Mineral Exploration and Development is the process of identifying a mineral ore deposit that may have the potential to be an economically viable mining operation. To learn more about this process and how it is conducted, click here.
The industries of mineral exploration and mining have evolved greatly over time and are now filled with obstacles that historically did not exist. Mining activities can accelerate economic growth in communities, but the scale of mineral projects presents challenges for local environments and ecosystems. These impacts fuel the debate on mining. An increasing number of leading mining companies are now implementing sustainable development principles and appropriately consider the communities and environments that they are operating in. In addition to the political, societal and environmental factors at play, quality mineral projects are becoming harder to find and prospectors often need to go to remote and sometimes dangerous areas of the world to find such projects.
Due to the growing number of obstacles in getting a mine permitted and built, and the continually growing world population, there is concern tat there could be a future shortage of critical minerals being mined. If this were to occur, the chokehold on supply will in turn raise the prices for commodities and trickle down to everyday products, meaning the additional costs will be borne by consumers. The following information provides valuable insight on the methods of funding for the mineral exploration and development industry.
Let’s first look at the industry players, classified as: Majors, Mid-tiers and Juniors. Major miners are companies with global reach and operate projects on a significant scale. Majors that conduct exploration activities are seeking additional streams of revenue or to upgrade their existing resources. Mid-tier miners have smaller market caps than the majors, and usually have at least one mine and/or multiple projects. Junior miners typically consist of a team of professionals that explore for mineral deposits and once identified, develop them to prove there is a resource that can be extracted economically. Once this has occurred, the Junior miner will most often solicit a partnership (termed ‘Joint Venture’) with larger mining companies that have the capital and expertise to construct and operate a mine. These types of partnership agreements can come in many forms and are usually very lucrative for both parties. However, reaching this stage of the process takes years of project development. In addition to the length of time, developing a project requires a significant amount of money for the activities associated with identifying a mineral resource.
The funds needed to explore for and develop a resource can originate from a variety of sources – they are listed below in order of most common to least.
Capital Markets (Traditional Equity)
Junior miners will most often apply to be listed on one or more exchanges (also called stock/capital markets), obtaining a listing by following the guidelines and obeying requirements set by each exchange. Once a company has been approved for a listing, an Initial Public Offering (IPO) will be arranged with a ‘Prospectus’ type document outlining the terms. During an IPO, shares of a company are sold to retail (individual) investors and sometimes also to institutional investors; an IPO is underwritten by one or more investment banks, who also arrange for the shares to be listed on one or more stock exchanges. Following the IPO, a ‘listed’ mineral exploration and development company will attract funds with a method called ‘Private Placements”. Private Placements are the offerings of a significant number of securities to individuals or corporations. In Canada, there are strict guidelines that dictate Private Placements for junior miners due to the associated tax regime explained below.
Accredited Investors (as defined by Canadian tax policy) are the main individuals that are legally able to participate in these offerings and it does not matter whether the investment is completed by stockbrokers/investment bankers on behalf of the accredited investor. Family, friends and business associates (as defined by Flow Through regulations) of the directors and management are also able to participate. In just the past few years, the (provincial) securities commissions in Canada collectively developed the ‘Existing Security Holder Exemption’. This exemption means if an investor already owns at least one share they now have the opportunity to purchase up to C$15 000 worth of the company’s stock to add to their existing portfolio. For more information on this exemption, click the following link to Thompson Reuters Law definition of the subject: https://ca.practicallaw.thomsonreuters.com/0-575-4975?transitionType=Default&contextData=(sc.Default)&firstPage=true&bhcp=1.
Many junior miners will pay stockbrokers and investment bankers a ‘finders fee’ for assisting in the fund-raising process that could even amount to an allocation of shares and warrants. Any shares acquired through a Private Placement Agreement are liable to a four month hold and cannot be put back into the market or sold during this time.
