Rod C. McKeen
Joseph P. Giuffre
Founding Partner
Axium Law Group
Founding Partner
Axium Law Group
So You’ve Found an
Ore Body – Now What?
What Junior Mining Companies Need to
Know About Moving to Production
axium
CORPORATE | FINANCE | LAW
axium
CORPORATE | FINANCE | LAW
Introduction
axium
CORPORATE | FINANCE | LAW
axium
CORPORATE | FINANCE | LAW
Introduction
Historically …
• Exploration companies either sell the
whole company or sell the whole project,
or …
• They enter into a joint venture with a
major company for a passive minority
interest
axium
CORPORATE | FINANCE | LAW
Introduction
However, recently …
• An increasing number of exploration
companies are becoming or looking to
become active producers
axium
CORPORATE | FINANCE | LAW
Introduction
Picture this …
• Assume a scenario where a junior
company owns a 100% (or substantial
majority) interest in a development stage
mineral deposit
• A preliminary feasibility study (or
detailed scoping study) has delineated
the deposit and economic viability
axium
CORPORATE | FINANCE | LAW
Introduction
Picture this … continued
• Management wants to be integrally
involved in advancing the project to
production
axium
CORPORATE | FINANCE | LAW
Introduction
Picture this … continued
• Significant additional funding is required
to move through the feasibility and
construction stages to production
axium
CORPORATE | FINANCE | LAW
Initial Considerations
Getting Organized
axium
CORPORATE | FINANCE | LAW
axium
CORPORATE | FINANCE | LAW
Getting Organized
Make a Plan
• You’re looking at a fundamental
transition in your company
• You need a strategic plan that focuses
primarily on access to financing and
getting your house in order
axium
CORPORATE | FINANCE | LAW
Getting Organized
Takeover Response Planning
• This might be a good time to adopt a
“poison pill” shareholders’ rights plan
axium
CORPORATE | FINANCE | LAW
Getting Organized
Confidentiality Agreement
• Review and upgrade your existing
Confidentiality Agreement for your technical data
• Include a standstill provision that would prevent
a prospective or actual joint venture partner from
acquiring your company for a reasonable time unless it’s a friendly deal
axium
CORPORATE | FINANCE | LAW
Getting Organized
Be One With Your Deal …
• If the property is currently held in a joint
venture, consider ways to unitize the
interest into one company, i.e. merger or
acquisition
• This will improve access to financing
axium
CORPORATE | FINANCE | LAW
Getting Organized
Buy Out Existing Royalties
• Look at buying out existing property
royalties
• These additional burdens can be
problematic at the financing stage
axium
CORPORATE | FINANCE | LAW
Getting Organized
Know Your Options
• Consult with key shareholders and
financiers about the feasibility or
desirability of the available strategic
options
• Your choices will basically be: find a joint
venture partner or go it alone and seek
financing
axium
CORPORATE | FINANCE | LAW
Getting Organized
Assess and Upgrade Your Team
• Add key management members and line
up key advisers with specific experience,
e.g. technical consultants, legal advisors
and financial advisors
axium
CORPORATE | FINANCE | LAW
Getting Organized
Assess and Upgrade Your Due
Diligence Readiness
axium
CORPORATE | FINANCE | LAW
Due Diligence Readiness
axium
CORPORATE | FINANCE | LAW
axium
CORPORATE | FINANCE | LAW
Due Diligence Readiness
Get technical data organized….
• Set up a data room with all technical
information, reports, current permits and
licenses and other technical data
• The data room should be well organized
and comprehensive
axium
CORPORATE | FINANCE | LAW
Due Diligence Readiness
Get ready for legal due diligence review
• Prepare a binder of all material agreements and
obtain English translations
• Get minute books up to date
• Pay any assessment and other fees to ensure all
mineral concessions are in good standing
axium
CORPORATE | FINANCE | LAW
Due Diligence Readiness
Confirm regulatory affairs, permits and title
opinions are in order
• Ensure compliance with your continuous
disclosure requirements including 43-101 reports
• Obtain and/or confirm receipt of required permits
• Obtain and/or update title opinions
• Address outstanding environmental issues
axium
CORPORATE | FINANCE | LAW
Due Diligence Readiness
Financial affairs need to be in order
• Financial statements are be prepared in
accordance with GAAP
• Books and records are accurate and
complete with updated financial and
operational reporting
• A financial plan and budget is in place
for addressing debt/liabilities
axium
CORPORATE | FINANCE | LAW
Letters of Intent / Joint Ventures
axium
CORPORATE | FINANCE | LAW
axium
CORPORATE | FINANCE | LAW
Letters of Intent
LOI is a tool for negotiations
• Letter of intent is a tool used to record the
preliminary understandings and substantive
terms of a transaction in contemplation of a
formal agreement
• It provides a structure for negotiation process
leading up to finalizing the formal agreement
axium
CORPORATE | FINANCE | LAW
Letters of Intent
Keeps negotiation process moving
• Encourages parties to raise difficult deal points
early on and try to resolve them before
negotiating the formal agreement
• Ensures parties adhere to the agreed terms
when negotiating the formal agreement
axium
CORPORATE | FINANCE | LAW
Letters of Intent
The types of Letters of Intent
• A Letter of Intent can be binding, non-binding or
a hybrid with binding and non-binding
provisions.
