Financing Mining Projects
Risks and Opportunities
J. Mverecha
Contents
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•
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Introduction
Opportunities in the Mining Sector
Mining Sector and the Broader Economy
Mining sector Financing Requirements
Financing Mining Sector Projects
Concluding Remarks
Introduction
Mining is a global business
Introduction
• For Countries such as:
• China, Australia, RSA, Russia, Peru,
Chile, Ghana, Tanzania
• Mining ha been catalytic for growth
• In Peru, the target is for $14bn
investment in mining
– Community Development initiatives
– Environmental issues
– Contribution to Fiscus
Introduction
The mining sector is increasingly,
evolving into a dominant sector in the
economy:
Accounted for 2/3 of exports in 2010
Will account for over 50% of exports in 2011
Accounts for about 20% of Nominal GDP
Mining is the fastest growing sector
Not Homogeneous
Large well capitalized mines
Medium sized mines
Small and artisinal mining
Mining Financial Requirements
Zimbabwe has over 40 different
minerals
Major Minerals are:
Platinum (45%)
Gold (24%)
Diamonds (14%)
Chrome
Coal
Nickel
A historical Overview
• The Mining sector output declined
progressively over since 1999,
culminating in the hyperinflation
• Only 3 mines were operating by
December 1998 (most had closed)
• Since 2009, STERP and new measures
• Mining has rebounded strongly
• Growth also reflects the low base
GOLD PRODUCTION
Kilograms 1980-2009
30,000
25,000
Kilogrammes
20,000
15,000
10,000
Fine Kilograms
5,000
0
1980
1981
1982
1983
1984
1985 1986
1987
1988
1989
1990
1991
1992
1993
1994
1995 1996
1997
1998
1999
2000
2001
2002
2003
2004
2005 2006
2007
2008
2009
Kilogrames 11,443 11,691 13,367 14,101 14,877 14,691 14,853 14,712 14,961 16,018 16,920 17,885 18,258 18,600 20,651 24,344 24,722 24,244 25,146 27512 22070 18049 15469 12564 21330 14023 11353 7018
3579
4966
PLATINUM PRODUCTION:1990-2009
8,000
7,000
6,000
Kilograms
5,000
4,000
3,000
2,000
1,000
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Kilograms
7
345 2,730 30
505 519.1 2306 4270 4438 4,833 4,997 5,085 5,496 6849
Ferrochrome 1990 -2009
350,000
300,000
Tonnes
250,000
200,000
150,000
100,000
50,000
0
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
Tonnes
99
19
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
3,000,000
Tonnes
COAL PRODUCTION:1980 -2009
6,000,000
5,000,000
4,000,000
2,000,000
Volume in
Tonnes
1,000,000
0
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
NICKEL PRODUCTION:1990 - 2009
16,000
14,000
TONNES
12,000
10,000
8,000
6,000
4,000
Tonnes
2,000
0
1990
Tonnes
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
11442 11312 10115 11889 13518 10863 9695
7136
8615
9137
7122 8144.7 8092 9516.5 10217 9220.3 8824.6 8581.6 6354.3 4857.5
IRON ORE PRODUCTION - 1980-2009
1,801,000
1,601,000
1,401,000
Tonnes
1,201,000
1,001,000
801,000
601,000
Tonnes
401,000
201,000
1,000
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
2011 Deposits Structure
Over 90% of Deposits are Short Term
Comm. Bank Loans & Advances
Mining share of loans is about 5%
Introduction
Mining requires over substantial
resources for capitalization:
US$3 – US$5 billion recapitalization
requirements over the next 5 years.
Gold (US$1 billion)
Platinum (US$1.2 billion)
Nickel (US$110 m)
Chrome (US$118 m)
Diamonds (US$339 m)
Coal (US$225 m)
A complex, risky and capital intensive industry
17
Exploration is the Genesis
TARGET GENERATION
• Commodity selection – market analysis, trends, demand
• Location – Geological Province/Country/Region/Area
• Entry Level – Grassroots Exploration/Joint venture/Buy in/ Strategic Alliances
DESKTOP STUDIES
• Country Minerals Legislation
• Licence Application (Government Ministry of Mines/Minerals - Regional/Reconnaissance/Prospecting
• Geological Information (Geological Survey)
• Geophysical coverage (Airborne and ground Private and Geological Survey)
• Remote sensing coverage (Geological Survey: aerial photography, satellite imagery, Modelling)
• Previous exploration activity and research (Geological Surveys held with Government Departments)
FIELDWORK
• Geological Mapping, Sampling and Assessment (Operators Team/Contractor Geologists, Field Technicians)
• Geophysics (Contractor - Airborne and Ground)
• Test Drilling (Contractors)
FOLLOW UP
• Drilling – Delineation of the orebody
• Environmental Base line studies
• Impact on local social and environmental issues
FEASIBILITY
• Ore Reserve calculations
• Metallurgical Testwork/Bulk Sampling
18
Funding Cycle
Lower risk, lower
reward
High risk, high
reward
Venture
Capital
19
Project
Finance
Corporate
Lending
Mining Development Stages
Mining Project Progression
Junior explorer
Claim Holder
21
Each player can add to the value chain
Player
Role
Claim Holder
Individual, Artisanal miner, Government
Selling or leasing rights with realist expectations given limited role in the
value chain
Prospector
Individual, Mining association
Understanding prospectivity &selling or leasing to junior explorersfor cash,
royalty or equity
Junior Explorer
Small Corporate entity
Initial exploration work to determine the scope of the ore body and the
potential for industrial scale mining of a mine.
