Perhaps it is time to re-visit “old school” approaches, in this “new order” world. The situation is simple: large and attractive mineral deposits are harder to find, and getting riskier. The provisioning (aka the writing off) of assets by major mining companies now totals over $100bn in the last 30 months and the institutional investor is not happy. Banks are hurting (still) and the public sector no longer can afford to co-finance subsidies and infrastructure. The mining company that is looking to develop a new project is therefore going to have to “de risk” the new asset, in order to satisfy the institutional investor who now has pensions and/or medical plans to attend to, and really does not want to know about the bad news; mining projects, on average, achieve a cost overrun of about 14%!!!.
In the “old days” when banks were keen on such financings, they employed “an independent engineer” (IE) who would review all budgets, qualifications and progress reports and milestones achieved to date; this was a continuous information flow and often involved the same IE throughout the life of the project. The banks were hiring a certain skillset which was producing pro-forma information; budgets and schedules against which the actual performances could be calibrated and could trigger adjustments in the financing; such adjustments included deferral of the first instalment, or an extension of the term or an increase in the funding available, or a requirement for the mining company to co-finance. The advantage in making this extra effort was “flexibility” for the project; banks knew that miners struggle to accurately forecast geology, technology, politics and the markets and that they did not wish to foreclose on an asset that had marginal value. Having a first (or fixed and floating) lien on the assets, meant the banks could ride out uncertainties, over time.
With “new order” institutional financiers who are somewhat risk-averse, and now active in the mining field, it may be time to re-engage the former practice of using an IE to better manage risk. This need not apply only to turnkey extraction projects but to also “milestone” financings for juniors whose relevant funding tranches depend on independently validated milestones such as Proven and Probable Reserves achieved, or pre-feasibility or feasibility study achieved or permits secured.