Surge in streaming and alternative funding for African miners

28th January 2025

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"Traditional financing of new ventures in the African mining sector has become increasingly challenging over the past decade," says Wildu du Plessis, a partner at Alchemy. “A variety of non-banking funding structures that might once have been regarded as "exotic" have increased significantly over the period and some of them appear to be almost replacing original funding. But do they function as promised and do they meet the needs of African miners?,” questions Wildu who will be hosting a panel discussion on these and related issues on Monday 3 February in Cape Town, to coincide with the Investing in African Mining Indaba 2025.

According to Wildu and fellow Alchemy partner Morné van der Merwe, access to financing has become increasingly challenging and even restrictive for miners looking to operate in emerging markets such as South Africa and other African countries. They face the high capital demands of operational costs, new project development, and expansion opportunities, often against the backdrop of political and regulatory uncertainty.

"Continually updated and revised banking regulations, stringent loan requirements and fluctuating commodity prices all limit miners' access to traditional bank financing," says Morné. "At the other end of the spectrum, equity finance is difficult to raise without a proven track record and even then is usually very expensive. Coupled with the region’s foreign investment rules and financial restrictions, miners frequently seek alternative non-banking funding sources to progress mining ventures on the continent."

So, what alternatives are available and are they truly viable options? Wildu and Morné provide further insight.

Private Equity and Venture Capital

Private equity investors can provide significant capital infusions making them ideal for early-stage mining projects or exploration ventures. They are generally more risk-tolerant and may well offer strategic guidance too. Typically, capital is provided in exchange for equity or a reasonable level of control including influence in company decision-making.

With fluctuating commodity prices, we notice that these investors are now hedging away from more speculative projects and rather investing capital in established mines. Their funding has also become more specialised and focused on more resource-rich regions and critical minerals.

Notably, there are several South African Private Equity firms that specialise in resource-based investments with some having a particular interest in mining. Examples include funds focusing on gold and platinum and others supporting projects in critical minerals. Additionally, others target projects with strong social impact and incorporate responsible mining practices.

Streaming and Royalty Financing

Streaming financiers and royalty investors provide upfront funding in exchange for a percentage of the mined product or revenue over the life of the mine. This model is appealing to miners as it doesn't entail ownership dilution or incur traditional debt obligations, particularly during the high upfront cost phase of mining operations.

Nedbank analyst Arnold van Graan recognises that "streaming deals have their place and often provide a much-needed lifeline when conventional funding is unavailable", however, he cautions against the high cost of many streaming deals, and believes the benefits don't outweigh the price (Precious Metals, Industry Insight, Nedbank CIB, 8 November 2024).

Export Credit Agencies and Development Finance Institutions

Export Credit Agency (ECA) institutions, active in some countries, support projects that contribute to economic development and can be a viable funding resource option for miners and mining start-ups. Their financing solutions are generally accompanied by beneficial terms such as low interest rates or extended repayment terms. ECAs also specifically support export-oriented mining projects by providing financing or credit guarantees. These are particularly beneficial for projects involving equipment or services from specific countries.

On the Development Finance Institution (DFI) side, one has to start with the International Finance Corporation and its regional branches – they are part of the World Bank and may provide funding for mining projects in developing countries especially if they can demonstrate sustainable environmental, social and governance (ESG) practices. In South Africa, the Industrial Development Corporation (IDC) provides funding to various mining projects that promote job creation, local economic development and the beneficiation of minerals, so mining services fit the bill very well. Almost every European and Asian country will also have its own DFI that would look to provide funding where there is a benefit to businesses operating in that country.

Sustainability Funds

Sustainability funds, designed to support projects that align with environmental, social, and governance (ESG) principles, are an increasingly popular alternative to traditional bank financing for mining businesses in Africa. They may also be known as Green Funds or ESG Funds. These funds typically target initiatives such as reducing greenhouse gas emissions, improved water management, waste reduction, renewable energy projects, and social development. They are often backed by international development organisations, private equity firms and impact investors.

The adoption by miners of these types of funds demonstrates a commitment to ethical and sustainable mining practices, which in turn may attract further investment or partnerships. These funds also ensure alignment with sustainability practices which helps with regulatory compliance. Some of them also offer preferential terms and lower interest rates if the project meets benchmarking requirements.

