Historic and long-term middle income growth trends, urbanization, and clean energy development combined are set to put more demands on the mining industry than ever before, creating a variety of new opportunities for investors. Investment will be required in many forms across the capital structure of companies. Credit will be particularly important to support the increased production of energy transition metals, the demand for which is poised to grow exponentially over the coming decades.
The long-term trends underlying economic growth continue: globally, 4.7 billion people have moved into middle income status between 1981 and 20211, and the growing middle class demands consumer goods and amenities, from electronics to housing, that are only made possible by metals and mining. By 2030, 60% of the world’s population will live in urban areas2, and this growing urbanization will bring increased need for reliable power, transportation, telecommunications, and sanitation, all of which are supported by metals. These needs must be met in a responsible and just manner to mitigate the risks of rising poverty and inequality where mines operate: ideally, mining has the capacity to have a positive impact, helping to address some of the issues such as through local employment and other community-based programs.
In addition to this, the green energy transition is already starting to propel unprecedented demand for many types of mined materials. Electric vehicles, hydrogen power, and renewable energy all depend on increasing amounts of critical metals and minerals such as lithium, copper, graphite, platinum, aluminium, manganese, and zinc.
But despite a clear need to ramp up production, capital is not flowing into the industry with anything close to the volume needed to keep pace with growing demand. Traditionally, investors have been cautious of mining, given its perceived cyclicality and technical risks. As a result, smaller mining companies are struggling to secure funds and so they are turning to alternative financing options, including SPACs, costly asset and production-based funding and sales structures such as royalties and streaming, and even crowdfunding3.
Lack of Commercial Bank Financing Paves Way for Private Debt
In parallel with the opportunity for private equity to solve the equity capital gap, a significant opportunity for private credit has also emerged. In 2010, there were approximately 20 or so global banks4 willing to lend to small-cap miners. But with changes in funding models, a reduction in commodity hedging, less appetite for risk, and a lack of technical expertise, the number of banks willing to invest in mines has fallen to only five or six, leaving small to mid-cap, sub-investment grade public and private mining companies with fewer options.
The gap in available credit liquidity reinforces the investment opportunities for private debt. The opportunity is clear: with demand ready to take off and mining companies hungry for capital, metals and minerals offer investors an opportunity to gain exposure to the resources sector and the new energy mix, beyond the traditional energy oil & gas markets, while supporting the transition to cleaner energy. And, with a lack of commercial lending available, private credit may offer a unique opportunity for savvy investors looking to take advantage of macro mining investment trends.
Downside Protection, Upside Potential
By providing attractive returns with stable yields across a diversified and flexible portfolio, a dedicated credit strategy offers investors exposure to the opportunities in mining while mitigating many of the perceived risks. Because it is the last money in after a significant equity buffer (usually 30-40%) has been invested, credit has a chance to invest through the de-risking phase as the mine is developed to start-up of operations.
Credit transactions are structured to provide downside protection, mitigating risk of capital loss while ensuring a predictable minimum contracted return. However, credit transactions can be structured to provide upside potential and to generate outsized returns through exposure to the underlying commodity price, asset performance, or equity.
However, credit investments will be structured to mitigate the default risk in a market downturn, benefiting from security over hard assets. In addition, credit investments valuations are linked to long term performance and outlook through return of capital and interest over the scheduled tenor: this gives investors the flexibility to deploy without reference to the short-term market views of equity valuations or commodity price.
Investing in Green Energy
While the oil & gas sector has benefited from a recent rebound, the long-term shift to cleaner, greener energy has enormous potential for investors—and they know it. Investment in clean energy jumped 27% from 2020 to 2021, with global investment in transitional technologies reaching $755 billion and $165 billion in climate-tech equity investment5.
However, these energy transition technologies – from solar panels to wind turbines, batteries, and all forms of electrical generation and transmission equipment – will be created from minerals and metals that must be mined. To cite just one example, the average weight of an EV is about 200 kg higher than an internal combustion car6—and almost all of that added weight (as well as the rest of the vehicle) comes from mined materials. Investment in the raw materials that are fundamental to these technologies provides the opportunity to invest in under-penetrated markets and gain balanced exposure across the energy transition supply chain.