Canadian Private Placements for juniors consist of three types of securities, which include Flow Through Shares, Non-Flow Through Shares, and Warrants. Junior Miners are not expected to turn a profit until a project has been explored for and developed enough to be bought by a mid-tier or major miner or brought to production by the company (both of which may take years to occur). This means a company must continuously raise money for exploration and development by issuing ‘Flow Through Shares’. Flow Through Shares can only be used by Canadian investors to reduce their taxable income by the amount they have invested in Flow Through Shares. The Government of Canada developed this tax initiative many years ago to spur domestic growth in Mineral Exploration and Development due to the considerable economic benefits derived from mining operations. For more information on what legally qualifies as an exploration expense that a company can pay for by issuing flow through shares, visit the Canada Revenue Agency webpage: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/flow-through-shares-ftss/glossary.html
The stipulation for this tax benefit is that all money raised from Flow Through Shares must be used for exploration and development purposes, NOT general and administrative costs. Another important note is that investors wanting to purchase them require Canadian Citizenship. Non-Flow Through Shares – often referred to as ‘hard dollars’ – fulfill the purpose of providing the junior miner funds for General and Administrative overhead expenses, legal fees and working capital. Obtaining Warrants means you have the right, but not the obligation to buy shares at a certain price within a timeframe that is identified in the ‘Private Placement Agreement’. The number of warrants issued is up to the issuer, but a good example of a common warrant structure is half a warrant issued per share issued. Flow Through Shares are typically listed at a premium to the Non-Flow Through Shares due to the tax benefits. For more information on Flow Through Shares, you can visit the Canada Revenue Agency webpage: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/flow-through-shares-ftss.html.
Lastly, in addition to the Flow Through Share Tax regime, accredited investors purchasing Flow Through shares are eligible for a Mineral Exploration Tax Credit (METC) of 15% of their investment. This means an additional 15% of the investment can be deducted from taxes owed. For more information on the METC, please visit Natural Resources Canada’s webpage on the topic: https://www.nrcan.gc.ca/mining-materials/taxation/8874
Historically, as a company completes exploration activities and moves their project(s) towards development and production (if feasible), more funds are occasionally needed. Due to this increase of required funds, the number of Private Placements increases and accordingly so does the number of shares and warrants issued. This gradual increase in shares issued is termed ‘dilution’, and companies that are able to keep the number of shares issued to a minimum while advancing their projects are more appreciated by shareholders. Because the number of shares increases with each Private Placement, any potential buyout or activity that would provide returns to an investor through an increase in share price is ‘diluted’.
Company Management must continuously raise money for exploration and development by issuing ‘Flow Through Shares’.
Although only accredited investors can participate in Private Placements, ‘retail investors’ are able to buy the shares on the open market when participants in past private placements put their shares up for sale. This provides an entry point for everyone to have the opportunity to gain a portion of the wealth generated by developing a mineral project into a mineable operation.
Private Equity
The constraints of getting and maintaining a listing are significant and include substantial legal fees and administrative costs, in addition to the fiduciary duties of executives and directors. Those that are unable to afford listing requirements, are not legally allowed to initiate a listing, or choose to skip the process entirely will elect to privately raise money for their projects. Obviously, this tactic requires more effort because a company’s business plan needs to be more stringent than those that are publicly listed and therefore publicly accountable. Investors trust exchanges will flag any concerning activities with their listed companies, so unlisted companies must be entirely vetted by the investors themselves.
Debt Financing
Institutions will provide debt financing for companies that have projects in the later stages of the exploration and development cycle. This is because a well-managed institution would not loan a significant amount of money to a company whose project has not proven the economic viability to extract resources. Often, these institutions are focused on the mining sector and will never even consider companies with early-stage projects.
Royalty/Streaming Companies
A royalty is an agreement which provides, in exchange for an upfront payment made to the mining company, the right to receive a portion of the revenue from a mining operation once in production. They can take several forms that are all related to stages of the extraction, refining and selling process. Royalties last for the entire life of the mine, and consequently provide great value to the holder depending on the type of royalty and associated mine production that define profitability.
A stream is an agreement that provides, in exchange for an upfront payment made to the mining company, the right to purchase some or all of the future production of a mine. Often these agreements will also state the price being paid to the mining company for the production for the life of the transaction.
Government Programs
In many countries around the world, governments offer mining companies different types of tax rebates, grants, subsidies, etc. to explore for and develop mineral deposits. A mine often creates billions of dollars of upfront investment and the host country will, throughout the life of the mine, tax the mined product when it is exported and/or sold.
Especially in developing economies, mines can provide valuable workplace opportunities for local communities.
Crowdfunding
Crowdfunding is not a popular method in North America for raising funds in the mining industry, especially in mineral exploration. Crowdfunding is an online method of raising money that is often successful with less complex and more environmental initiatives such as clean-ups or green technology. The sheer amount of data related to a mineral exploration and development project can be fabricated to portray a project as more promising than it actually is. The reason why investors feel more comfortable investing on the stock market is because there is oversight, transparency and accountability of the companies and their associated data.
The aim of this blog is to provide potential investors in mineral exploration and development with some of the knowledge needed to make an informed decision when contemplating mineral projects. Minerals provide the necessities for modern life, and without the adequate discoveries of new quality projects there would be significant strain and impact on the daily lives of many. Please consider the positive outcomes that derive from mining activities, and be cognizant of how important this little-regarded industry is.
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