Commentary: Juniors can still raise capital if they learn from the past

As many in the mining sector are well aware, junior mining companies are having a harder time accessing capital markets for financing. Even when they are able to get their hands on some money, the financing comes with more onerous terms than were available just two or three years ago.

But this isn’t the first time junior mining companies have faced these conditions — remember certain periods in the 1980s and 1990s? Drawing on the lessons of those past experiences as well as implementing a few key steps will give management teams the best chance of raising money today.

In the 1980s and 1990s, common financing structures included:

• Raising funds from foreign investors, particularly from Germany.

• Using federal tax incentive programs aimed at retail investors to fund early or mid-stage development projects.

• Merging with like-minded mining companies (i.e., sharing a common resource, location, level of development or future profitability) that with scale provided the market with a more compelling investment story with which to raise funds.

• Giving up future production through a sole royalty or pre-sale with a commodities broker or investor in exchange for funding that would get the project into production

The underlying premise here is that history repeats itself. Accordingly, long-abandoned capital-raising structures may have to be resurrected to allow progress in the mining sector. Of course, successful managers will tweak these structures to reflect shifts in market dynamics (e.g., targeting the new “German” retail investors of the world, like those in Brazil or China) and lobbying the federal government to target the mining industry with revised tax-credit opportunities that will ensure its health.

But embracing previously used financing mechanisms is not enough. Making your company as attractive as possible to investors is critical to accessing capital markets. There are several steps that junior mining companies can take to enhance their ­prospects in the eyes of capital providers:

Be prepared. Any investor will undertake significant due diligence before providing capital. It’s critical for managers to anticipate this and gather materials such as corporate overviews, financial statements and third-party reports before approaching capital providers. In tight markets, capital providers will move on to other opportunities if they find it difficult to get information from companies under evaluation.

Be realistic. You have to be willing to take less capital then you need. Although management teams spend a considerable amount of time putting together budgets that show the “minimum” amount of capital needed to get a project to its next stage, that amount is frequently different than the amount of capital investors are willing to provide. “Short funding” capital requirements can bring added distractions and more funding costs, and even prevent project completion, but management teams should consider taking fairly priced capital when it is available, even if it doesn’t fulfill all of the company’s financial needs. In an uncertain market, a management team that waits to see if it can fund the shortfall may find that capital is already deployed elsewhere.

Be flexible. Consider alternative funds of capital. Every management team has a preferred capital structure that it seeks to access in the market. However, the structure is frequently different from what capital providers are offering. It’s important to be open to forms of capital that you would not have considered taking several years ago, such as convertible notes, warrants, off-take agreements and royalty streaming agreements. Even mergers — which can end up putting management out of a job — must be strongly considered when they are available. Ultimately, management teams and boards must act primarily in the interests of their shareholders. Frequently, a merger is the only option to ensure ongoing value for a company’s equity holders.

In today’s market, the capital providers hold the balance of power, which is a reversal from just a few years ago. As a result, management teams seeking capital must be prepared and be flexible, so that their company can have the best chance possible of accessing capital markets and ensure the long-term success of their companies and their stakeholders.

— Based in Toronto, Dan Porter is a senior vice-president and a director for MNP Corporate Finance Inc., a subsidiary of accounting and management-consulting firm MNP LLP. He has 30 years of experience helping public and private companies across a wide spectrum of industries, including junior mining, to develop and implement innovative financing strategies that enable them to achieve their business and financing goals.

Evan Lipton is a vice-president and a director for MNP Corporate Finance in Toronto. He provides corporate finance and mergers and acquisitions advisory services to entrepreneurial mid-market companies across a broad range of industries, including junior mining companies. See www.mnp.ca for more information.