June/July 2013


De-risk your mining assets to access capital

By Mauro Chiesa

Risk-averse capital markets look for dividends and predictability. This adds two new dimensions for mining companies that need financing to consider: cash-flow sustainability and risk management. Meeting “guidance” is now the miners’ mantra, as opposed to offering upside and hints of finding potentially vast sources of ounces, pounds or tonnes. To quickly adapt, companies need to adopt a de-risking strategy for both operational and developing mining assets.

Far too many reporting systems focus on the ounces rather than the full costs associated with the existing or developing assets. The typical mining company today can span operations in six continents and involve a broad range of direct, indirect, joint, common, and sunk costs. A management information system is essential for better decisions to be made across all these information “silos.” SAP and Microsoft, among others, have off-the-shelf systems to address such needs.

With such systems in hand, senior management then finds itself with more complex decisions to make, especially when rationing capital. One essential strategy to deploy is an internal risk assessment panel that looks at projects and issues to ensure that all dimensions have been addressed across all “silos” before senior management approaches the board.

With costs and risk properly weighted, a company can then focus on the following issues:

Finding cash-flow sources: All producing and cost units must be assessed to determine where the free cash flow (FCF) originates. FCF is the operating cash flow, after the required sustaining capex, and it indicates self-sufficiency. While simple to explain, it becomes complicated if direct or indirect overhead costs, or joint and shared costs, exist. Additional complexity arises from shifting geographic markets. For instance, an iron ore mine on the North Atlantic may no longer be optimal if new booming markets are in Asia, and oil is at $120 per barrel or more.

Public sector impact: Public sectors played a substantial role in the past, offering incentives such as subsidized infrastructure, energy, training or restitution costs. Public sectors in deficit may have to modify such contributions and perhaps increase the taxes and royalties. Therefore, it behooves the company to assess its assets without taking such public contributions into consideration and assessing a higher tax and royalty regime.

Phased projects: Economies of scale once assured low-cost operations and survival in markets that saw, for instance, nickel and copper prices at or under $1 per pound. Given the more buoyant metal markets and the difficulty in procuring capital, however, new projects require careful reassessment as multi-phased projects in order to live within capital budgeting limits and self-financing of subsequent phases. Additional benefits include a longer life of mine to attract buy-in from public officials, along with added flexibility: two phases may be rolled into one (i.e.: Penasquito; Pueblo Viejo) while the reverse is not possible.

Better Reserve/Resource: Drilling programs can be refocused towards higher quality Reserves and/or Resources, with infill and step-out drilling, as opposed to pursuing total ounces. Given the variability of metal markets over the last five years, the markets may also wish to know the in situ metals contained at a broad range of presumed metal market prices.

Solvent mine plans: Mine plans and production profiles once focused on net present value of the producing asset. The mine plan is now increasingly scrutinized for its early and continuous FCF, especially if the project is in either a precarious political or frontier situation, and market-funding in the longer term is less certain.

Permitting: The permit is a binary element that is impossible to price. The early and flexible development of permits is crucial, and the inclusion of all authorities (and of your legal counsel) cannot be understated. Permits are now also seen as having lives of their own, and thus their ongoing management is essential, as their suspension can easily become irrevocably politicized.

The data room: The electronic data room is now a central depository for the validation of assets – in both operation and development. The validators must have internationally recognized reputations to attract international capital. The information base must also be clear, concise, current and consistent. NI 43-101-compliant reports are always necessary but far from sufficient.

The above are straightforward and essential initiatives for a mining company striving to survive and prosper in today’s buyer’s market. Information is power: internally and in the markets.

Mauro Chiesa has more than 33 years of experience in financing and advising extractive and infrastructure projects around the world. He has worked with multinational banks, the World Bank Group and EDC.

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