By Robert K. Mason, Janet Howard and Janet Lee, partners in Norton Rose’s Toronto office.
While the Canadian economy has been historically reliant on a wealth of natural resources, the mining and exploration industry is experiencing tremendous growth domestically and internationally. There are opportunities for inbound and outbound investment there never have been before. Mining companies and the financial community are extremely well placed to make the most of this as Canada has a well-earned reputation as one of the most stable mining jurisdictions in the world. Foreign investment is and always has been essential to a vibrant economy, and Canada has not engaged in the resource nationalism that is presently occurring in many countries around the world.
On the contrary, in May 2012, the Canadian government announced that regulations would be amended to progressively raise the review threshold for foreign takeover deals under the Investment Canada Act from $330 million in asset value to $1 billion in enterprise value over a four-year period. In April 2012, the federal government announced it would amend the Investment Canada Act to provide greater transparency in the review process of proposed foreign acquisitions. Both of these developments are very good news for foreign investment in the resource sector in Canada, where a great number of deals are below $1 billion in value.
As with many other parts of the world, in Canada we are seeing continued investment in the mining sector by Asian investors as they seek to supply the resources they need to continue their economic growth. China is of course the region’s largest player and its companies are applying some well thought out strategies to investment. Many Chinese companies building their businesses in Canada are doing so by making a number of smaller acquisitions instead of focusing on one big deal.
This approach has several advantages. Smaller deals may not require review under the Investment Canada Act and the regulatory approvals required in China may not be as onerous. It also allows Chinese companies to reduce some risk. If a smaller deal doesn’t work out, it won’t have the same impact as a big one failing. Companies can shift direction more easily if market circumstances change quickly or if they decide to take a different tack. And it allows companies to not receive public attention as they invest in Canada if this is something they prefer.
Chinese companies investing in mining operations in Canada often have the advantage of having access to acquisition and project financing provided by Chinese banks. As part of China’s policy to encourage companies to invest overseas, certain Chinese banks are active in providing acquisition and project financing, which is often guaranteed by the mother company in China.
For all the tremendous growth in the mining industry, the difficulty for companies to get financing has been a reality in the sector recently. This has been driven by a volatile stock market. Companies have to be even more alert for financing windows when they open, as they can shut very quickly. Companies have also been utilizing alternative ways to get the funding they need to move forward.
Issuing high yield notes are options for some mining companies in Canada and around the world. With the growth opportunities that exist in the sector, paying more for funding may not be a deterrent to funding key projects and deals. Most companies that have sold high-yield bonds have producing mines. There are signs that interest is increasing among junior miners to fund exploration and that investors are becoming more receptive to those deals for the right return. Banks are for this if it means good deals.
Convertible debentures are another method. Investors seem more willing in the current market conditions to invest in convertible debentures which offer both yield and potential future shares rather than in straight equity. This type of financing is most appropriate for producing or near producing issuers which will be able to cover the interest expense with actual mining revenue. A number of convertible debenture deals have been completed recently in an otherwise challenging financing market.
Offtake agreements are being entered into as well. They are popular with some investors whose highest priority is to get minerals out of the ground to supply their demand. Offtake agreements have been a major source of financing of near production projects over the last two to three years, especially iron ore. It’s been the most common way for companies to raise significant money without diluting down their existing shareholders.
Offtake agreements can be challenging however, as they affect any M&A strategy companies may have in the near or long term. The commitments that agreements bring may make potential buyers of a company turn away from a deal. If the offtake company is the eventual strategic buyer in a deal, this isn’t an issue. But it’s something companies need to consider before entering into an offtake agreement.
Another creative alternative financing approach was taken by Canada’s Gran Colombia Gold Corp. in 2011. The company issued $80 million in a public offering of silver-linked notes, they were worth $1,000 each with an annual interest rate of 5.0%, payable semi-annually over seven years. But holders could choose to receive the financial equivalent of approximately 66.7 ounces of silver per note, using a notional price of US$15 per ounce of silver. This provides holders with the opportunity to benefit from silver prices in excess of the price per ounce.
While it may be counter-intuitive in a market where it can be difficult to raise capital, resulting financial pressures have created new M&A opportunities. There has been recent activity in the joint ventures arena. In instances where one joint venture partner is no longer able to satisfy capital calls to finance its share of an exploration budget, there is increased willingness to negotiate an exit, rather than face dilution of its interest under the terms of the joint venture agreement. The resulting consolidation of ownership of one partner’s interest in a mining project can take the form of a court approved plan of arrangement, a friendly take over bid or a direct transfer of the joint venture interest. This recent consolidation of ownership paves the way for future consolidation on a company-by-company basis as projects in the advanced stages of exploration start to come on line, transitioning into the revenue generating phase of production.
The mining sector and Asian markets are key areas of growth in Canada and globally, creating exciting and wide-ranging international opportunities for the financial community.