December 13, 2017

Optimism on funding sources and revised regulation for junior mining

The junior mining sector was locked into critical conversations on the current state of the industry, funding, and regulation during the first day of the inaugural Junior Indaba, held on the yesterday 2nd June 2015 in Johannesburg.

Updates on the state of the nation and hearing what shape the junior mining sector is currently in, finding out where and how to source the next investment dollar, captivated a lively and participative audience at this year’s event.

State of the nation

Mike Teke, President of the Chamber of Mines of South Africa reiterated in his key note address that the coal prices are not where they should be, and that like the rest of the global mining industry, there are job losses, and during these difficult times, the industry is indeed suffering.

Teke positioned the vision of the Chamber of Mines to act for the industry as the key creator of decent job and to see government as a proud and fully supportive stakeholder.  Teke spoke to his vision of a mining jurisdiction with proactive management, productive and fairly paid workforce, and that the Chamber should be the enabler in creating these balances.

“We need junior miners and we need to be aggressive about it.  There are big opportunities, the world is urbanizing with five billion people in towns and cities, and the mining industry is central to this.  South Africa needs to participate”, remarked Teke.

According to Teke the world of a junior is strong, and South African companies have the capability of going beyond South Africa “we need to consolidate the fragmented junior industry, and sit in a room with Transnet, Eskom, the ports, the regulators, financial community and the junior miners to create models that work and I will support this move”.

In a response to questions on allowing the juniors to play in the fracking space, Teke responded positively, provided that regulations are in place and that there are opportunities for juniors to play alongside the majors in this space.

Inspector of Mines, David Msiza from the Department of Minerals and Resources (DMR) reminded delegates of the abundant world class mineral resource that exist in South Africa, and that the roll out has started to unlock the infrastructure opportunities in energy generation, transport, health and education to name a few.

“It is evident that the junior mining sector is lagging behind on transformation targets, and we are encouraging this sector to be compliant.  We are also committed to provide support to the sector in the processing of the Bill that has been referred back to parliament,” stated Msiza, “The DMR believes that one of the strengths of our mining industry is our spirit to engage and to come up with solutions, by working together with state, business and investors.”

In a poll amongst the delegates however only 46% felt that they could do honest business with the DMR. In response Msiza said it is regrettable that such a negative perception exists, however he is encouraged by industry initiatives like the Junior Indaba, to help government understand and open up lines of communication and deal with the challenges facing this sector.

Some encouragement was found in the DMR’s continued efforts in the closing down of illegal miners.  Msiza mentioned that the DMR will continue working with the sector, law enforcement agencies, and labour in this regard.

State of exploration

Dr Tony Harwood, President and CEO Montero Mining revealed statistics on the state of exploration in the junior mining sectors, both globally and in Africa.  Figures showed that the easiest African jurisdiction in which to operate is Botswana, followed by South Africa.  Even though statistics showed that that the best ore bodies are found in South Africa, only 10% of the industry delegates present believed that the market outlook is “looking up”.

“Funding options are small in exploration as it is a very risky business, and it is difficult to value such projects in the early stages. The good funding days were seen back in 2007, 2010 even 2011, but the collapse midway through last year, was evident in other sectors such as agriculture, fuel, but still metals were the hardest hit” reported Harwood.

The state of funding is mimicked the world over, and global exploration funding took a bad dip this year.  The money that is available for exploration is going to Latin America, where most discoveries are being made, and into other safe havens such as United States of America, Canada and Australia. Global debt equity spending is risky and has decreased although some banks prefer debt financing, private equity has been very much reduced, with little going into debt funding structures.

Most of the drill funding is coming out of Canada, USA and Asia Pacific regions.  African project finance capital is coming from Canada and Australia, giving South African companies the potential to participate.

“Africa is the heart beat on the global political, corruption and artisanal mining risk map” continues Harwood, “fund managers read this type of information, and out of 50 of the least developed countries globally, most are in Africa, the level of development risk is high.”

26% of exploration expenditure is mostly found in South America, although Africa is ranked reasonably high, Africa is still under explored.  “The best people to explore Africa are Africans, they have the skills. Many South Africans are already working on projects in Africa, “concludes Harwood.

“Compared to Australia, the conversion of discoveries to mines is relatively low in Africa.  South Africa did benefit from high metal prices, but the problem is getting the ore out” stated Keith Scott Managing Director, the MSA Group.

Peter Major Mining Policy Consultant, Cadiz Solutions added “that South Africa did better on exploration in the last boom, than it had done in the last 40 years. In the more than 20,000 prospecting licenses that have purportedly been issued, I can’t come up with more than three or four  mines that have been born, and out of the 6,000 odd abandoned mines, not one has been rehabilitated into production.  If we cannot translate this ore into revenue, it is simply not doing us any good.”

The panelists and delegates agreed that the industry needs an enabling sector, one that rows in the same direction to ensure projects are realized with everyone doing their part.  From the issuing of permits, financing, and incentives, it’s the belief that politics have infected the industry and prevented most from doing anything productive.

