Gold rush: Can juniors benefit from market conditions?

Gold rush: Can juniors benefit from market conditions?

While many commodities, particularly battery metals, are taking a pounding amid the COVID-19 pandemic, gold continues to shine, reaching its highest price in seven years.

GERARD PETER asked JONATHAN BROOKS, head of mining and metals and partner at European law firm Fieldfisher if the buoyant market has created more financing opportunities for gold projects, especially for junior miners.

Earlier this year, investor confidence took a knock as tensions increased between the United States and Iran escalated. Market fears were further exacerbated by the onset of the COVID-19 pandemic, resulting in investors trying to safeguard their money in safe haven assets such as gold.

As a result, the precious metal is enjoying its highest price in seven years, surpassing the $1 700/oz mark* with analysts even predicting the price will reach as high as $1 900/oz before the end of the year.
This spells good news for gold mining companies but does this renewed interest make financing a new gold project easier?

Brooks’ areas of speciality include equity capital markets, mergers and acquisitions (M&A), joint ventures, alternative financing and environment, social and governance (ESG) issues.
He believes that there will be a continued interest in gold mining projects.

“Gold has been of interest for a while. This can be seen in the fact that there has been a lot of M&A activity among gold producers that stretches back a couple of years and there is certainly investor appetite for more M&A,” he states.
Despite the COVID-19 pandemic, Brooks points outs that gold miners in Africa are continuing to announce deals and these are being driven by the gold price.

“Francophone Africa seems to be a hub for gold transactions at the moment with mid-tier Australian and Canadian producers leading the way in making deals and existing producers looking to replenish their reserves through M&A activity.”
However, while the gold sector is buoyant, Brooks believes that this is more advantageous for some companies more than others, particularly in the junior mining space.
As such, securing finance is still a big challenge for those companies who are still in the exploration phase and those trying to move through the development phase to raise finance to get their mines built.

Options for juniors
However, it’s not all gloom for juniors, Brooks states, explaining that there is still an appetite for these projects.
“There are a variety of financing opportunities for those juniors who have attractive projects. These options range from traditional project financing to alternative financing models that are becoming ever more popular. Private equity funds, royalty companies and metals traders are now all offering a variety of alternative financing options,” he explains.

Alternative funding for gold miners in, or near,-production includes streaming agreements, a concept that originated in North America. In addition, there are royalty companies such as Osisko Gold Royalties in Canada and Anglo Pacific Group in London who are willing to fund gold projects.
“There are also pre-pay arrangements provided by mining private equity funds or metals traders,” Brooks adds.  “Companies such as Glencore, Trafigura and Traxys will advance money upfront in return for an offtake agreement to purchase future gold production at a discounted rate.”

Social licence increasingly important
Whether a junior is trying to secure finance through traditional or alternative funders, Brooks advises that there are a few key important factors to consider to make a project attractive to investors.
 “The first thing an investor will look at is how much money needs to be invested and what hurdles need to be overcome in order to get into production and generate cash flow.
“These hurdles include permitting requirements, community resettlements, political risks and any agreements that need to be put in place at national and local government levels. There are also the technical aspects in terms of how the mine will operate and any metallurgical challenges.
“Also, I believe it is inevitable that those African countries who are suffering from the consequences of the coronavirus and the global economic contraction will be analysing their revenue sources.  This this may lead to an increase in royalties, taxes or a combination of the two for gold mining companies,” he explains.

Furthermore, Brooks emphasises that ESG factors are becoming ever more relevant for investors, particularly the social aspect.
“Developing a social licence to operate is important. Investors, consultancy firms and rating agencies are focusing very closely on ESG, looking at the social impact of mining and how communities benefit from the mines.”

He adds that ESG will become even more important once the COVID-19 pandemic is over and countries try to kick-start their economies again.
“Research confirms that those mining companies that pay more than lip service to ESG and embed it in their company culture attract more investment attention than those that give it less attention.”
However, it is not just the attractiveness of a gold project that draws investment attention; the company’s leadership team is equally important.
“If you have a CEO or a senior manager with a good track record, who has overcome obstacles and made money for investors in the past, this is highly attractive for investors.

“Unfortunately, this is where some juniors fall short. While they may have a good management team, they don’t have a track record and so investors may be reluctant to fund them,” Brooks explains.
Also, Fieldfisher’s experience shows that having a well-connected local CEO or senior manager based in the host country makes a massive difference.
This is because they understand the local culture and can negotiate with governments on issues that could be a challenge for expat management teams.

Size matters
Finally, Brooks advises that juniors should relook at how they want to present their projects to investors.
“Since 2012, there has been a paradigm shift that bigger is not necessarily better. Juniors should look at refocusing their feasibility studies and plan to develop a mine requiring a smaller investment with more manageable challenges to overcome to ensure that cash flow can be generated and investors paid off within a shorter timeframe.
“The plan should also have exploration upside to further develop a project.
You need to be able to show investors that you have a well-defined and quantifiable route to guarantee a ROI in a realistic timeframe,” he concludes.