A Paradigm Shift in Demand
To meet the goal of net zero carbon emissions by 2050, clean energy innovation and deployment need to accelerate rapidly. The required infrastructure and capacity will drive a sustained period of demand growth for critical minerals over the next three decades and beyond. A credit strategy focused on transition metals can yield returns for investors, while also playing a role in facilitating global decarbonization efforts.
Energy transition will drive secular demand for critical minerals over the next several decades to deliver new infrastructure and capacity required to meet climate goals.
Figure 1: EV Sales
Figure 2: Total Battery Storage Capacity
Figure 3: Total Solar PV Capacity
Figure 4: Total Wind Capacity
Source: 2040 figures based on IEA’s Sustainable Development Scenario, Approximations from the Role of Approximations from The Role of Critical Minerals in Clean Energy Transitions, IEA, Paris, except for growth figures which are stated, Bloomberg New Energy Finance, June 2022.
Figure 5: Electric Cars vs. Conventional Cars
EVs contain +6x more critical minerals than ICE cars.
Source: IEA, The Role of Critical Minerals in Clean Energy Transitions, 2021, Paris
Figure 6: Wind vs. Solar vs. Nuclear vs. Coal
Clean energy production contains significantly more (2-5x more) critical minerals than fossil fuel sources.
Source: IEA, The Role of Critical Minerals in Clean Energy Transitions, 2021, Paris
Critical Metals for Energy Transition
- Primary Transition Metals
- Metals that are expected to see significant demand growth due to energy transition application and/or which are critical to the realization of the energy transition.
- Secondary Transition & Strategic Metals
- Metals for which the energy transition will be one of several drivers for demand growth and/or which are considered strategic for wider economic growth.
Source: IEA, The Role of Critical Minerals in Clean Energy Transitions, 2021, Paris
Primary Uses of Critical Transition Metals
1. Renewable power generation
The energy transition from fossil fuel-based power generation to renewable power, including wind, solar, and nuclear, requires substituting out hydrocarbons for metals and minerals inputs. It’s estimated that two-thirds of the total energy supply in 2050 will come from solar, wind, geothermal, bioenergy, and hydro energy; solar alone is expected to account for 20% of energy supplies. Solar photovoltaic (PV) capacity, which relies on copper, silicon, silver, and zinc, is predicted to increase 20x by 20507,8.
2. Electric vehicles and EV batteries
The transition from internal combustion engines (ICEs) to battery electric vehicles (BEVs) essentially involves substituting hydrocarbon with metals and mineral inputs. The number of electric vehicles sold globally is expected to increase from 3 million in 2020 to 66 million in 20409. Electric vehicles contain, on average, about 6x the amount of metal and mineral inputs of a conventional car. Battery demand for nickel, cobalt, and copper alone is set to increase 144x, 70x, and 25x, respectively. California’s new 2035 zero-emissions vehicle mandate highlights this trend.
3. Power storage and grid infrastructure
The intermittent nature of renewable power generation means that the establishment of energy storage systems is critical to the resilience of the energy grid. This will require the build out of substantial battery systems which represents further demand for metals. As a key component of lithium-ion battery anodes10, graphite is projected to grow in demand by 25% by 204011. Vanadium flow batteries (VFBs), which are well suited for grid storage roles, are expected to become commercially available around 2030 and are projected to increase the demand for Vanadium by over 100x. Significant investment and expansion of power infrastructure will be required to ensure a resilient and reliable grid network as reliance on renewable and more dispersed energy sources occurs, this investment will increase demand for copper, which is expected to more than double between 2030 and 204012.
