Image courtesy of Babija Photo at Pexels

10 years ago, a small junior with a market cap of around CAD10 million was looking for the same amount (CAD10 million) to finance a silver asset. This kind of proposition is rarely appealing to a debt provider, nor suitable for equity placements, yet the junior managed to secure a US$6 million loan with royalty on the production and raised the rest in equity. This junior is Aya Gold & Silver, now a CAD2 billion market cap company.

The initial loan was provided by the European Bank of Reconstruction and Development (EBRD). We spoke to Anass Joundy, associate director and lead banker for natural resources, South & East Mediterranean Region, at the EBRD about what went into the decision: “The hybrid structure of financing and streaming is something that not many financial institutions would bother with for a ticket lower than US$10 million. Still, we went ahead and the project was a success. Aya started producing and repaying the loan, their share price on the TSXV started to go up, the warrants gained value, and we began exercising those warrants, becoming a shareholder. Four years later, we reached  record IRR and exited."

The past few years have been difficult for financing greenfield exploration. Globally, the aggregate market cap of mining companies has decreased in recent years due to volatility in commodity prices in 2023, which impacted financial and capital markets. According to S&P Global, the global junior and intermediate sectors raised a total of US$11.62 billion in 2023 – almost half compared to the US$21.65 billion raised in 2021, which is reflected in lower drilling activity and exploration budgets. Mining companies are also less willing to spend on greenfield exploration, preferring instead to spend on acquisitions of existing assets. According to S&P Global (2024), greenfield exploration has been declining sharply over the past decade, while M&A activity has picked up in compensation. Despite a rise in metal prices this year, S&P expects exploration budgets to decrease by 5% in 2024. 

In the international financial markets, Africa is also disfavored. A higher risk perception premium translates to higher borrowing costs, both in the form of a higher coupon at issuance as well as higher refinancing costs in the secondary market. The IMF has looked into these claims and found that structural challenges, such as the development of the financial sector, the size of the informal sector, or the quality of the regulatory system, are key factors impacting the premium paid, emphasizing thus the importance of structural reforms.

Meanwhile, on the equity markets, listed firms with operations in Africa are familiar with the ‘discount’ their share price suffers due to the perceived risks, which makes their projects difficult to valuate. This is highest for early-stage exploration companies, said Sam Mokorosi, head of origination & deals, at the Johannesburg Stock Exchange (JSE): “Investors continue to be concerned about operational risk, especially in the junior sector. Buying shares of a mining company exposes investors to operational leverage that gives them both a steeper upside and a steeper downside; that operational risk is the highest with early-stage miners.”

GBR interviewed a few private companies planning to IPO in the upcoming years, including Rwandan diversified miner Trinity Metals, tin producing, smelting and trading company Woodcross in Uganda, project generator Antler Gold with assets in Namibia and Zambia, early-stage gold junior Red Sea Resources with licenses in Egypt, and Zambian copper explorer Zamare Minerals. Roger Murphy, the managing director of Zamare, looks at the TSX, ASX and AIM as the exchanges most relevant to a junior explorer: “While we know that we will eventually go public, the timing will depend on when market conditions permit, as the last few years have been challenging for junior explorers.”

All of these are juggling the old chicken-or-egg decision: consolidating first to be able to get good investment traction but needing investment to be able to consolidate and advance their projects. Other private companies are more inclined to look for a financing partner in the form of a debt, offtake or JV format. Akobo Minerals, a gold junior in Ethiopia, is seeking a partner to help it unlock the broader potential of the region beyond its current asset. 

While investor confidence continues to improve, especially for high-performing commodities like gold, we note a growing importance of multi-lateral financial institutions, development banks, streaming and royalty firms, as well as private equity and venture capital firms starting to fill in the financing gaps in the junior and intermediate sector. Trinity Metals approached the US International Development Finance Corporation (DFC) and was granted US$3.86 million in technical assistance focused primarily on ESG initiatives at its portfolio of projects in Rwanda. Lifezone Metals has also announced the start of a financing process with DFC this year. 

The Industrial Development Corporation (IDC) of South Africa has also become more active in the critical minerals space. Giyani Metals, a battery-grade manganese project developer in Botswana obtained a US$16 million convertible loan from the IDC this year. South African copper developer Orion Minerals also has the backing of the IDC for the financing of its Prieska copper project in South Africa, whereas another South African junior, West Wits Mining, secured a pathway for a loan of US$15.9 million from the South African Development Finance Institution (DFI) for its Qala Shallows gold project. While not directly financing mining projects, the Development Bank of South Africa (DBSA) is assisting with mining-related infrastructure; it recently provided ASX-listed Black Rock Mining, a graphite developer in Tanzania, with up to US$60 million towards upgrading the transmission line at the mine site, and is looking at three or four more critical mineral projects in Southern Africa.

“On the debt side, the appetite remains robust from institutions like AFC and other MDBs, especially in sectors where commodity prices have remained stable and where hedging solutions are available. However, political risk remains a key consideration when evaluating these opportunities. This growing interest signals positive momentum, but the need for strategic partnerships and careful risk assessment is essential to unlocking larger-scale projects,” commented Franklin Edochie, senior vice president at the Africa Finance Corporation (AFC).

The AFC has announced its largest syndicated loan to date, at approximately US$1.16 billion, and is supported by mandated lead arrangers and bookrunners from across the world, including First Abu Dhabi Bank, Emirates NBD Bank, the Bank of China and Standard Chartered. Among its most recent investments, AFC put US$150 million into the development of the Kamoa-Kakula copper complex in the DRC, as well as providing greenfield exploration support to FG Gold’s Baomahun gold mine, the first and largest commercial mine in Sierra Leone. The International Finance Corporation (IFC), African Development Bank Group (AFDB) and the EBRD are also participating more in Africa’s resources sector, whether directly in extractive projects or indirectly through infrastructure support. This year, the EBRD has announced expanding for the first time in Sub-Saharan Africa. Annually, the EBRD provides between US$300 and US$500 million across 10-12 projects in the mining industry across its traditional jurisdictions in Europe, Central Asia, North Africa and the Middle East. The next expansion phase will include six new countries in Sub-Saharan Africa (Benin, Côte d’Ivoire, Ghana, Nigeria, Kenya and Senegal) and a bigger share of mining projects within the bank’s portfolio. 

Vusi Mpofu, sector lead for mining and chemicals at Nedbank, offers a final word from the perspective of a financier: “We are not a seasonal business. In the capital allocation framework, you cannot make decisions based on current macro conditions, but a longer timeframe that spans the life of project must be considered. The mining sector is endowed with a vast history of prudent capital allocation; it survives thanks to this history and culture of being able to make the appropriate capital allocation decisions in anticipation of a future that not everybody sees.”