STOCK MARKETS AND VENTURE CAPITAL FUNDS TO FINANCE MINING PROJECTS: THE CASE OF CHILE
| Jurisdiction | Derecho Internacional |
(Apr 2005)
STOCK MARKETS AND VENTURE CAPITAL FUNDS TO FINANCE MINING PROJECTS: THE CASE OF CHILE
Carey & C§a. Abogados
Santiago, Chile
Born in 1963, Rafael Vergara received his Law Degree from the Universidad de Chile in 1987. Since 1985, at the time of joining Carey & C´cmb;ia., he has been involved in legal practice related to mining and natural resources. Currently, he is the partner in charge of the Mining, Natural Resources and Environmental Department.
Mr. Vergara was a participant in the 1993 course of the Academy of American and International Law of the Southwestern Legal Foundation, Dallas, Texas, U.S.A. and in the 1997 Program of Instruction for Lawyers of the Harvard Law School.
Mr. Vergara has been Professor of Mining Law in the Universidad de Chile from 1996, and in the Universidad de Los Andes from 2003.
He is member of the Chilean Bar, of the legal committee of the National Mining Association (SONAMI) and of the association Abogados Mineros Latinoamericanos (AMLA).
Mr. Vergara has presented papers on Chilean mining law, natural resources project financing, and on related matters at numerous meetings, both in Chile and abroad. He has given special courses on mining law organized by the Judiciary Academy of Chile, for judges and members of the Courts of Appeals.
I. INTRODUCTION
For some time now, there has been talk in Chile of developing a domestic venture capital market to finance mineral exploration, mine exploitation and the construction of mineral processing and beneficiation plants, the three classic phases of the mining industry.
For the same reason, two years ago, I presented a paper on this subject in Lima at a special institute of the Rocky Mountain Mineral Law Foundation in Lima. 1
Two years after that paper, I believe that there is greater clarity in Chile on the mechanisms needed to develop the venture capital market, including the mining market, and there has been some progress in this period to implement that market. I will discuss all of these subjects in this monograph.
II. THE STOCK MARKETS AND THE MINING INDUSTRY
Unlike what has occurred in developed countries, where the mining industry plays a material role in Latin America, stock markets and venture capital funds have not financed mining exploration and have collaborated in the mine exploitation and mineral processing phases only to a small extent. 2 And this has been due mainly to the following:
1. No depth or relative magnitude of the market that justifies including mining companies in the range of investment options, which require enormous sums of money for their business.
2. "Little productivity of mining capital internationally in comparison to other industries. The maximization of capital productivity is related to the creation of value for the shareholder. Historically, the mining industry has been perceived as a destroyer of equity." 3
3. No admission of third parties to ownership of the companies.
4. Exposure to a greater volatility in the valuation of the company because mining is essentially unpredictable.
5. Ignorance of the mining sector. As a result, these local markets lack a real capacity to analyze and evaluate the risks inherent to the appropriate development of a mining project.
6. No clear rules on mining resources and reserves, the entity or person that must qualify them as such, the timing and type of reports that must be issued.
7. No generally applicable rules encouraging high professional yield in the development of mining, specially in the exploration phase.
8. Legal impediments to make investments in companies other than stock corporations that are very particular to mining, such as the special contractual mining company in Chile.
9. No tax incentives to offset the associated risk.
On the other hand, financing via the placement of shares has numerous advantages, which include: it is the only way to finance on a continuing basis, meaning with no obligation to reimburse the capital invested, which fits well with the long term nature of mining projects; there is an ongoing valuation of the investment since the progress in the mining project should generally increase the value of the company; it improves the creditworthiness of companies without saturating their debt-equity ratio; the involvement of third parties-normally institutional or private-in the ownership of the company should be no inconvenience since in general, they are not interested in participating in management but rather in seeing a good management performance and a reasonable return; it improves the corporate image by requiring financial information to be presented on a continuing basis; and they are more profitable although greater in risk.
Bearing in mind these advantages, specially for mining exploration, and the successful experiences in countries like Canada and Australia, talk and discussion began in Chile on the possibility of adopting technical and legal tools to aid in implementing this stock market and venture capital market for mining. 4
Certain basic assumptions have always been made in these discussions:
- The enormous mine exploitation and mineral resource processing that always require the lowest cost financing in order to be competitive.
- Expansions of actual mines and plants. 5
- New projects that are already being implemented given the better prices for base metals. 6
- An enormous geological potential open to new discoveries and developments, 7 like what has occurred in the last 20 years 8 even though there is warning of a depletion of known high-quality reserves, which means that the average grades of projects have slowly diminished over time and the geo-metallurgical uncertainty associated with mineral deposits has risen. 9
- Chile has an economic and political stability and maturity recognized internationally that suffices to develop this type of capital market. 10
- Chile may be a source of financing for mining activity in other countries in the Latin American region. 11
III. THE CHILEAN STOCK MARKET - AS IT STANDS NOW
1. Availability of Financing - Depth of the Market
The Chilean stock market is large considering the population and per capita income.
In 2004, Chilean stock exchanges traded 263 billion dollars. 12
This size and transaction activity have been due principally to the role played by pension funds in generating savings and private investment. Pension funds currently manage an equity of nearly 57 billion dollars. 13 Only 1.75% of that amount has been allocated to investment in stocks or bonds of mining companies, all engaged in exploitation and doing business for several years on the market.
Insurance companies handle an investment stock of close to 2,327 million dollars. 14
Mutual fund managers administrate resources for approximately 10,300 million dollars while investment fund managers manage close to two billion dollars as of September 2004. 15
Added to the above-mentioned resources are the hundreds of thousands of non-institutional or private investors.
In summary, there are enormous amounts of money waiting for business opportunities and at least in regard to institutional investors, with managers who have expressed a desire to participate in the financing of mining businesses via stock exchanges or venture capital funds.
In general, the mining industry has been incapable of gaining systematic access to the banking system and less so to the stock exchange, all of which has prevented it from developing appropriately and making a greater contribution to the country.
The problem of access to the financial system is even more evident in small-and medium-scale mining, where there is limited access to the banking system because there are insufficient guarantees to back eventual credits and even less so to finance a mining exploration project.
2. Actual Participation of Mining Companies on the Stock Market.
At this time, of all companies registered in the Securities Registry who trade their shares on the exchange, only seven are mining companies. We can add to them the cement industry, making a total of ten, which represents barely 4.2% of the listed companies trading shares as compared to the nearly 8 to 10 percent contributed by the mining industry to the gross domestic product.
And if the exchange value of the mining companies trading their shares on the stock exchange is compared to the rest of the companies (7.1%), this gap is even more evident.
All mining companies registered in the Securities Registry that trade their shares on the primary or secondary securities market are governed by the general rules applicable to any other company. There is no distinction as to reporting requirements. 16
The absence of specific rules particular to mining regarding the information that mine exploitation or mineral processing companies must provide constitutes, in my judgment, a shortcoming contrary to the interests of those companies that should be resolved by what we discuss below regarding the progress and technical considerations for the creation of a capital market for mining, specially information on mining reserves and resources.
3. Market for Emerging Companies
In 2001, with the first capital market reform under Law 19,768, special rules were introduced that regulated the so-called emerging companies. The Superintendency of Securities and Insurance (SVS) dictated 17 special rules on the registration of corporations and their shares in the Securities Registry while the Santiago Stock Exchange issued others, establishing, inter alia, the figure of the sponsor and the market maker, which are responsible for ensuring the liquidity of the securities traded.
The emerging companies are smaller than those traded on the traditional market, but with a high growth potential. Certain tax benefits were granted to encourage their...
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