4. Green Hydrogen
The emergence of green hydrogen as a pathway to achieve net zero in hard-to-decarbonize industries (e.g., to create “green steel”) further demonstrates the importance of metals to the global energy transition. The production of green hydrogen will require significant volumes of platinum group metals, a key component of the electrolyzers at the heart of the hydrogen production process. The IEA notes that hydrogen demand will need to more than double, from 94MT in 2021 to 200MT by 203013, if the world is going to keep pace with net zero emission goals by 2050. This hydrogen demand will require a step change in the level of investment in Platinum Group Metal14 (PGM) mining and refining to achieve needed growth.
Seven Advantages of Credit Investments in the Mining Industry
Alternative financing has grown significantly, but mining remains underrepresented, and many mining companies struggle to secure adequate funding despite the growing demand for metals and minerals. Institutional investors looking for higher returns have increased their allocations to alternative asset classes15, yet mining still represents less than 1% of the $8 trillion in total global assets under management16.
Moreover, the emphasis of these investments is often on equity, while credit is frequently overlooked. But mines and their equity investors need access to credit—and credit offers investors the opportunity to generate attractive, sustainable yields with upside potential whilst remaining senior to other capital sources.
1. Complement to equity
The returns on credit can become an attractive diversifier to equity, with structured return profiles that are sustainable through downside conditions.
2. Optimizing the value of equity
All projects require equity and debt (often on a debt-to-equity ratio of 60/40). Debt provides non-dilutive funding to complete the funding for the project to be developed, with a structured return, while equity preserves its full (undiluted) ownership and full exposure to asset development and commodity prices over the long term.
3. Reduced capital hold risk
Credit deals are structured with a predetermined exit at a particular time, usually on an amortizing repayment schedule over the tenor of the investment. These are tailored to ensure the return of capital under downside scenarios. This provides a reduced capital hold risk enabling a higher confidence in the target risk/return profile.
4. Inflation hedge
Real assets and the commodities they produce often act as a natural hedge to inflation risks as rising prices lead to increased revenues for mines in the production phase. Therefore this sector should have low non-performance rates due to inflation while other sectors are materially impacted.
5. Diversified portfolios
Capital can be selectively deployed in a diversified portfolio at different points and in different opportunities across the mining lifecycle, including:
- Development capital – debt financing for new mining and metals projects, processing capacity, and related infrastructure
- Growth capital – debt financing in support of mining and metals companies’ operating capital needs and in support of expansion and acquisition growth
- Special situations – opportunistic investments in public or bank debt of mining companies to capture value opportunities.
6. Secured debt
As a secured lender, investors benefit from preferred return of capital in any downside restructuring reducing the risk of loss of capital compared to other investment strategies.
7. Yield during investment cycle
Credit strategies can offer predictable and sustainable yields over the life of the investment, with loans to the sector typically floating rate eliminating yield erosion in a rising base rate environment.
Why Credit, Why Now?
Between the growing global population, the trend toward urbanization, and the need for alternatives to traditional energy, the need for transition metals will only get stronger. Moreover, while investors are flocking to clean energy opportunities, most are deploying capital to other parts of the green energy value chain but forgetting about the foundation—mining—on which it rests.
Since the global financial crisis, there has been a material reduction in commercial bank lending to the mining sector, limiting banks’ ability to respond to new investment needs—specifically, creating a scalable market opportunity to deploy capital.
Together, these circumstances have created significant opportunities for investors. The energy transition will underpin significant new metal demand over the next 20 years, requiring trillions of dollars of new capital investment in new mine supply and processing capacity. Private debt and credit offer ways for investors to capitalize on the demand for metals while diversifying risk with equity investing.
Examples of Debt and Financing Techniques
Credit providers often come to the table with a mix of different credit and structured financing options, providing flexibility and optionality to create solutions tailored to the mining company’s needs.
- Term Loans & Project Financing – Loan repayable over fixed tenor, usually amortizing over the investment period from operating cashflows; providing consistent yield through interest payments and staged return of capital through to maturity of investment. Loans usually structured with floating interest rates with a floor to mitigate rising base rate risk.
- Capitalized/PIK interest – Offers Borrowers an option to roll up interest payments during construction of asset, swapping cash paid yield to investors for an increased overall return on deferred coupon payments.
