Navigating Project Financing In The New Normal

The past year has been anything but uneventful for the global economy in the context of the “new normal” that we have all gradually adjusted to since last March. Like all other major drivers of economic growth and development, the African mining sector has had its fair share of dealing with the pandemic, though it has shown remarkable resilience even in these unprecedented times.

Performance among some of the majors was buoyed by stronger commodity prices, particularly in the platinum and gold sectors where investors flocked to mitigate the negative impacts of the pandemic.

This boded well for various African commodity markets including Cameroon, Ghana, South Africa and Zimbabwe in propping up struggling economies. However though positive in the short term, the overall sentiment held by investors regarding financing new project initiatives in the longer term has been one of muteness and caution.

Depending on how the pandemic progresses into 2021, various considerations will be taken into account by prospective investors looking at mining opportunities in Africa. Among others will be the possibility of new operations being shut down if the incidence of COVID-19 infections rises, which in turn will affect construction and production targets and the ability to meet financial obligations and covenants.

Additionally, it will strain the ability to visit project sites should there be travel restrictions imposed, which will have a further knock-on negative impact on the broader mining sector value chain, from logistics and transportation through to materials availability and equipment supply. In crafting viable financing strategies going forward it will be important to develop the right foundation for rebuilding lost growth.

Exploring IFI funding avenues

The historical view of the African mining space has been one of exploitation of local labour and environmental degradation to the benefit of international companies and foreign investors.

In recent years, however, a lot more emphasis has been placed on the way major mining companies are contributing in meaningful ways to development initiatives, and in particular their environmental, social and governance initiatives (ESG).

Though many have stepped up to fight, the current challenges posed by COVID-19 with donations of personal protective equipment, the longer-term strategies that a number have put in place concerning community development, and resilience, are being brought to the forefront.

Given the precarious investment climate yet pressing need to bring back economic activity to pre-COVID levels, there is scope for international finance institutions (IFIs) to get involved in supporting mining initiatives that would have a stronger emphasis on local beneficiation.

Getting buy-in from major organisations like the African Development Bank (AfDB) and the International Finance Corporation, and even other bilateral agencies such as Germany’s KfW and GIZ, and Finland’s FinnFund, will aid mining companies to raise sufficient capital and increase the financial viability of more risky projects.

The AfDB for one has been a supporter of the African extractives sector for some time through its African Natural Resources Centre and African Legal Support Facility (ALSF) which both look to facilitate the ability for African countries to secure beneficial mining deals. This strategy can be expanded on through more targeted roundtable discussions between the private sector, government and IFI stakeholders.

Offloading non-critical assets and consolidating operations

Bringing on board IFIs will in part address the need for liquidity in the sector given tight forecasted expenditures on new projects. Looking for additional financiers to provide for possible repayment moratoriums on interest and capital while also negotiating favourable lending rates are viable options to consider.

For their own part, mining companies need to also relook their balance sheets in optimising existing costs in freeing up working capital to capture on potential opportunities as they emerge over the course of the year. Non-core assets could be sold, with asset financing sought in opening up available cash flow to sustain operations.

Considering the volatility of markets at the present time, looking for asset financing will prove more cost-effective than leasing, particularly for operators that have long-term projects in the pipeline.

In a parallel vein mining companies should also look to consolidate on existing operations in minimising their operating expenses, and redirecting resources towards more productive operations. Doing so will free up additional liquid capital for project investments, while also providing assurance to shareholders that risk exposure is being reduced.

Connecting the dots

Though the new normal has had a considerably negative impact on the global economy, it also presents an opportunity to start anew in many respects. Constrained demand for minerals amid weak economic growth and a growing emphasis on ESG issues in the mining space are placing mining companies in a precarious position and requires careful consideration in managing all stakeholder expectations.

Even if mining companies are able to minimise costs in leaning out their expenses, they will still require financial support in getting new projects off the ground.

Should IFI funding avenues be sought without clear ESG targets in place, future project efforts are likely to run into various hurdles, both specific to host markets looking to eek as much local beneficiation as possible as well as global imperatives.

What is certain is that two other facets not discussed herein, namely mine automation/digitalisation and the global energy transition, will exert their own influence as 2021 unfolds, thereby necessitating fast and decisive action on the part of all stakeholders.