Financing in Difficult Times: Joint Ventures
With the start of 2013, many of the uncertainties that plagued the capital markets in 2012 show little sign of quick resolution. Investors remain very much uncertain over near-term global economic recovery with continued debt-fuelled concerns over the state of the European economy and the “fiscal cliff” drama unfolding in the United States.
Traditional capital raising methods for many mining companies continue to be elusive. Even where equity financing is available, it is often at levels so dilutive that companies are reluctant to pursue it. Debt financing upon palatable terms also continues to be a challenge.
Our goal is to present a series of alternative financing methods that may be available to mining companies where other more traditional routes are cut off. This article will take a closer look at joint ventures (“JV”) as a source of alternate financing.
Alternative Financing Methods: Joint Ventures – Benefits and Issues
The typical participants in a mining JV arrangement are a cash or expertise-poor junior mining company with a potentially attractive property and a major mining company, usually with a strong cash balance and a need to replenish its project pipeline. For the junior mining company, the benefits of entering into a JV with a major include providing project validation, securing technical support as well as market access. Depending on the type of JV arranged, the junior can continue to maintain a significant level of ownership interest in the project.
The greatest drawback for the junior mining company entering into a JV arrangement is that it will usually be required to give up operatorship over the project to another party that may not have the same short-term goals as the junior. Also, once a JV agreement is signed, the availability of other types of financing may become more difficult to obtain.
Notwithstanding the drawbacks, a JV may be the best way forward for a mining company that has a sound property.
Joint Ventures – Structure
The first decision the future JV parties will need to make is the form of the JV. JVs in Canada can be broadly slotted into three classes: Incorporated, Unincorporated and Hybrid. The decision of JV form will be driven by considerations such as tax treatment, existing corporate structure of the current project owner, local law considerations and liability/bankruptcy concerns.
Unincorporated JVs are, relatively speaking, the easiest to set up. They are creatures of common law and equity and the rights of the JV parties will be wholly housed within the JV agreement (as opposed to some reliance on corporate law under an incorporated JV). An unincorporated JV structure is generally also an effective flow-through vehicle for tax losses and revenues.
Under an incorporated JV, the parties are shareholders in a corporation that serves as the JV vehicle and which (normally) also owns the target property. While this form of JV may provide more certainty as it draws in a body of corporate law, it may also result in less flexibility and greater complexity for the parties with respect to governance or dilution-related provisions in the JV agreement. From a tax view, an incorporated JV may suffer from a degree of tax inefficiency. Statutory debt and equity ratios along with thin capitalization rules maybe also constrain the ability of the JV parties to fund the JV using debt.
Joint Ventures – Agreement Terms
A common concern for a junior mining company is that it will be out-spent and diluted out of its project by the major mining company. Accordingly, one of the most important provisions in any JV agreement will be the earn-in terms by which the major mining company will earn its interest in the JV and the target property. It is in both parties’ interest to ensure that the deliverables are objective and controllable and focus on the funding of work to move the project forward. However, timing of the earn-in obligations is often a source of conflict as the major mining company will want as much time as possible to complete its earn-in as well as having a clear right to walk away. Conversely, the junior mining company will want to avoid extended periods of inactivity during the earn-in period and require a minimum spending commitment from the major mining company.
Project financing is often another source of debate when drafting joint venture agreements. From a junior’s perspective, the whole point of a joint venture with a major may be to have access to funds that would otherwise be difficult to obtain. On the other hand a major mining company will typically want to avoid funding a junior or otherwise carrying it and will want the ability to move the project forward regardless of the junior mining company’s ability to obtain financing.
One way in which junior mining companies will often claw back some level of control over a JV project will be through minority protection provisions. These provisions often require much time spent negotiating what amounts to a form of veto power on the part of the junior mining company. It is, however, typical for the major mining company to agree to a few minority protection provisions, such as protections against disposal of project assets.
Finally, the procedure for how the JV participants will reach a development decision should be approached with caution by both sides. The obvious concern for a junior mining company is that a development decision will be made by the major mining company without its consent, particularly when coupled with a lack of project financing. At other times the junior will be concerned that a major mining company will avoid or delay making a development decision in favour of focusing on other projects in its pipeline. In such instances, the junior may seek to have the power to force a development decision.
Joint Ventures – Conclusion
In a climate where funds for exploration are unavailable, many mining companies may find that a joint venture solution is one of the few options available to keep a project moving forward.
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