Senior Explorer
Medium sized Corporate entity
Advancing exploration work and developing mines for industrial scale
mining
Major
International Blue chip corporate
Large Scale miners have the capital and technical expertise to
commercialise ore bodies in a way which maximises the economic value of
the entire ore body
22
Typical cost of a large scale mine over its life
Gross outlay to get a mine to production up to $315m and up to
12years
Exploration
Construction
Ramp-up
• 3-7 years
• Shareholder funded
• Extremely high risk
• Cost: $10-15m
• 2-3 years
• Shareholder funded
• Very high risk
• Cost: $20-200m
• 2 years
• Debt/Equity funded
• High risk
• Cost: $10-100m
Operation
Wind down
Closure
• 15-20 years
• Debt/equity funded
• Moderate risk
• Benefit: $0-100m
• 5 years
• Debt/equity funded
• Moderate-high risk
• Benefit: $0-100m
• 3 years
• Equity funded
• Moderate-high risk
• Cost: $5-100m
23
Risks to mitigate when investing
Political
Technology
Ore Body
Operational
Market
Infrastructure
Construction
24
Environmental
Role of FDI in Financing Mining
• Long Term Funding is key for sustained
mining sector growth
• Venture Capital Financing
– High risk/ high return
• Shareholders Equity
• Other Long Term Sources of Funding
Debt/Equity Financing
Debt/Equity Financing
Investors are prudent
What to look for
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•
•
•
•
•
•
•
•
•
A level playing field
Political Stability
Property rights protection
Rule of law
High ethical standards
Freedom to trade
Financial system regulation
Mobility of capital
Local partnerships
Skilled and industrious
workforce
• Management teams with an
established track record
28
Why
• Manage the savings of normal
people
• Regulated industry subject to
strict oversight
• Fiduciary and legal duty to
minimize risk
• If a project does not meet the
highest standards it will not be
given the greenlight
Fraser Report Assessment
Benchmark risk perception measure
The Fraser Institute Surveys 3,000 mining companies and
institutions
Responses from 670 executives
The companies participating in the survey reported exploration
spending of US$2.9 billion in 2009 and of US$3.6 billion in
2008. Thus, survey respondents represent 38 per cent of total
global non-ferrous exploration of US$7.7 billion in 2009 and 27
per cent of US$13.2 billion in 2008
Assess how mineral endowments and public policy factors such
as tax as taxation and regulation affect exploration investment
The report indicates what potential investors think of risk of
investing in Zimbabwe mining
29
Source: Fraser Report 2009, Metals Economics Group
Gold Production
(Actual & Forecasts)
Gold Production: Actual & Forecast (Baseline Vs Capex)
60,000
50,000
30,000
20,000
10,000
Actual + Forecast (Baseline)
Actual +Forecast(Capex)
20
15
20
14
20
13
20
12
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
0
20
00
kgs
40,000
Platinum:
Actual & Forecasts:2000-2015
Platinum: Baseline Vs Capex
25,000
20,000
kgs
15,000
10,000
5,000
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
0
Actual + Forecast (Baseline)
Actual +Forecast(Capex)
Ferrochrome:
Baseline Vs Capex: 2000 - 2015
FerroChrome: Actual & Forecasts
300,000
250,000
150,000
100,000
50,000
0
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
tonnes
200,000
Actual + Forecast (Baseline)
Actual +Forecast(Capex)
Coal:
Baseline Vs Capex:2000 - 2015
Coal: Actual & Forecasts
tonnes
8,000,000
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
0
Actual + Forecast (Baseline)
Actual +Forecast(Capex)
Nickel
Baseline Vs Capex:2000 - 2015
Nickel Output: Actual & Forecasts
tonnes
30000
25000
20000
15000
10000
5000
Actual + Forecast (Baseline)
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0
Actual +Forecast(Capex)
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