Facing a funding shortfall and apathy from public investors, mining companies are increasingly turning to private equity for much-needed capital.
But this alternative and growing funding source is unlikely to prove to be a panacea for the entire industry.
The latest generation of specialized mining private-equity firms is known for being extremely picky, taking months before pulling the trigger on deals, and insisting on tough terms.
Poor industry returns over the past decade, the decline of active management and the flight of investor capital into other sectors such as bitcoin, means the traditional bought deal is no longer the de facto option for mining companies to raise capital in Canada. (In a bought deal, investment banks purchase shares in a mining company at a discount from an issuer and then resell the stock to public investors.)
Against this backdrop, mining companies have been forced to seek out alternative sources of capital, particularly private equity.
Speaking at the Prospectors & Developers Association of Canada (PDAC) convention on Tuesday, Peter Collibee, industry head of global mining and metals with Scotia Capital Inc., said private equity is the single most important new funding source for the mining industry.
"They are providing more money for the development of these larger [mining] projects than any other source," he said.
"They are the backbone at the moment of funding."
Historically, mining was perceived as overly cylical and volatile for private equity. But thanks to decent performance from a number of private equity firms in the sector, it has grown in popularity.
A number of specialized private-equity mining shops have grown in influence over the past few years, including Denham Capital, Waterton Global Resource Management and Orion Resource Partners, which recently raised US$2.1-billion for a new fund.
But the private-equity approach to investing in mining is also vastly different to traditional bought-deal financings.
Private-equity companies are known for being extremely conscientious and careful investors who take their time before committing capital. Doug Silver, portfolio manager with Orion, also speaking at PDAC, said the firm's due diligence on deals usually takes three to six months. By comparison, during the heyday of the commodities bull run in Canada in the mid- to late-2000s, bought deals were sometimes put together in a matter of days.
Specialized private-equity firms also generally only invest in "shovel-ready projects." The investment needs to align with the private equity investment time horizons, which generally run about seven years.
Deal terms are also known for being expensive and stringent. So-called "structured deals" usually see a private equity company take an equity position in a company, streams on future production, and make a debt investment.
Here's how veteran investment banker Egizio Bianchini, outgoing co-head, global metals and mining with BMO Nesbitt Burns Inc., put it, perhaps only half jokingly during PDAC on Tuesday.
"It's like Uncle Guido. He wants a little bit of this and a little bit of that. And if you don't pay him back, he'll break your knees."
That stands in sharp contrast to public investors in the bought deals of yesteryear, who basically hoped for the best when they invested, said Mr. Bianchini, but had no recourse if the stock went to zero.
The other issue is that private equity does not usually invest in exploration companies. The investment timelines are too long and the risk/reward picture not attractive. That means juniors are generally out of luck and can't seek this type of funding.