The long term Chinese investment is a welcomed source, and a nation that is trying to create benefit for its own industry sectors.  The Chinese are doing what the British and Americans did in the 1940s and 1950s, building infrastructure.  The African continent is also obtaining investment from American and Russian sources.   The view is that if African countries made a decision to reduce taxes, reduce fiscal responsibility, and made way for transparent enabling legislation, this would open the door for Africa to become a more attractive option  “Change one step at a time, if it doesn’t work, you back up immediately” concludes Major.

Where the next dollar will come from

In terms of funding, the IFC’s Sacha Backes stated that the IFC looks at projects where there is a resource, where a feasibility study is in place, and you can “see the light at the end of the tunnel”.  The starting point for the IFC is getting to know the management team, a team that is built on credibility; this should be done well before the funding process.  “A compelling story showing a project’s technical merit, a plan that has identified the risks, as well as ways to manage the risk, coupled with a good asset management team, is far more likely to succeed in obtaining funding”.

Boris Kamstra, Investment Executive from Pangea Exploration has a different investment outlook “The international appetite for exploration is waning; funders want to see a risk mitigated project.  It must be a world class ore body, have a clear strategy on how it will move forward.  The days of easy capital being available, are regrettably gone. Pangea looks at equity investors and not debt. We have an incredible team to add value to take juniors all the way through to production”.

Kamstra’s advice is that juniors need to get some momentum themselves, spend money on the ground, source historical data, obtain samples, and research the funders and market to the right sector funder.  “The new mining legislation unlocked sterilized ground and data.  South Africa has a tremendous skill base and terrific assets, so if you get the license, do the work, identify the risks and share the information with the investor, you will find the money”.

Alugumi Dzebu, Senior Investment Manager, Partnership Funds at Anglo American stated that the Zimele Anglo Khula Mining Fund has been operating for close on 10 years.  The premise of the Fund was to assist emerging black junior mining companies or miners with early stage exploration funding. “Our appetite is very high in terms of risk, we fund projects that have a value prospecting right, and funding models for any stage of exploration.  We put in equity and loan funding at the feasibility stage.” Currently the Fund has funded up to around eight projects with an average of R15 million each in recent years.

Dzebu further added “Our funding is not necessarily geared towards commodities that Anglo American is mining or exploring, but also in projects that are easier to get into production, so we can diversify the Fund’s portfolio.  Funding granted can be up to R30million per project through a combination of different instruments”.

“It is critical to build mines, to provide early stage funding, and vital that the investor be part of the project and not stand on the outside. We involve the entrepreneur throughout the whole process, so it is easier to understand the risk and to provide critical support to enable the project to move forward. In short there must be a vested interest in the project, a certain level of technical competency, and community involvement” advises Dzebu.

Startup company Bakgatla-Ba-Kgafela Investment Holdings’ CEO Noah Greenhill mentioned that it has concluded two major investments, 98% of which is in platinum, but added that the company does have a mandate to diversify. “The company’s investment strategy is not sector, nor mineral specific.  We do look at both equity and debt financing and are open to value chain investment in the mining sector as well” stated Greenhill.

Investment is a balance of risk and return, and higher quality teams with higher quality projects are attracting investor attention. The legislative environment is difficult to explain to an investor.

“The JSE is well regulated, has a good set of rules, the challenge is the investor” says Greenhill. “The retail investor in Canada is happy to take the risk.  The depth in South Africa’s retail and hedge fund is weak, we don’t see the risky capital chasing the junior sector, you go to London, Toronto, and you list in Canada.  There is a significant listing of companies with South African assets, it’s not right.  We need to introduce float shares with tax incentives for the junior sector.  We sat lagging watching the game instead of playing the game”, states Greenhill.

Greenhill wrapped up what makes funders take notice “Viable assets, passionate management, and skin in the game”.

Regulation

Otsile Matlou Director at ENSafrica concurred with delegate sentiments that the development of future mines is dependent on exploration.  However Matlou mentioned that the current regulatory framework is designed for existing mines, so too is the issue of beneficiation in-country, and also the Bill that has been referred back to parliament, all have little or no regard for junior miners. “If you dispose of a single share of a prospecting company, you may find you need ministerial consent.  This way prospecting companies will end up not doing the work they are meant to be doing” says Matlou “there is no distinction between someone looking for minerals, to one that has a little mine, or even a major, currently all are subjected to the same legislation.

So there is scope to develop bespoke rules for each sector of the mining industry.  Currently juniors are facing compliance on more than 200 different statues “juniors are in a position technically of non-compliance before they start” concludes Matlou.

Other territories like Zambia have bespoke rules, compliance and reporting obligations that speak to the sector at the relevant level of the project. Peru is one of the leading countries in transformation of mineralization; one can transfer mining rights without government approval. Burkina Faso is debating a new mining code; there is an outright exemption on VAT as an exploration company. Even Australia, a relatively immature environment, has come up with a fresh approach, quick application processes, it introduces 30 prospect mapping, promotes strategic industry research, provides geophysical and geochemical surveys, all co-funded by government, plus there are exploration incentive schemes.

The fundamental difference to the JSE and other exchanges such as TSX, ASX and the LSE is that all these exchanges have allowed juniors to list without onerous requirements, and are tailored for the most risk adverse investor.

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