As any industry veteran knows, mining is cyclical.

What followed Australia’s most recent boom wasn’t so much a bust but more of a consolidation, as the big miners tightened their operations and focused on costs. At the same time, it became a bit more difficult for smaller players to get projects off the ground.

The problem appears to have become more acute in the last 18-24 months, reflected in a lack of risk appetite from traditional funding sources (namely, equity markets) — particularly for projects that are still in the exploration phase.

Just yesterday, Manganese miner Rolek Resources gave up on its plans for a backdoor-listing on the ASX, citing a lack of interest among equity investors for junior miners.

In response, an increasing number of industry players are discussing alternative sources of financing. It’s currently a topical theme in the sector, with a panel at the Melbourne Mining Club scheduled to discuss the future of mining funding in early May.

For starters, where are the instos?

Hedley Widdup, executive director at fund manager Lion Selection Group, says he’s noted a broader change in the allocation of mining capital by large fund managers, towards more of a short-term view.

“I don’t know if there has been a complete shift of landscape for institutional money — it could be cyclical or more permanent — but I certainly don’t see nearly as many long term and patient investors as there used to be supporting companies wanting to develop new mining projects,” he told Stockhead.

“It’s quite possible that as the cycle moves on, more institutions will be investing in the mining space and presumably some money will trickle down into the riskier development space.”

“But I’m not sure that money will be long term, so it’s questionable how beneficial that will be for developers – they might get the money to start with but could be vulnerable after that if their share price weakens.”

The four-letter word

For Graeme Testar, director at Perth-based corporate advisory firm PCF Capital, the financing struggles of junior miners have derived mainly from changes in the risk metrics for debt funding.

“Ultimately, there’s not a lack of capital in the sector. In fact, to borrow a phrase there’s enough debt to choke a horse,” he told Stockhead.

The problem now is how to make that funding fit within a more conservative financing structure.

“It’s not a lack of capital, but the cost of capital. So previously, say the capital structure was 70/30 debt-to-equity or 60/40, that ratio’s come back to 50/50,” Testar said.

“Lenders are demanding an extra 50-100 basis points to satisfy the cost of that capital. Now an extra one per cent for debt funding shouldn’t shouldn’t see a project fall over, but it makes it difficult when you consider balancing the equity side to fit the new structure.”

Competition for early-stage equity funding is also heating up, with the rise of the cannabis sector and cryptocurrency. Following a recent trip to Canada, Testar noted that crypto has come off sharply but cannabis “definitely has not”.

The net result is that there’s increased competition for equity capital, at the same time as equity markets are being forced to pick up the slack from a reduction in debt finance. Mr Widdup noticed a similar trend.

“I suspect traditional debt and all the forms of semi-traditional debt are still available and vibrant, but have always relied on the equity market to do its part,” he said.

Looking for alternatives

So if traditional funding sources aren’t coming to the party, where else should mining companies be looking?

One option that’s been recently tabled in an increasing number of circles is private equity. Although according to Mr Testar, it’s not exactly a new player in the space.

“The PE model isn’t new by any stretch – names like Taurus and Orion have been around for a long time,” he said.

“But those are the big names, and what you’re seeing now is new entrants, smaller players that are more nimble looking for opportunities.”

Mr Widdup highlighted PE has a potential source of alternative financing, noting there are some great teams in the space who “know mining well”. However, he said managing the risks associated with exploration-stage projects won’t be easy.

“Historically, PE funding has been much more a source of ‘renovation’ rather than ‘development’ funding,” he said.

“PE is very risk aware, and its exceptionally hard to manage the risks through project development without also applying fall-back funding which eats into PE returns.”

Did someone say crypto?

Last October, the team at PCF presented a novel financing idea to the market: security token funding.

Perhaps best described as crypto-adjacent, security tokens attach an underlying financial security to a crypto token that’s stored on a blockchain.

PCF’s proposed Future Gold token will be backed by the future royalty streams derived from gold mines in production, and will be used to fund early-stage projects by opening them up to a new class of investors.

The company wants to class its Future Gold token as a Managed Investment Scheme in the Australian market, in accordance with ASIC guidelines. Implementing the idea across the global marketplace is proving more challenging, but Mr Testar is optimistic.

“It’s still on,” he said. “But there’s of work and regulatory hurdles to clear first.”

“It’s mainly about how the structure works from a global perspective. We want to offer a product that isn’t limited by jurisdiction – so whether it’s the US, Europe or Asia it really doesn’t matter, but adhering to the regulations across each of those jurisdictions is the main challenge.”

“Can I give you a time frame? Not yet, but we’re looking at some time later this year,” he said.

A successful security token in Australian mining — now that would certainly get the market talking.

Then there’s exchange traded funds (ETFs), the huge passive investment managers that have drawn in trillions of dollars in capital over recent years.

If active fund managers are staying away from the space, perhaps an ETF indexed around junior Australian gold miners could help free up some capital?

Unlikely, says Mr Widdup. For starters, they “certainly don’t fund mine development!”

In addition, “ETF’s can buy and hold stocks so are perhaps “long-term” money, but the ETF pools of money are large and driven by achieving a model weighting and not a fundamental,” he says.

That means if certain metrics aren’t reached, ETF fund flows will automatically reduce their exposure to a specific stock or sector, and it could be for reasons “totally detached from company performance or influence”.

So on the whole, it increasingly looks like the industry will have to turn to alternative sources of funding on private markets.

Whether that’s increased PE participation, new ideas around debt financing or security token funding will be an interesting debate.

For now though, many smaller mining companies continue to face challenges in funding their projects from the exploration stage through to development and production.