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Alternative fundraising model seen flourishing but regulatory issues could stifle uptake in South Africa

DIGGING FOR VALUE New focus has been placed on alternative mining investment platforms, such as crowdfunding, with these funding models arising and proliferating

Photo by Reuters

TRADITIONAL ROUTE While equity crowdfunding could change the junior mining investment space, mining majors would focus on conventional funding paths in the long run

Photo by Northam Platinum

ROGER BAXTER Despite the idea of crowdfunding being an interesting one, the Chamber of Mines sees little relevance of the model in the South African mining market for now

20th May 2016

By: Mia Breytenbach

Creamer Media Deputy Editor: Features

  

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The mining industry is facing increasing risk aversion from equity and debt investors, owing to testing circumstances in the depressed global market, particularly with regard to falling commodity prices, slower economic growth in China and reduced mining production.

Owing to traditional funding options from equity investors and banks being more difficult and costly to obtain, new focus has been placed on alternative mining investment platforms, with alternative funding models subsequently arising and proliferating, states Canada-based equity crowdfunding company Red Cloud Klondike Strike president and CEO Chad Williams.

Among these models – which include convertible debt financing and royalty deals, as well as streaming, where miners are paid cash upfront for future output – the focus in the mining industry is on equity crowdfunding, he says.

Canadian Model
Red Cloud Klondike Strike launched an online mining capital market/equity crowdfunding platform in March to reshape mining investment for junior miners and, ultimately, mining majors.

The platform enables Canadian individual and institutional investors to not only access multiple security offerings of select Canada-based mining companies but also participate directly in security offerings of publicly traded and privately held mining companies, explains Williams.

Sequentially, the mining issuers listed on the platform benefit from an alternative means of capital raising, with access to a fresh pool of investors.

“The traditional funding model is in many ways . . . not functioning well, [while] the Internet has revolutionised every industry in the world,” Wiliams avers, suggesting that it would be “a matter of time before a Web-hosted funding platform revolutionises the manner in which mining companies raise funds”.

“This is a very disruptive type of process,” Williams suggests, adding that fundraising through the Internet will enable Red Cloud Klondike Strike to broaden the availability of the number of investors in a “dramatic fashion”, resulting in “a democratisation” of the mining investment processes.

Significantly, the platform addresses the need for change and innovation in mining finance. To date, fundraising issuers – the mining companies – have relied strongly on their in-house networks or small networks to obtain “love money” (similar to angel investment) that close friends and family raise to fund these smaller companies.

Since the launch of the Red Cloud Klondike Strike platform, three gold companies, a plati- num-group metals (PGM) developer and a uranium developer have listed on the platform. Uranium company Goviex has an asset base in Africa, Canadian-orientated developer Radisson Mining a gold development property in Quebec, Canada, and Sudbury Platinum a PGM project in Ontario, Canada. Similarly, Banyan Gold and IDM Mining are exploring for gold in the Yukon territory and British Columbia, both in Canada, respectively. Subscriptions for IDM funding closed last month, with the company having raised close to $11-million in equity crowdfunding for its projects.

Williams, however, proclaims Red Cloud Klondike Strike to be “commodity agnostic”, with plans to include a variety of commodity-related companies, such as those in the field of copper, lithium, diamonds and zinc, on the platform. He emphasises that Canada is not an exclusive jurisdiction, as Red Cloud Klondike Strike also aims to expand the platform’s reach and is in discussions to open divisions in Europe, Australia, the US and Asia.

“Investors will have interest in high-quality assets, regardless of where they are located. Mining investors have to be open-minded on global mining jurisdictions . . . If investors believe it is a good investment, they will invest, even if the assets are not in Canada,” he argues.

Additionally, there will be no limit to the size of future potential fundraising.

Professional services firm Venmyn Deloitte mining advisory consultant Nicol Crous believes that, while the platform is an agreeable alternative funding/fundraising method for junior miners, with the key advantage of enabling them access to a new market, he points out that mining majors currently struggle to gain access to debt.

“After losing a lot of value in the last year, shareholders dislike having to provide more cash to maintain their current shareholding. Consequently, majors are opting for nonconventional and nondilutive funding options like streaming instead of rights offerings, he says, adding that majors would focus on conventional funding paths from banks and traditional equity exchanges in the long run,” he says.


