over.”