• Avoid any confusion by using express language
to specify any sections that are binding and
those that are non-binding
axium
CORPORATE | FINANCE | LAW
Letters of Intent
What provisions should be binding?
• It is common for substantive provisions to be
non-binding, as parties will be reluctant to
deviate from these agreed terms in negotiation
of the formal agreement
• Any substantial deviation from agreed
substantive terms will likely put the transaction
in jeopardy
axium
CORPORATE | FINANCE | LAW
Letters of Intent
Common binding provisions…
• Some common binding terms that potential joint
venture parties would expect to see in the LOI:
• A confidentiality provision to encourage
negotiations, allow due diligence
investigations and prevent unauthorized use
of confidential information
axium
CORPORATE | FINANCE | LAW
Letters of Intent
Common binding provisions…
• An exclusivity/non-solicitation clause to
restrict negotiations and restrict discussions
with third parties while the LOI is in effect
• A stand-still clause prevents certain actions
outside of the ordinary course of business
that may cause an adverse effect on the
property or negotiations without prior consent
axium
CORPORATE | FINANCE | LAW
Letters of Intent
Common binding provisions…
• A good faith clause that requires each party
to negotiate the formal agreement in good
faith
• An access to information clause to allow
parties to get access to all necessary
information to conduct due diligence
axium
CORPORATE | FINANCE | LAW
Letters of Intent
Common binding provisions…
• A deadline clause to set a “drop dead date”
when the parties obligations to continue to
negotiate the formal agreement come to an
end and the parties can enter into
discussions with another party
axium
CORPORATE | FINANCE | LAW
Joint Venture Considerations
axium
CORPORATE | FINANCE | LAW
axium
CORPORATE | FINANCE | LAW
Joint Venture Considerations
Typical mining joint venture
• Most often a mining joint venture will
take the form of an option/joint venture
• One party owns the property and the
other party earns in and acquires and
interest by providing certain financing or
making expenditures to complete work
on the property (i.e. a feasibility study)
axium
CORPORATE | FINANCE | LAW
Joint Venture Considerations
What are some of the considerations
• When a junior mining company enters into a JV
with a major or mid-tier producer the
considerations are more complex
• The junior is more dependant on the major for
expertise, financing and development which result
in detailed joint venture negotiations
axium
CORPORATE | FINANCE | LAW
Joint Venture Considerations
Considerations for development and funding
• Determine the basis for making a development
decision (i.e. positive feasibility) and how funds
are to be secured in order to proceed to
development (i.e. equity/debt)
• The junior partner often does not have or may not
have a controlling interest or the financial ability to
fund its share of the development program costs
axium
CORPORATE | FINANCE | LAW
Joint Venture Considerations
Engage outside technical and financial
advisors early if required
• Juniors are typically more dependent on outside
technical consultants to assist in negotiating
parameters for and reviewing a feasibility study
for regulatory compliance and securing financing
• Consider the need to engage a financial advisory
group to assist in raising your share of
development funding within the time required
axium
CORPORATE | FINANCE | LAW
Procedure for Development
Obtain advice for creating the appropriate
joint venture structure
• Joint ventures can be structured in a variety
of ways including general partnerships, a
limited partnership, corporate entity, trust,
unincorporated joint venture, etc.
• Each type of structure raises tax and liability
concerns and a certain structure may be
required by a project financing lender
axium
CORPORATE | FINANCE | LAW
Procedure for Development
What should be in the feasibility study
• It should be comprehensive and deal with all of
the various aspects of permitting, construction
and operation of a mine including infrastructure
• Include social, economic and political
considerations
axium
CORPORATE | FINANCE | LAW
Procedure for Development
Ensure the feasibility study is bankable
• Make it bankable in order for you to seek thirdparty financing for your share of costs unless
you can negotiate with the major to arrange
project debt and your equity participation
• Consult with the preparer to fully understand the
parameters to be used, including projected
costs and required rate of return for the project
to be considered “positive”.
axium
CORPORATE | FINANCE | LAW
Procedure for Development
Who will be operator?
• Usually the major takes over as operator at
feasibility stage but you may be able to
negotiate for your technical/operating
people’s involvement on the ground
• After feasibility, operatorship may be based
on who has the largest percentage interest,
typically also the major
axium
CORPORATE | FINANCE | LAW
Procedure for Development
How are decisions made?
