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How Do Junior Mining Companies Obtain Funding?

February 19 2021, 12:05 GMT

In order to pay for exploration and development, junior mining companies who don’t have cash flow from existing mines need to obtain funding. Juniors have several funding options, depending on where they are on the Lassonde curve (a realistic representation of the life stages of a junior mining company.)

This article is an introduction to investing in junior mining for beginners in investing and new to mining. It introduces some of the funding options available to companies at different stages of their life cycle. We will be drilling down on these in greater detail over the next few weeks. If you can't wait until then, do join us on cruxinvestor.com/club where we have started a weekly show on finance and funding in mining.

Screenshot 2021-02-19 at 10.33.55The Lassonde Curve. Source: Visual Capitalist 

Private Start-Ups

Many junior miners begin as private start-ups. These are new companies that are restructuring or reappraising an older asset where shareholders were wiped out. Private start-ups bring in new managers and technical staff to redevelop and rebrand the asset. 

The money that goes into these early-stage companies is well-informed and is usually taken out quickly when the company’s share price starts to stabilize.

Investors should take a slow approach to these companies. It’s worthwhile to wait and see how things pan out, and how the company builds up trust with institutions and their network. 

Initial Public Offerings (IPOs)

The primary way juniors obtain funding is by issuing stock. Junior companies can offer shares through an Initial Public Offering (IPO) on a public stock exchange. They often issue stock at a high price, so the original shareholders and founders don’t get too diluted further down the road. 

When a company issues shares through an IPO, it’s important for investors to consider their funding history. If shares come to market at a much higher price than during the private funding rounds, there is a risk of early selling by those who want to take advantage of high prices. In most situations, however, there is minor early selling and the share price gradually settles down. 

Retail investors have less opportunity to engage in IPOs, but it’s worth understanding how they work. Retail investors may want to wait to invest until share prices have settled down after the IPO.

Institutions

Institutional investors in the junior mining space aim to crystallize gains. It can take time for an institution to build trust with a junior miner, as it is a big commitment for an institution to take on a new position. Liquidity is very important for institutional funds, as is maximizing returns. Funds are looking to outperform the market by 10-20%. The right fund can be a great partner for a junior miner. 

Institutional investors can be generalists or specialists. Many of the larger institutions cannot invest in the junior mining space, as investments must be relevant to the size of the fund and juniors have relatively small market caps. Generalist investors typically don’t have the technical understanding of the junior mining sector and aren’t interested in small scale stocks like juniors.

Specialist institutions are better suited for junior miners, although there are very few that can play in the junior sector. These smaller funds are also looking for funding and have to report to their internal investment committees and investment partners. 

Private Equity

Private equity firms began participating in the public sector after the last downturn, as money from generalists, specialists and institutions began slipping away. The teams have extensive technical experience - geologists, engineers, metallurgists - and do extensive due diligence. They commit a significant amount of time to investing in a junior’s project, as they are looking for significant returns - 2 or 3 or even 5 times their money. 

Private equity firms typically run on fund cycles and have an exit strategy in order to market the next round of funding. They typically have a larger unit size (for example, $200M) and fewer positions (10-20) than an institution. As a result, private equity firms can become the dominant position in a company, which can cause an imbalance of power, especially during bad times. 

Private equity within smaller juniors should be approached with caution. Ideally, private equity should be in the picture very early on, or late in the game. Retail investors should consider the dynamic between the private equity team and the junior’s management team - whether or not the teams are aligned and the funding history. It’s not a good sign if a private equity firm is funding at a lower level.

Partnerships with Larger Companies

Junior miners can receive funding and investments from larger mining companies. While private equity firms or institutional funds invest in juniors to make money, major producing companies have little interest in the junior’s share price. Liquidity, share structure and options are not a concern, as they would be for institutional or retail investors.  

Instead, majors are trying to buy access to the junior’s data. They are looking for the next big asset and want to gain a better understanding of the junior’s geographic region. Majors will take a 10-20% position or an exploration agreement with the junior and passively watch as the junior continues to develop the asset. 

It can be a good sign when a major invests in a junior, as it shows they are interested in learning more about the asset. However, retail investors should still consider other factors like funding history and share price issuance.  

Royalties

Junior companies who are in a stress situation will sell royalties. Royalties are the rights to a percentage of production or revenue in exchange for an upfront payment. Be cautious of royalties and look for capped royalties.

 

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