JUNIOR MINING COMPANIES IN TODAY'S MARKET, PART 1: THE ROLE OF JUNIOR MINING IN TODAY'S MARKET AND CHALLENGES AHEAD A SURVEY OF RECENT LEGAL ISSUES AND CHALLENGES FACED BY JUNIOR MINING COMPANIES
| Jurisdiction | Derecho Internacional |
(Apr 2015)
JUNIOR MINING COMPANIES IN TODAY'S MARKET, PART 1: THE ROLE OF JUNIOR MINING IN TODAY'S MARKET AND CHALLENGES AHEAD A SURVEY OF RECENT LEGAL ISSUES AND CHALLENGES FACED BY JUNIOR MINING COMPANIES
Andrew Robertson
Partner
Lawson Lundell LLP
Vancouver
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STUART BREEN is a partner with Partner, Lawson Lundell LLP in Vancouver. He practises corporate and commercial law with an emphasis on corporate finance, securities and mergers, and acquisitions for public mining companies. Stuart acts for domestic and international companies in a wide variety of transactions including equity and debt financings, business combinations, acquisitions, and stock exchange listings. He also advises clients on corporate and securities regulatory compliance issues, and corporate governance matters. Stuart has extensive experience acting for clients involved in the mineral exploration, development, and mining industry, including advising clients on and completing commercial transactions such as joint ventures, option/earn-ins, royalties, strategic investments, and asset acquisitions. He also regularly provides advice on the unique continuous disclosure requirements of companies in the mining industry. Stuart has been recognized by International Who's Who of Mining Lawyers as being among the world's leading mining lawyers, by Best Lawyers in Canada for mergers & acquisitions law and by Lexpert's Guide to the Leading US/Canada Cross-Border Corporate Lawyers in Canada as one of Canada's Corporate Lawyers to Watch. Stuart received a Lexpert Rising Star Award in 2012 as one of Canada's Leading Lawyers under 40 and a Business in Vancouver's Forty Under 40 Award in 2012 as a leading business professional in Vancouver under 40.
At the Cambridge Resource Investment Conference held in Vancouver, Canada in January of 2013, John Kaiser, a Canadian newsletter writer focussed on the junior mining industry, publically predicted that as many as five hundred of the junior resource companies then listed on the TSX Venture Exchange (the "TSX.V") would cease to exist by the end of that year.1 This prediction was widely discussed and reported in the media. However, while the last two years have been difficult for many companies in the extractive sector, and in particular for junior and mid-tier mineral exploration and development companies, the number of mining companies that have delisted from Canada's venture market is considerably fewer than the five hundred that Kaiser predicted. In fact, the total number of mining companies listed on the TSX.V has changed relatively little during from 2013 to 2015. Between December 31, 2012 and December 31, 2014, the number of mining companies listed on the TSX.V fell from 1,309 to 1,201, representing less than a 9% change in the total number of mining companies listed.2 This paper surveys from a legal perspective a few of the key challenges and issues faced by junior mining companies during this period and some methods by which such companies have responded and adapted to the recent downturn in resource capital markets, and offers certain "survival strategies" for junior miners moving forward.
The recent volatility in commodity prices has led to write-downs, financial losses, and a commensurate drop in the market capitalization of many junior mining companies. In response to the instability, many investors and fund managers have eschewed the mining equity markets which serve as the traditional source of financing for junior mining companies. Major and some mid-tier miners have been able to survive the difficult economic climate by selling off non-core assets, cutting costs, mothballing certain projects, and walking away from joint ventures. Junior miners have responded to the tough economic conditions by finding creative solutions, be it a shift from raising equity to allowing investments directly in assets, or transacting with private equity funds entering the mining space. The latter phenomenon has also paralleled a shift in the former, as private equity funds are using a diverse range of methods by which to invest in mining companies.
An increased focus on compensation costs may also help ease expenses for certain companies, as well as guard against shareholder unease (or, in some cases, revolt). In the face of diminished earnings, many companies have been pressed by shareholders to renew an emphasis on tying executive compensation to company performance. Companies that have not concentrated on aligning compensation to performance, or have ignored certain recommendations from shareholder advocacy groups, are often at danger of exposing themselves to hostile reactions from shareholders.
