Following the drop in secondary debt trading, over the past ten months we have seen distressed investors seeking to diversify their portfolios and explore new opportunities, including in the rapidly evolving royalty financing space. We are delighted to have worked with ENSafrica to produce a primer for investors considering mining investments – looking in particular at the economics and structuring of a royalty financing.
Mining investment is projected to surge in coming years, in response to a worldwide push to net-zero. Sustainable investing, incorporating ESG considerations and performance targets into mining projects that form part of the lithium-ion battery value-chain, may provide a means to facilitate the projected increased need for investment in mining.
Unlike in streaming contracts – another common form of financing with the mining sector – investors in royalty financing can take a return on investment without taking responsibility for the physical assets produced. Royalty financing arrangements have the following features:
- Equity-like instrument: The investor takes a non-participating interest in the mine. Investors provide up-front funding in return for an interest in the upside of the mine’s production.
- Diverse portfolio: Alongside a wide investment portfolio generally, investors can diversify their mining investments across multiple jurisdictions and metals to minimise risk. Investors may also negotiate with the mining company to ensure that all minerals recovered at a site are included when calculating return (rather than being limited to only one mineral at a site where multiple minerals may be recovered).
- Limited costs: By engaging in pure financing arrangements, investors have limited overheads for their own employee or operational costs. Moreover, investors are insulated from the potential costs of the mine itself.
- Late-stage investment: Investors provide funding once a mine is already in production, with funding often needed to finance new projects or expansions, and so see a quick return on their investment.
In addition to the benefits of royalty financing for an investor, royalty financing also offers an attractive means of alternate finance for a mining company. Royalty financing is flexible in comparison to traditional finance, as it is focused on revenue return. There is no fixed obligation on payment or deliveries, meaning any temporary delay in production or commodity price fluctuation is of less relevance in royalty financing arrangements.
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“Investors are betting that the rise of electric cars will drive a period of rapid growth for lithium miners and battery producers.” —Financial Times, “Bets on electric vehicles light up lithium miners and battery makers” by Henry Sanderson, 22 July 2021