- Bullet/Balloon Repayment – Option to defer capital repayments, increasing capital deployed over the loan life and yield generated. Similar to high yield bond structures with refinancing risk taken by the investor.
- Convertible Loans – Loan structured with the right to convert loan principle into equity in the Borrower, creating option value in the equity upside without losing right to capital return through repayments in downside.
- Prepayment Facility – An upfront payment (i.e., a loan) is made against future delivery of a specific volume of mine production. This can be structured to create an option on metal price upside with repayment of capital on a fixed schedule through delivery of product.
- Stream – An upfront payment (i.e. a loan or deposit) in return for the right to buy future production from the mine, at a discount to market price or at a fixed price. Similar to the prepayment but the obligations are tied to production, providing both price and production upside, continuing indefinitely but with a minimum floor for the return of capital.
- Royalty – Similar to a stream purchase, upfront payment to purchase a right to a fixed % of future revenues: structured with a minimum return threshold which is a secured interest, it provides investors exposure to asset revenues for life of mine, beyond scheduled tenor of the loan facility.
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Source of Data
1 World Bank Data, RCF Analysis, September 2022
2 United Nations, Department of Economic and Social Affairs, Policies on spatial distribution and urbanization have broad impacts on sustainable development. https://www.un.org/development/desa/pd/sites/www.un.org.development.desa.pd/files/undes_pd_2020_popfacts_urbanization_policies.pdf
3 Fieldfisher, Alternative financing for mining: New horizons. https://www.fieldfisher.com/en/sectors/energy-natural-resources/mining-and-metals/alternative-financing-mining
4 RCF Analysis, 2022
5 BloombergNEF, Energy Transition Investment Trends 2022. https://assets.bbhub.io/professional/sites/24/Energy-Transition-Investment-Trends-Exec-Summary-2022.pdf
6 Kar-Tainer, Container Transport: Electric Vehicles vs ICE Vehicles. https://www.kar-tainer.com/post/container-transport-electric-vehicles-vs-ice-vehicles
7 IEA, Net Zero by 2050 A Roadmap for the Global Energy Sector. https://iea.blob.core.windows.net/assets/7ebafc81-74ed-412b-9c60-5cc32c8396e4/NetZeroby2050-ARoadmapfortheGlobalEnergySector-SummaryforPolicyMakers_CORR.pdf
8 NSW Government Planning, Top four metals and minerals that help solar panels work. https://www.planning.nsw.gov.au/News/2019/Top-four-metals-and-minerals-that-help-solar-panels-work
9 Bloomberg, At Least Two-Thirds of Global Car Sales Will Be Electric by 2040. https://www.bloomberg.com/news/articles/2021-08-09/at-least-two-thirds-of-global-car-sales-will-be-electric-by-2040#xj4y7vzkg
10 Canary Media, Here are the minerals we need for batteries, solar and other clean energy tech. https://www.canarymedia.com/articles/clean-energy/the-minerals-used-by-clean-energy-technologies
11 Mining.com, Graphite deficit starting this year, as demand for EV battery anode ingredient exceeds supply. https://www.mining.com/web/graphite-deficit-starting-this-year-as-demand-for-ev-battery-anode-ingredient-exceeds-supply/
12 IEA, Mineral requirements for clean energy transitions. https://www.iea.org/reports/the-role-of-critical-minerals-in-clean-energy-transitions/mineral-requirements-for-clean-energy-transitions
13 IEA, Global Hydrogen Review. https://www.iea.org/reports/global-hydrogen-review-2022
14 Platinum Group Metal (PGM) mining refers to mining certain metals that have similar characteristics and tend to be found in the same mineral deposits. PGM Metals include: platinum, palladium, rhodium, iridium, ruthenium, and osmium.
15 McKinsey & Company, Alternative financing in mining. https://www.mckinsey.com/industries/metals-and-mining/our-insights/alternative-financing-in-mining
16 P&I, Top Global Asset Managers’ AUM, 2017
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