Mining growth through private investment

In the fall of 2015, following 12 months of weak performance, the TSX metals and mining index was down more than 40 percent. The slump was attributed to falling commodity prices and a slowdown in global GDP growth, which had a negative impact and dragged down mining equities.

However, after a rough 2015 that left many mining companies battered, the sector is recovering and perhaps on track to end this year on a high note.

Some analysts credit the rise in the price of silver and gold to weak performance in the energy sector, which is creating an environment where investors are looking to mining companies to offset the losses their portfolio took in oil and gas.

This of course was further proven earlier this year when oil hit a 12 year low. In a review of the natural resources industry released in January, Moody’s blamed China’s economic slowdown for its gloomy outlook and pointed to a “substantial risk” that oil prices will recover only slowly from decade lows of less than $30 a barrel.

“Even under a scenario with a modest recovery from current prices, producing companies will experience much lower cash flows,” read the Moody’s report.

Despite banks being reluctant to invest, mining companies in North America are gaining large investments due to the private debt fundraising market.

A recent study of private capital in the resources sector commissioned by industry tracker Preqin found significant growth since 2008 in the debt fundraising market, with 54 funds closed for more than 5 years and raising more than $29 billion.

According to the data Preqin collected, there are currently 32 unlisted natural resources funds in the market that will invest in debt and together these funds are targeting an aggregate of $23.2 billion.

The majority of this investment will be earmarked for North America because as the study’s author notes, the region has a longer tradition of private ownership of natural resources assets than many other areas.

It’s estimated that $700 million of the total capital raised is destined for debt financing in mining.  Currently, there are two unlisted metals and mining funds in market planning to invest in debt, both targeting approximately $400m in institutional investor capital.

“Among fund managers with the requisite expertise, the particular financing needs of mining companies may create attractive opportunities,” notes the Preqin report.

But, what does this have to do with Canada’s mining sector?

The short answer is substantive and long term growth. The continued progression of interest in debt fund investment throughout the North American mining sector will help fill the void left by the banks’ inability to meet the financing needs of the sector.

These private debt funds will hopefully encourage mining industry growth and expansion through the funding of ongoing and future projects, which in turn results in favourable effects for the Canadian economy.