Appointing investment advisors is something many companies do with some trepidation. Keeping a tight rein on expenses is business as usual for junior explorers and developers, and so making the right choices about when to seek advice, and from where, is an important consideration.
Executive teams need to be realistic about what they can practically manage internally, in terms of skills and time, and boards need to consider whether all the right questions have been asked and answered, especially from the perspective of shareholders.
By Sascha Keen, director, Noah’s Rule
Does the company need a full-service offering, delivering an outcome, or more of a coach/mentor providing specialist oversight and input to the core team? The answer will be different in every case, and getting the process right the first time is best for all stakeholders, but not always where companies end up.
This article first appeared in Mining Review Africa Issue 1, 2020
To say that the public equity capital markets for junior mining stocks are tough at the moment is nothing new. The sector has been on the verge of a recovery for some time, and while very good projects and teams will always find capital, the weight of money has still not returned to the junior end of the market, neither across the board nor en-masse.
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As an industry, we need to stop looking around the room for the bitcoin or cannabis bandit who stole the money and consider why retail investors remain on the sidelines.
In the current low interest rate environment, debt and credit funds seem to be popping up overnight. The attraction of debt funding and the number of possible sources has never been greater.
Yet it is the all-important equity component that is often the elusive slice of the pie needed to complete the financing equation.
Chief executives are keenly aware they must attract attention with compelling stories, but equally they can only go to the well so many times and delivering on expectations is the key to share price momentum.
Even when targets prove up to be resources; commodity prices head the right way; and studies show the viability of projects, misjudging the timeline to bankability of any project will hit the equity investor hard.
Needing twice as much money and/or time to get to the point where professional lenders and investors will risk their capital can be potentially fatal when funding is scarce.
In a cyclical industry, avoiding missteps along the development path can be the difference between catching the investment wave and being left behind.
In our long experience, when it comes to financing a new development, being well prepared for the financier audience is crucial. Good projects and teams will attract financier attention early, but while they are eager to engage, we observe that few companies are ready to respond.
Before embarking on a dialogue with the finance community, ensuring you are “lender ready” or on a clear path to being so, will lead to a tight, well executed process rather than a journey of exploration, false starts and possible unwelcome surprises. That process should start internally, well before the completion of a feasibility study.
Establishing a realistic timetablemay sound obvious but working backwards from a deadline to having full funding available and considering the multiple workstreams that need to be managed to deliver that outcome is a complex process.
Clarify the checklist of items that need to be delivered or loaded into a data room. Determine which of these require independent review. Consider if the information meets the calibre and detail required of financiers and ensure it is consistent across all reports and models.
Identify gaps as early as possible, and assign the task of closing them to the right people.
Only once the house is in order should attention turn outside. Borrowers must have a clear engagement strategy, based on a realistic understanding of your risk profile in the eyes of a lender.
Before engaging, know your alternatives, both the providers and the products. Then, be prepared to accurately assess and compare them across the full range of criteria, not only direct cost, but also risk, opportunity cost, strategic value, and dilution.
Know in advance who you should ideally be dealing with and the terms you should be seeking. Importantly, be clear on the minimum equity you will need to raise, when to do it, and how plausible that is at your current market capitalisation.
This process alone can take some time and pass several iterations, as initial findings may not be as expected.
When the strategy and desired terms are clear, ensure sufficient time is budgeted to reach final terms, complete credit processes and document the transaction.
Consider what the conditions precedent to drawing that investment finance will be, and what is required to meet these, especially when not all will be within your control and may have third party approval processes.
Understand what can be done in parallel and what must be done in sequence.
Even this short overview presents a daunting mountain to climb and shows that the delivery of a “bankable” feasibility study is merely one step in the journey from developer to producer.
Seeking the support of appropriate and proven investment advisors, be they technical, financial or legal, is an inherent part of this process.
Mining development comes with risks, and correctly identifying and addressing those risks is fundamental.
Choosing how to finance that development and negotiating the investment right deal that shares and allocate risks and returns between the company and professional investors can be the difference between shareholders being well rewarded for risk or merely carrying it.
Getting it right as an industry will hopefully give retail investors the confidence to come back, and stay.