Financing a Gold Mining Processing Plant

Financing a Gold Mining Processing Plant

Financing a Gold Mining Processing Plant

Published Jul 20, 2022 


67 Articles

Recently, there is an increase in the use of the public bond market to generate funds for Financing a Gold mining plant. The mining industries collectively issued about $1 billion worth of new paper. Historically, this vehicle had been used primarily by the base metals industry, where projects tended to be of sufficient size (roughly $100 million as a base) to justify their use. However, there have been some notable exceptions in the precious metals mining sector, such as the bonds issued by Newmont and Placer Dome, and the gold-backed issue by Normandy Poseidon of Australia in 1994, which had a highly innovative structure. Judging by the number of issues that have come to market so far this year, and those being planned, the use of bonds as a means to raise mining finance will continue to increase.

The balance of the capital required comes by way of the debt market. The syndicated project loan market is vast and has been used successfully to finance large and risky mining projects in a wide range of countries. This market is accessible to both mining companies with projects located in developed countries, as well as companies in the LDCs when assisted by the role played by the IFC and, recently, the EBRD.

Implementing or construction of a large gold mining and processing plant is highly expensive and runs in Billion of dollars. This is a long term financing that should not be sidelined. Extensive research and development of an optimal financial model lay the foundation for future commercial success.

The traditional Source for gold mining and processing plants includes the following;

  • Export credit financing
  • Multilateral Institutions
  • Commercial bank loans
  • Supplier financing & captive finance companies
  • Production payment loans and advances
  • Debt and commodity-linked securities
  • Equity and equity-linked securities
  • Internal cash flows
  • Joint venture industry partners

There are also some non-traditional sources, such as:

  • Host governments
  • Leasing companies
  • LBO funds
  • Individual investors
  • Investment management companies
  • Institutional investors

Financing Methods for Gold Mining and Processing Plants

Financing methods for gold mining falls into two different main categories;

Equity Markets

In a simple explanation, equity financing means that investors receive a share in the company in exchange for a cash contribution. It can come from existing shareholders or new issues and is, for the most part, permanent. Types of Equity Capital Ordinary shares usually form the core of a company’s share capital. The holders carry most of the financial risk in exchange for substantial rewards if the company prospers. Preferred shares, as the name implies, afford differential treatment to the holder, which might include priority on dividends, voting right and priority in the event the company is liquidated.

Convertibles give right to holders to receive interest and repayment of principal on some specified basis. The holder may exchange the debt into equity of the issuing company, or sometimes a parent company, either over a continuous a period or at intervals during the life of the instruments. Warrants are usually associated with debt issues and are attached in a similar way to the conversion option found in convertibles. The warrant is effectively the right for the holder to purchase a specific number of shares at a predetermined price on a predetermined date, or between two specified dates in the future.

Long-term bank loans

Long term bank loans remains an easiest financial structure used in the mining industry. As a rule, the term of such loans reaches 10–15 years or more, depending on the specific project, sector and company. Given the lack of domestic resources for mining and the surplus of financial resources in the banks, the latter seek to more actively place investments in the mining industry.

Counting down from the 90’s, this has led to a situation where the share of loans in large mining projects reaches 50% and even more. Companies wishing to use credit tools for the construction or modernization of a mine should consider adequate loan collateral and provide alternative guarantees of debt repayment. These can be various kinds of government guarantees or business guarantees from other companies. The paradox is that banks provide large loans mainly to those who really do not need them. They lend money against high-value assets that already exist, rather than based on the borrower’s ability to generate future cash flows.

However, loans are more needed by companies that do not have enough money, but have the potential to generate income.

Financing a Gold mining Processing Plant through the capital market

Similarly, it is assumed that another practices used to finance a large project as mining is through the issuance of securities. This involves the issuance of bonds that promise high returns to investors given the high risks of the industry.

It is also possible to issue shares of a mining company, which allows investors to generate higher, but variable returns as the business develops. Transitional tool between the two above is the so-called convertible bond.

These securities can be converted into preferred shares, potentially providing investors with a high fixed income if the ore mining and processing plant achieves positive financial results. In general, the use of stock market tools is becoming more popular today.

Nevertheless, it is important for the companies initiating the project to remember that the procedures for issuing shares and bonds are associated with high costs and require a professional approach to ensure the financial security of the project and the company as a whole. Also worth mentioning are promissory notes that are suitable for large and reputable companies. Basically, this financial tool provides medium-term financing with a high cost of capital.

Venture capital: Venture financing for the construction of mining and processing plants is distinguished by the attitude of investors to business. The security of investments in general is of paramount importance for any venture fund, but not the profitability of each specific project.

Advantages of Project Finance in Mining and Processing Plant

Project finance refers to the financing of an asset or project, in which the lender focuses primarily on the future cash flows of the project as a source of debt repayment.

As an alternative to taking projects on their own balance sheet, mining companies have increasingly looked to finance new expansions and acquisitions through project finance. Under these borrowings the capital investment invoked will be repaid only from the cash flows generated by the project. The lenders will not have recourse to the company as a whole. Interest rates are higher than for recourse corporate finance, but higher leverage helps reduce the overall cost of capital.

Advantages of Project Finance: It allows a mining company to finance a project beyond (is means while preserving existing banking lines, and to explore competing for investment opportunities. It limits the risks of a project to the company. It also improves the return on capital invested in a project by leveraging the investment to a greater extent. In an extreme case, the sponsor ‘s credit may be so weak, or the project so large, that it is unable to obtain sufficient funds to finance a project at a reasonable east on its own. Project financing may then offer the only practical means available for financing the project.

Disadvantages of Project Financing: Project financing will not lead to lower after-tax cost of capital in all circumstances, as it is complex and costly to arrange. It is structured around a set of contracts that must be negotiated by all involved parties. The necessary legal expenses involved in setting up the project structure, researching and dealing with related tax and legal issues and preparing the necessary project ownership, loan documentation and other related contracts will result in higher transaction costs than conventional financing. Project financing typically also requires a greater investment of management’s time.

Project Finance and traditional corporate finance for mining and processing plants explained

Banks usually needs a lot of information about the financial condition of the company (assets, cash flows, key business indicators for the past, and so on) on this type of financing. This allows risk managers to easily assess credit risks and allows the credit rating service to determine a company’s creditworthiness. A mining company looking to carry out an expansion, acquisition or new project development involving a significant capital investment usually seeks some level of debt financing. If recourse financing is used, the lender of the funds has recourse for repayment to the company’s cash flow from all its operations and security over all its assets.

Cost of Project Finance for Mining and Processing Plants

Project financing in the mining and processing plants is capital intensive and required a hug sum of money. Project finance for mining and processing plants can be more expensive than traditional debt financing.

Evaluating The Gold Mining and Processing Plant Project

Project finance providers will pay close attention to the discounted cash flow or net present value analysis in their review of the project’s economics. This is the value of the future cash flows of a project in present terms. In the base case, cash flow and sensitivity runs the discounted value of the future cash flows and should always exceed the amount of the debt outstanding. This ratio is known either as a loan life cover ratio.

Havelet Finance Limited offers a long term financing for the construction of Gold mining and processing plants in any regions of the world. Kindly contact us for all your large and small scale mining business.

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