Which funding providers would be ideal for a mining company at each stage of its evolution?
Understanding the different stages a mine goes through during its life is important for both financial analysts, and investors in the mining sector. As an analyst or dealmaker, it would be important to be able to identify which funders would be best-suited to provide funding for a mining company depending on which stage of development it found itself in. As an investor it would be important to understand the changing risk-profile of a mine over its life, and how this should influence one's desired returns as compensation for taking such risk.
In this article I will outline each of the different stages of development a mine would pass through from initial exploration to closure. I will also identify the ideal funders to be approached to provide funding for a mine at each stage of its development.
The mining life cycle can be broken into the following stages:
Project Evaluation and Fundraising;
Steady-state Production; and finally;
Closure and Rehabilitation.
A Graphical representation of the mining life cycle is shown below, illustrating the cashflow and production of ore at various stages of the mine:
Each stage has unique objectives for the owners of a mine, and presents different challenges for all stakeholders involved, namely: labour, equity providers, debt providers, government, and local communities. The first three stages of mine development are considered to be the riskiest. During these stages a mine would be exposed to both commodity-price risk, and construction risk. Commodity price risk would be the risk of commodity prices falling, which would result in declining profitability for the mine. Construction risk would be the risk of project completion delays or failures, which would prevent the mine from actually being completed or being completed on time and on budget.
The final two stages of mine-life are mainly susceptible to commodity price risk and operational risk. Operational risk is the risk that the operational and technical teams working on the mine fail to deliver forecasted output levels, which may result in lower than anticipated profitability for mine owners.
I hope you benefitted from this brief article, which forms part of my larger Mining Finance free e-book, where I go into more detail into the topic of funding and capital structures for mining companies. To
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