A favorable financial climate
Québec's financial ecosystem is a safeguard against market turbulence
The current financing climate for mineral exploration is harsh. Markets are altering their pricing structures in anticipation of a recession, and the US Federal Reserve interest rate increase has added fuel to the fire. Yet Québec has an advantage when attracting the attention of investors.
“Right now, there is a markedly low tolerance for risk, especially when it comes to the more speculative mining prospects,” said Chad Williams, chairman and founder of Red Cloud. “Despite this, there has been a strong demand for Québec flow-through financing, as this style of financing is extremely investor friendly.”
Indeed, the province has designed a particularly robust business climate for mining investment that helps the industry weather the storms that inevitably arise. On the investors’ side, the province’s flow-through share system allows individuals to deduct up to 120% of the cost of their investment. For mining companies themselves, the Mining Tax Act offers various measures to support actors throughout different phases of the mining cycle, such as a refundable duties credit for losses and an allowance for community consultations. To encourage exploration, the Québec government outlines a refund tax credit that provides a refund of up to 38.75% of eligible exploration expenses.
What is truly unique to Québec’s financing ecosystem is the role of quasi-governmental institutions such as Ressources Québec, a business unit of Investissement Québec that manages a C$1 billion Natural Resources and Energy Capital Fund, thereby enabling the provincial government to acquire equity interests in energy and natural resources companies. The role of SIDEX in helping to finance early-stage exploration, Caissse de dépôt du Québec (CDPQ) during the engineering and feasibility phase, and Investissement Québec closer to commercialization cannot be understated, as unlike private investors, these provincial institutions take a more holistic approach towards deciding which projects to fund. As a result, they can afford to take on greater risk when it is deemed to be in the interest of the jurisdiction.
“We are willing and able to take risk when we believe the project has clear benefits to Québec’s economy and is in alignment with our vision of what will drive the industry forward,” commented Jean-François Béland, vice president of Ressources Québec. “The beauty of our model is that we do not look only to financials.”
Instead, Béland highlights that when selecting which projects to fund, Ressources Québec considers the financial viability of a project alongside the impact it will have on the economy and the relationship it has with the Québec social contract.
In many ways, this is how the broader provincial government approaches fostering mining development – putting money where its priorities lie. The support exploration companies receive when conducting activities in the north of the province is a great example; the Mining Tax Act provides an exploration allowance that adds an additional 25% to exploration expenses incurred in the more remote region to help offset the high costs associated with bringing a mine into production in the north.
“The government of Québec supports the mining sector in raising capital, but operators are often interested in foreign investments as well. In many ways, the mining industry is connected at the international level, through capital as well as ideas.”
Jean-Marc Léger, Director, Terrapex
The royalty model thrives in an inflationary environment
The royalty sector provides an additional element of security to the mining investment climate. Unlike debt, which can be a burden to an early-stage company, the financing via a royalty company is only repaid when the mine begins to do well. Given the closer correlation to risk royalty companies have, they play the long game on leveraging astute allocations of capital for bigger payouts down the line.
“Royalties are phenomenal financial instruments to hold, particularly in an inflationary environment, as they commonly come off the gross revenue of a mining operation and are not exposed to increases in costs for discovery and exploration towards new mineral deposits, for building mines, and for maintaining mine operations,” explained David Cole, president and CEO of EMX Royalty Corp. “Royalty holders are exposed to increases in commodity prices, however. I see no better hedge on inflation than royalties.”
An additional benefit to royalties is the potential for a producing royalty to grow without requiring more capital from the royalty company itself. Osisko Gold Royalties has a royalty on Canadian Malartic, the largest within the gold royalty sector. When Agnico Eagle and Yamana Gold announced a US$1.3 billion investment to take the mine underground, Osisko Gold Royalties did not have to contribute a cent. “The royalty model is a go-to for investors looking for gold exposure,” offered Sandeep Singh, the company’s president and CEO. “The mix of lower risk (through greater diversification and lesser opex and capex exposure) and significant upside (through exposure to additional ounces that are discovered on our grounds) has tended to outperform in the mining sector over long periods.”
“While we see long-term value in precious and base metals, we recognize the excitement surrounding battery metals. We are always looking to be counter-cyclical, and we like to acquire prospective mineral rights when prices are down.”
David Cole, President & CEO, EMX Royalty Corp
This long-term advantage becomes all the more apparent in inflationary periods when input costs escalate dramatically. Even if gold remains strong, mining companies will struggle with the burden of cost inflation, thereby undermining the very leverage proposition that investors want. David Garofalo, CEO of Gold Royalty Corp, believes this conflict provides royalty companies an opportunity not only to stand out to investors seeking exposure to commodities, but also to play an important role in financing exploration activities. “In the royalty business, we are purveyors of capital and provide an important element of the capital structure that is fundamental to building new mines,” said Garofalo. “The equity capital markets are not currently open to junior explorer or the developers, but they certainly are open for royalty companies, and we can thus provide access to capital for those developers and explorers which otherwise could not afford to further their assets.”
The advantages to the royalty model have become all the more apparent in the context of mounting geopolitical risk on a global scale, and the endurance of such a model will likely ensure royalty companies maintain their solid footing in mining’s financing ecosystem in the future.
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