MINERAL INDUSTRY FINANCING: A GLOBAL PERSPECTIVE
| Jurisdiction | Derecho Internacional |
(Apr 2005)
MINERAL INDUSTRY FINANCING: A GLOBAL PERSPECTIVE
Jeff Scanlon
McMillan Binch LLP
Toronto, Ontario, Canada
Steve Vaughan is a partner of McMillan Binch LLP and the chair of its Natural Resources Group. McMillan Binch LLP has a long history of involvement in the international natural resource and energy businesses, particularly in the mining, oil and gas, geothermal and nuclear industries. Steve has participated in natural resource transactions in more than 65 countries over the past ten years.
Steve has a BSc and MSc degree in geology as well as a law degree and has worked in or been closely associated with all facets of the mineral exploration, mine finance and securities industries since 1955. He served as a director of Atomic Energy of Canada Limited from 1992 to 1998 and was chair of its Environmental Committee.
Steve is a director and member of the Securities Committee of the Prospectors and Developers Association of Canada, a former director of the Toronto Branch of the Canadian Institute of Mining, Metallurgy and Petroleum, and was a member of the joint Toronto Stock Exchange / Ontario Securities Commission Mining Standards Task Force. He has also served on various committees advising Canadian governments and the Ontario Securities Commission / Toronto Stock Exchange on issues such as mineral policy, mineral strategy, mining finance, mining taxation, seed capital, junior resource policies, over-the-counter trading and nuclear issues.
Steve has authored a number of professional papers on resource financing, mining, international due diligence and related securities law issues.
I. INTRODUCTION
Global mineral industry financing dropped in 2004, well below the peaks reached in 1996/97 and 2002/03. While the global mineral industry announced more than C $59.3 billion in new financings in 2003, new announced financings reached only C$44.8 billion in 2004, representing a decline of roughly 25% from 2003 levels.
Interestingly, only about 40% of the 2004 financings were directed at new mine construction, suggesting that supply might outstrip demand over the medium and long terms unless more financing is directed to the exploration for, and establishment of, new mines.
Although the mineral industry has an insatiable need, the reduced level of financing in 2004 is partly as a result of mineral industry companies finally returning to record high cash flow levels, thereby reducing the need for externally sourced funding. Record cash flows are a result of two primary factors: (1) high commodity prices; and (2) consolidation in the industry.
It is precisely this return to high cash flows that will likely meet the mineral industry's financing needs going forward in the short term, thereby likely creating another downturn in mineral industry financings for 2005.
II. MINERAL INDUSTRY FINANCING - GEOGRAPHIC BREAKDOWN
A. Canada
Mineral exploration and mining companies in Canada are primarily listed on either the Toronto Stock Exchange ("TSX") or the TSX Venture Exchange ("TSXV") (together, the "TSX Group"), although CNQ, a relatively new internet based stock exchange is attracting new junior exploration listings at an accelerated pace. The TSX Group is the seventh largest stock exchange in the world and third largest in North America in terms of market capitalization of listed companies. In terms of the number of listed companies, the TSX is the largest stock exchange in the world.
Of the over 3,600 mineral industry listings on the TSX Group, roughly 10% consist of mining companies with a combined market capitalization of US$130 billion. In total, 1191 mineral exploration and/or mining companies are listed on the TSX Group, which represents over 50% of the world's public mineral industry companies. In addition, 28 of the mining companies listed on the TSX Group have market capitalizations of more than C$1 billion.
In terms of announced financings, 2004 was an interesting year for Canadian mineral industry companies. Although Canadian exploration companies and Canadian small producers experienced an increase of financings from 2003 to 2004, Canadian large producers saw their financings plummet by approximately 70%. Figure 1 illustrates this development.
| Canadian Exploration | Canadian | Canadian | |
| Companies | Small Producers | Large Producers | |
| 2003 | C$2,897,124,847 | C$2,112,033,987 | C$12,071,662,915 |
| 2004 | C$3,592,082,651 | C$2,532,092,387 | C$3,707,562,193 |
| Increase/decrease | ±24% | ±20% | -70% |
| from 2003 to 2004 | |||
| Source: Gamah International Limited, Mining and Exploration Company Financings - December 2004 (Toronto). |
In 2004, mineral industry issuers listed on the TSX experienced an uneven year. Although the sector saw broad based growth in many areas (including new mineral exploration and mining listings growth of over 600% from 2002 to 2004), overall financing activity fell by 19% between 2003 and 2004. Figure 2 illustrates this development.
a1. 2004 figure yet to be finalized.
| 2002 | 2003 | 2004 | |
| New Mineral Industry Listings | 6 | 14 | 37 |
| Total Market Capitalization | US$69 billion | US$110 billion | US$130 billion |
| Mineral Industry Financing | US$1.0 billion | US$2.4 billion | US$2.3 billion%na1%n |
| Total Volume Traded | 11.0 billion shares | 16.4 billion shares | 18 billion shares |
| Total Value Traded | US$63.6 billion | US$77.9 billion | US$106 billion |
| Mining Companies in S&P/TSX | 27 | 37 | 42 |
| Composite Index | |||
| Source: TSX (http://www.tsx.com/en/marketActivity/tse/marketInformation/mining/index.html) | |||
The TSXV's mineral exploration sector experience in 2004 was much more growth focused than the TSX. Not only did each major area of the sector experience growth, financings grew by an astonishing 85% from 2003 to 2004. Figure 3 illustrates this development.
a1. 2004 figure yet to be finalized.
| 2002 | 2003 | 2004 |
| New Mineral |
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