• Most decisions will be through the
management committee. The party with
the greatest interest controls the
management committee
• Negotiate for unanimous or supermajority decision making on
fundamental joint venture issues
axium
CORPORATE | FINANCE | LAW
Procedure for Development
Seek a right to proceed with the
project
• Negotiate for the right to make a
decision to proceed and become the
operator if the operator is not prepared
to proceed to feasibility or to production
• This can be important if the major has
other priorities and decides to put a
good project “on the shelf”
axium
CORPORATE | FINANCE | LAW
Procedure for Development
Development funding
• A portion of development financing is often
done through third-party lenders as project debt
to get benefits of leverage
• Typically there are equity and debt portions to
development financing and the junior participant
may want to minimize the equity portion
• Try to negotiate for the major to arrange the
project debt financing
axium
CORPORATE | FINANCE | LAW
Procedure for Development
Seek a commitment to fund your equity
portion
• Each participant will usually be responsible for
its own share of the equity portion of the project
debt unless you can negotiate for the major to
provide funding for some or all of your equity
share of the development
• Try to secure a commitment from the major to
provide any required completion guarantees
axium
CORPORATE | FINANCE | LAW
Financing Considerations
axium
CORPORATE | FINANCE | LAW
axium
CORPORATE | FINANCE | LAW
Financing Considerations
Look at all the options …
• Talk to different types of financiers
(banks, merchant banks, equity brokers)
• Find out what they are looking for and
what approval process they will go
through
axium
CORPORATE | FINANCE | LAW
Financing Considerations
There is frequently a need to mesh
equity and debt financing …
• Plan carefully to avoid conflicts, i.e.
convertible debt vs. conventional debt
and “chicken and egg” scenarios
axium
CORPORATE | FINANCE | LAW
Financing Considerations
The Mix of Debt and Equity Will be
Driven Primarily by Market
Conditions and the Capital Costs of
the Project
axium
CORPORATE | FINANCE | LAW
Financing Considerations
The Pain Threshold
• There is a point below which the time,
cost and aggravation of a conventional
project debt financing will not make
sense for a junior company
• i.e. if you need $20-$30 million and
equity markets are good – avoid
conventional debt
axium
CORPORATE | FINANCE | LAW
Financing Considerations
Conventional Debt Financing Comes
at a Heavy Price
• Ancillary costs and fees
• Drain on management time
• Long-term restrictions (ie. hedging and
bank requirements and the bank wanting
to, in effect, sit in your board room
axium
CORPORATE | FINANCE | LAW
Financing Considerations
Conventional Debt Financing Comes
at a Heavy Price
• The relationship with the lender is quite
different than with an equity broker. It is
more long term, closer and more
interventionist.
axium
CORPORATE | FINANCE | LAW
Financing Considerations
Be Prepared for Due Diligence (as
discussed above)
• Banks will go over both the project and
your company with a fine-tooth comb
• If you’re not prepared, there will be
delays and more costs
axium
CORPORATE | FINANCE | LAW
Financing Considerations
Royalty Financing
• Selling a royalty to one of the royalty
companies out there may be a useful
part of your financing plan – but be
careful, they are the experts at
negotiating and documenting those
deals
axium
CORPORATE | FINANCE | LAW
Financing Considerations
Unconventional Financing
• We recently saw a project financed by a
high net worth individual who just
wanted to own a piece of a gold mine
axium
CORPORATE | FINANCE | LAW
Financing Considerations
Government Financing
• Depending on where a project is
located, you may be able to get some
funding from government or quasigovernmental sources, e.g. The World
Bank, the European Union, etc.
axium
CORPORATE | FINANCE | LAW
Financing Considerations
Country Risk Insurance
• Depending on where your project is
located you may need this insurance
• Can be quite involved and expensive to
obtain
• Government or quasi-governmental
agencies like EDC and MIGA are worth
talking to
axium
CORPORATE | FINANCE | LAW
Financing Considerations
Insurance
• Overall, insurance is a key area and
getting an experienced, helpful broker is
essential
axium
CORPORATE | FINANCE | LAW
Financing Considerations
Partner Up
• If your project clearly requires significant
project debt, having a much larger joint
venture partner might be advantageous
• The partner’s balance sheet and operating
experience will generally make for more
flexible and beneficial loan terms
axium
CORPORATE | FINANCE | LAW
Financing Considerations
Buckle Up – Debt Financing Ahead
• Plan for very substantial costs and fees as well
as time investment by management
• Independent technical review, insurance, hedging
and legal costs can seriously add up
• This is one reason why smaller ($10 - $30
million) debt financings may be of marginal value
axium
CORPORATE | FINANCE | LAW
Conclusions
axium
CORPORATE | FINANCE | LAW
axium
CORPORATE | FINANCE | LAW
Conclusions
Get the Right People Involved
• Find top notch managers and
advisors and start strategic planning
immediately
axium
CORPORATE | FINANCE | LAW
Conclusions
Understand That It Won’t Be Easy
• But think how much you’ll learn!
axium
CORPORATE | FINANCE | LAW
Rod C. McKeen
Joseph P. Giuffre
Founding Partner
Axium Law Group
Founding Partner
Axium Law Group
Thank You
axium
CORPORATE | FINANCE | LAW
axium
CORPORATE | FINANCE | LAW