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How to package your mine to attract investment

By Business Reporter – Monday 18 May 2020

LOCAL – HARARE (Mining Index) – INVESTMENT is the action or process of investing money for a Return on Investment (ROI), which is profit.

An investor is a person or consortium with an input that would enable a mining venture to thrive, and for sustainably may invest finance, expertise or mechanisation.

There are different types of investment but in this presentation, I will focus on debt and equity, as two ways to raise capital for start-ups.

Equity consists of giving an investor a portion of your mine’s stocks in exchange for money.

It is a great way to finance a new project. However, it might be challenging to agree on the terms of the investment when you are projecting to launch a new company and have no metrics to support the valuation of your mine yet.

More so, as a founder, you might want to keep enough equity for yourself to exercise effective control over it (you can also choose to offer only non-voting shares in exchange for your financing, but bear in mind that it makes finding investors harder).

Debt allows you to fund your project in exchange of future repayment plus a premium that generally takes the form of interest.

In equity finance, what do investors look at? How do we package our mines to attract investment?

Know your geological potential

Geological potential is a pre-requisite to investment decisions an investor has to make and the perception of this potential is also affected.

It is therefore important for a miner to be aware of the mineral potential in order for them not to be exploited.

Miners must be aware of the exact requirements for his/her mining venture to be successful. The ‘‘when’’ part is important so as to attract the right investor at the right arrangement.

There is need to do proper valuations in terms of capacity of the business to  ensure correct valuations of operations so that no one will be short-changed in the future. The ‘how’ part of this issue has two main aspects related to it; the administrative and technical aspects.

 

Administrative and Technical requirements

The administrative aspect requires that the mine owner should have the necessary paper work required n order to attract investors. Some of the paper work needed include registration certificates, siting of works, Environmental Impact Assessment (EIA) and production returns (in the case of gold, such as gold deliveries made to Fidelity Printers and Refiners (FPR).

The above necessary paper work is crucial as it falls into the first phase of a mine owner showing transparency and administrative competence, and would give a prospective investor the opportunity of clearly seeing a picture of the mine to be invested in.

Investment Assets

Investors now want to limit the time between acquisition of an asset and the commencement of production. In that light, assets that require significant capital for exploration and preparatory works are sometimes not attractive.

There is need to ascertain and prepare assets for investment if miners intend to attract adequate capital and derive value from their minerals within a short period of time.

This requires a comprehensive geological assessments and setting up basic infrastructure in the areas where the deposits exist.

This allows the miner to present a semi-prepared asset to investors which can be brought to production in a shorter period.

Such an asset will readily have takers compared to an undeveloped asset because it can be brought to a position of production quicker.

In short, investors are attracted to assets where work has been done on them, which makes a project bankable.

The biggest challenge artisanal and small-scale miners (ASM) face is lack of information. Lack of information leads to lack of ability to quantify and embed risks into financial models. Remember, an investor puts money for a ROI.

Investors Prospectus

An investor prospectus should include a business plan with as much data as possible on the production, geology, ore grade, and other mineral risks to the operation.

 Question and Answer

Q:  How can one access old geological reports for mines in Zimbabwe?

A: Old reports can be found in geological books and the bulletin. These can be found at the Zimbabwe Geological Survey Department.

 

Q: Say an investor offers to sponsor 100 percent operational costs on a virgin mine, do you share net profit or output? What is the recommended percentage share of (profit/output) should owner/investor split?

A: You share net profit. Expenses have to be covered. There is no recommended share of profit. It depends on the contribution made and your agreement. I have seen that for local sponsor practices, sharing agreements vary according to areas. Some say 50 percent owner, remaining 50 percent between sponsor and workers. Some split between 40:60 respectively.

 

Q: It is alleged that the ministry of mines maps were tampered with at independence thereby short changing miners of the much needed background information on previous mine locations and records.  How do you suggest remedying this scenario?

A: Some mining houses had data-based or archives of the same records. You can close this gap by using archived data.

 

Q: How authentic are the geological books and where can we access them

A: They are very reliable and historical information and production statistics are given. They are found at Zimbabwe Geological Survey Department, 5th and Selous Avenue in Harare.

 

Q: The geological books from the National Geological Survey offices give records of huge mines covering large tracts of land. As an ASM who has pegged only 10hectares which is not even a significant fraction of the whole mine recorded, how is the same report significant? What if I pegged a portion of the same mine with no mineral?

A: That’s a valid point. Most old mines are now divided. The historical information will assist you all the same. We do not solely depend on historical. You will need to engage a geologist for current information.

There are also some exploration reports done by conglomerates. I have one covering the whole of Odzi. Be friends with geologists. They have the information.

 

Q: Considering the myths and beliefs in our country, where “belts disappear,” where diamonds turn into rubble (the famous pamajecha in Chiadzwa), how can we strike a balance between the geological aspects , customs and traditions?

A: Belts disappear. In geology those are faults.

Can you spot the geological fault?

Q: All aspects being equal, how does one arrive at a price tag at the disposal or offloading of a mine asset?

A: Mine valuation. There are various ways to come up with a value. In Zimbabwean context it is very difficult, but can be done.

Enterprise/resource value takes total resources contained in the ground and divides it by the enterprise value of the business.

Price to Cash Flow (P/CF) ratio is also common but only used for producing mines as it takes the current cash flow in that year, relative to the price in the asset.

There are however many ways used to determine that.

 

Q: Can an investor buy a greenfield based on the geological report only?

A: Yes, but that now depends on the level of confidence carried in the report. It also determines the price.  There are claims being sold for US$5 000 while others for US$100,000 etc.

 

This presentation was done by Kudzai Tuhwe in her own capacity as a miner. Views expressed herein are based on her education and experience.

“Good projects will always get good finance despite the government regulatory policies. Sitting back and saying there is no money is simply not true. It’s a competitive world out there so ASM have to work hard to secure funding.” Errol Smart CEO , Orion Minerals. ENDS// www.miningindex.co.zw

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