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What finance solutions are available for mining companies?
11 January 2018
What finance solutions are available for mining companies?

Starting a mining project can be an enormous undertaking. One of the most important and difficult aspects of the project is finding finance to purchase equipment and other necessities. However, there are options that cater for projects such as this, which will be outlined below. 

 

Choose an instalment sale

One of the most popular asset finance solutions among the mining industry is an instalment sale. This is because it grants you ownership at the end of the final payment of the loan, which means that you will have the equipment to use for years to come, or sell in order to make up the money spent on the loan. 

An instalment sale also means that interest payments and capital allowances may be claimed as income tax deductions. You will be able to claim money back once the term has finished, and inject this straight into your company to use for expenses and other repayments. However, be sure to carefully examine the terms and conditions of the instalment sale before making such a commitment. 

 

Choose to lease the equipment

A lease agreement is another solution for mining companies. In today’s world, technology and equipment are being updated rapidly, and so continuously buying new equipment would be a drain on the finances of your company. Leasing the equipment allows you to upgrade the equipment as you need, granted this is in your lease agreement terms. 

Some lease agreements allow you to own the asset after the last payment, and the payments may be claimed as an income tax deduction. Leasing could end up costing you more in the long run, but for an immediate solution it is a good option to consider. 

 

Consider bridge finance

Bridging finance or a bridge loan is applicable for the preliminary stages of the project. Many commercial banks are willing to lend on a short-term basis as they know that companies will be able to repay these bridging loans at any time, without a prepayment penalty thus making it a lower risk option. 

Bridge finance does come with its own risks. The bridge lender may ask you for the same security or collateral as a larger lender which can be problematic if you are on a tight budget or do not have sufficient collateral for both loans. Using this type of finance is better suited to projects that are underway but which need further funds to bridge the gap between two longer-term financing loans. 

 

Examine Export Credit Finance

Export Credit Finance (ECF) requires a mining company to source its equipment/assets from a particular jurisdiction. The ECA (Export Credit Agency) of that jurisdiction will then provide support to the project company in relation to the relevant equipment supply contract. 

Choosing ECF will increase the debt capacity of the project, and many commercial banks are willing to grant loans to mining projects that are backed by ECAs. Further, if an ECA lends directly to a project, this will reduce the reliance on commercial bank debt, encouraging commercial banks to cover the residual funding requirement due to there being government support involved. 

 

Look for a venture capitalist

Finding a venture capitalist during the pre-feasibility stage of your project is the ideal option for those who do not have much startup capital but have a project that is guaranteed to succeed. A venture capitalist is usually a wealthy investor who has a passion for the project, in this case, mining. 

These venture capitalists can afford to lose a little a money during less successful months of the company, which is why they are willing to invest. There are certain criteria you will need to meet, so it is best to ascertain all the details of the agreement you enter into with the investor before signing. One downside is that the investor may want to have a certain amount of control over the direction of the project, which can affect productivity and profit. 

 

Offtake financing is an option

Offtake financing is another innovative financing option that has come to the fore in recent years. If lenders see that there is a purchaser for the product of the mining product, it makes it easier to obtain finance for the building of a structure to begin the project.  

Offtake agreements are used in natural resource industries, in which the capital costs to extract the product are high and the company wants a guarantee that the product will be purchased. You are able to renegotiate an offtake agreement should you feel it is not working out, however, you most likely will incur a fee or penalty from the purchasing company. 

 

Conclusion

Financing for a mining company can often be a difficult process to undertake, especially as traditional banks consider it a high-risk industry. If you look into alternative funding methods, however, you will be able to find one suitable to your needs in order to begin your project. 
 

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