In aiming to include Africa in its global expansions, Red Cloud Klondike Strike presented the notion of equity crowdfunding to the mining community at this year’s Investing in African Mining Indaba, held in Cape Town, in February. Williams was part of a panel discussion on alternative financing models.

“Despite South Africans tending to be a little more avant-garde in terms of technology and innovation, there is a significant level of intellectual capital and entrepreneurial spirit that might not be as obvious in other parts of the world, and for that reason, I would think of South Africa, in particular, as an area where Red Cloud Klondike Strike could flourish.”

The company has consequently been involved in early discussions with South African partners regarding the establishment of the platform in Africa.

Williams believes that the greater the number of Africa-based mining companies on the platform, the greater the appeal to African investors.

African Attraction
“Some investors are biased towards African assets because they are keen on the potential of the continent,” Williams points out, reiterating the potential of Africa’s mineral wealth.

Crous agrees, predicting that interests in African projects will be substantial. “These projects could be high up on the list . . . particularly if you punt the right aspects of the project, such as good grade or significant resources.”

He warns, however, that many problems associated with African projects do not involve the quality of the resource, but the lack of infrastructure, logistical challenges and political issues; an uninformed investor might not be aware of these factors and, unless the crowdfunding platform advises on these factors, investors could be at risk.

Chamber of Mines of South Africa CEO Roger Baxter says that, despite the idea of crowdfunding being an interesting one, the chamber sees little relevance of the model in the South African mining market for now.

“South African mining investments typically require significant funding – a shaft, for instance – can cost about R5-billion. And the investment is required over a very long time, with paybacks as long as five to ten years,” he notes, adding that crowdfunding tends to attract shorter-term investors with limited funding.

Crous, nevertheless, envisions equity crowdfunding to change the junior mining investment space, as companies having more access to cash in the current environment would probably improve early-stage development of mining projects.

Regulatory Requirements
Baxter points out that the emerging regulatory environment in North America and the UK in respect to crowdfunding is seeking to limit investment, which tends to make it unsuitable for long-term and large-scale projects.

“The US Securities Exchange Commission is developing regulations for crowdfunding which will, in many ways, undermine its very essence,” he suggests.

Crous also highlights the regulatory aspects of crowdfunding platforms in Canada and the US, underlining that these countries have better regulation than South Africa does for investors and fundraisers, which promotes and protects investors.

“Research shows that, traditionally, the better the regulation in terms of securities exchange, the better the capital and the easier it is to get capital because investors, in addition to having all the necessary information, are protected and can manage their risks,” he explains.

“However, regulation with regard to crowdfunding in South Africa is not significant, while the uptake on crowdfunding hasn’t been substantial,” Crous laments.

The regulations would need to be well defined, with a regulatory Act to be drawn up. Similar to the Jobs Act in the US and the Securities Exemption Act in Canada, there is a need for specific exemption for securities and exchange regulations in South Africa, which allows for companies to raise a capped amount of money every year to prevent overinvestment that could potentially damage the economy, he explains.

But not all prospectus exemptions cap the amount of capital that can be raised annually, Red Cloud Klondike Strike points out.

Further, Crous believes that crowdfunding will not gain traction in Africa, or South Africa, soon, as it will take some time before reaching the same level it has overseas. This, he says, is because it takes time to promulgate the regulations, while the investors targeted and project funding will most likely also be from abroad.

Crous suggests that, if a company aims to set up mining-focused crowdfunding in South Africa, it will have to be executed by market professionals, larger banks and trading houses, and boosted by mining brands which can use their influence.

Meanwhile, Baxter, highlights that the South African mining industry is well regulated by law and through the reporting and disclosure requirements required by the JSE, besides other exchanges.

“South Africa is rated first globally in reporting and auditing standards, and third . . . in relation to stock market regulation. This, we think, is a good thing – bringing appropriate levels of due diligence and governance into the way in which mining projects and companies are run. These checks and balances ensure that companies are accountable and investors protected.”

While this might not always be the case, it is far more likely that the riskier investments, which do not hold up against the scrutiny of appropriate levels of due diligence, will seek crowdfunding, says Baxter. “This would be detri- mental to all stakeholders,” he concludes.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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