Thankfully for junior and mid-tier miners, securities regulatory authorities have also moved to relax certain regulatory burdens, in particular for those companies listed on venture exchanges that do not yet have significant revenue. The Canadian Securities Administrators (the "CSA")
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published proposed amendments in May of 2014 aimed at streamlining, and as such reducing the cost of, disclosure required by venture issuers. In November of 2014, the CSA published additional amendments that would make it easier for companies to raise equity from existing security holders, both through a new exemption for equity raises in the Province of Ontario, Canada's largest equity market (matching an identical exemption in most of the other CSA jurisdictions), and a proposed overhaul of the existing rights offering regime.
By finding new sources of financing and reducing costs, junior and mid-tier miners that survive the recent commodity volatility may emerge as stronger and more adaptable companies, and potentially the beneficiaries of excellent asset opportunities. Combined with proposed amendments that are intended to reduce the costs of regulated disclosure and make the process of raising equity easier, Canadian miners that have their "financial house" in order will be better-situated to thrive when commodity prices recover.
A. Shifting from Equity Investment to Asset-Based Financing
The lack of available equity financing has led to an increased focus, and perhaps dependence, on financing arrangements that involve investments directly in companies' assets. Common ways of doing this are through royalty financing, metal stream financing, offtake commitments (often as a component of a larger package of financing), and commodity-based loans. These types of financing, often referred to as "alternative finance", typically provide an investor with an interest directly in a mineral asset or the profits of a mineral project without giving the investor an equity interest in the publicly listed parent company that owns such asset or property.
Royalty Financing
Royalties on mineral projects have been common for decades; however, in recent years royalty-based financing arrangements have become more prevalent and companies that focus on royalty financing have played a prominent role during the market downturn. In its most basic form, a royalty financing involves an investor making a payment, often to fund a project, in return for a portion of the minerals or the proceeds of the sale of the minerals from the project to which the royalty relates. From the investor's perspective, royalties can be attractive arrangements because they allow the investor to benefit from the proceeds of a mine without having to contribute to the mineral project's ongoing production or operating costs (other than the initial investment). From the miner/operator's perspective, royalty financing can be an attractive alternative as it avoids the potential share dilution that comes with an equity financing, which is of particular concern when share prices are depressed. In addition, a royalty financing will typically allow the operator to retain control over the mineral project and not be subject to as many restrictive covenants and events of default as compared to traditional debt financing arrangements. As royalty payments are usually dependent on production, another benefit to the operator is that, unless advance royalty payments are negotiated, the operator is often not obligated to make payments until the mine is producing and in some cases profitable.
Royalty-based financing has been an important source of funds for some junior mining companies during 2014. For example, recently, the purchase of Osisko Mining Corporation by Agnico Eagle Mines Limited and Yamana Gold Inc. saw the creation of a new gold royalty company, Osisko Gold Royalties Ltd. ("Osisko Royalties"). In December of 2014, Osisko
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Royalties gave TSX.V-Iisted Highland Copper Company ("Highland") a $10 million loan in return for a 3% net smelter returns ("NSR") royalty on all metals produced at Highland's White Pine North Project.
Sandstorm Gold Ltd. ("Sandstorm") is an example of another royalty company that has continued to be active during the mining downturn. In January of 2015 Sandstorm entered into a number of royalty agreements, covering ten projects operated by three junior miners in Africa and Nevada. The miners agreed to NSR royalties of between 0.45% and 1.2%. Of these ten projects, TSX-listed Orezone Gold Corp. and TSX.V-listed Castle Peak Mining Ltd. each operate one project in West Africa, and TSX.V-listed Tarsis Resources Ltd. operates eight projects in Nevada. The Sandstorm deals are on an even smaller scale than the Osisko/Highland deal. For example, Sandstorm acquired the Orezone Gold Corp. royalty for USDS3.0 million. Other recent examples of royalty financings for projects held by junior miners include:
| Financing Party | Operator | Date of Agreement | Details of Agreement |
| Silver Wheaton Corp. | Chesapeake Gold Corp. | August, 2014 | Chesapeake assigned a 1.5% NSR royalty in its Metates Project to Silver Wheaton for US$9 |
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