However, access to these types of funds is still fairly limiting as they are not widely available yet and are more onerous for smaller mining projects. They also have stringent ESG assessments and stakeholder consultation processes making approval times lengthy. For many smaller miners, the additional administrative, monitoring and ongoing reporting requirements for these funds further detract from their appeal.

Prepaids

Prepaids refer to financing arrangements where a borrower, usually a mining company or a commodity producer, receives an upfront payment in exchange for the future delivery of goods or services – a form of repayment. The price is typically fixed using a pre-agreed formula. These are typically structured as prepayment agreements or prepaid commodity forward contracts. Prepaids are not always classified as debt, which can be advantageous for companies seeking to avoid increasing their leverage ratios.

For miners, prepaids are particularly useful when traditional bank loans are inaccessible due to high-risk profiles, low credit ratings, or when they wish to avoid restrictive covenants. The structure leverages the future value of their output to unlock immediate cash flow. Another benefit to miners is that fixing prices can provide a hedge against market volatility, and financiers benefit as they secure physical commodities at a pre-agreed process, thereby reducing market risk.

Delivery and pricing risks are some of the considerations that need to be taken into account when considering this mechanism. The borrower needs to ensure they can meet their future delivery obligations to avoid penalties or defaults. Also, locking in a price in advance may lead to opportunity costs if market prices rise significantly. Unique legal and tax implications also need to be managed carefully.

Joint Ventures and Strategic Partnerships

Increasingly, smaller mining companies are seeking strategic partnerships with established industry players who can provide both capital and operational expertise. This is fairly common in South Africa, and the approach helps both partners meet the Mining Charter's transformational goals to advance inclusivity.

The pros and cons of alternative funding

Alternative mechanisms to traditional financing options are prevalent and growing as we see by the number of different structures that exist. In the majority of mechanisms, the advantages for miners include critical upfront cash flow, no or little equity dilution, and risk sharing. However, financing through them still remains challenging. Non-banking structures often come with stringent contractual obligations which may include specified volume deliveries; fixed pricing may limit miners if commodity prices soar; and the adopted structure may need to be secured against specific assets or streams which will limit the miner's flexibility in managing resources. Moreover, complex and varied regulatory landscapes in African jurisdictions can complicate the implementation of these structures, and, infrastructure, political instability, and logistical challenges prevalent in some parts of Africa can disrupt production, increasing the risks associated with these arrangements. The costs involved in negotiating and managing these alternative contracts may also be high and time-consuming.

Yet, the high-risk profile of many African mining projects and limited traditional financing channels suggest that these alternative structures can help bridge a crucial funding gap to enable miners and perhaps more specifically smaller miners access to the capital needed for exploration, development, and operation.

There are certainly options to explore, and for miners seeking funding, a thorough understanding of the various financing solutions is crucial. The regulatory environment, political stability, cross-border investing, financial restrictions, ESG compliance, and commodity demand cycles are some of the key considerations when looking at alternative funding options. And, in South Africa, non-traditional funding needs to intertwine financing with wider policy objectives, especially in promoting transformation and sustainability within the mining sector and for alignment with the Mining Charter.

Do these alternative funding structures function as promised?

In general, for financiers many of these mechanisms secure a predictable and often profitable return on investment that is tied to production volumes. For miners, the benefits will depend on the terms of the agreement and the project's success. Positive outcomes will certainly be realised for those with a respectable balance sheet, robust operations and stable production. However, unforeseen operational issues, difficult market conditions, the ability to manage risks effectively, and political instability can make these transactions burdensome and even untenable. They therefore need to be carefully negotiated and tailored to the specific risks and requirements of individual projects.

Alchemy will be hosting a panel discussion, in the light of new and innovative thinking, to unpack the alchemy of these tried-and-tested paths and dig deeper into the modern world funding challenges faced by the mining sector in Africa. The session will bring together perspectives from a miner, a streamer, a banker, and an investment analyst.

Should you wish to attend the panel discussion, please contact Bruce Schubach.

Edited by Creamer Media Reporter