Mining Finance Guide

Our mining finance experts look at four of the world's major mining markets to provide an overview of each jurisdiction.

For an explanation of mining finance terms, read our Mining Glossary. 

THE UK

AIM was established in 1995 as a secondary market to encourage investment in smaller medium-sized growth companies.

The role of the Nominated Adviser (Nomad) is fundamental to the success of AIM. The Nomad will co-ordinate the due diligence process, including legal due diligence carried out by the company's lawyers, financial due diligence carried out by suitably qualified accountants and, in the case of natural resources companies, it is almost invariable market practice for a competent persons report to be prepared into the technical nature and extent of the resources available to the company (although not mandatory).

The Nomad will also ensure that the content of the prospectus (or admission document) has been properly verified. For a mining company key issues to be addressed here include confirmation of the ownership of mining tenements, the extent to which licences are required, whether they are in place, and when they are likely to expire.

There are inevitable tensions between the function of the prospectus as a sales tool for the company's brokers and, on the other hand, its function as a disclosure document.

Potential investors are as a result generally able to rely reasonably heavily on statements of fact but may consider more carefully statements which are preceded with the phrase "the directors believe that …�

The AIM rules require that the directors of a company seeking admission make a statement in the admission document that in their opinion the working capital available to the company will be sufficient for the 12 months following admission.

Where a business has not been earning revenue for at least two years  director/employee shareholders and other key shareholders will be compulsorily locked in under the AIM rules. This will therefore automatically apply to exploration companies. Lock-ins are arrangements by which those shareholders undertake that their shares will not be sold for at least 12 months.

In February 2007, The London Stock Exchange announced further regulatory changes for AIM. A new rulebook provides examples of the types of activities the Exchange expects Nomads to undertake, while enhanced disclosure requirements mandate all AIM companies to maintain a website and to display core management and financial information, including admission documents, on it.

Dealing in mining shares is a question of assessing the service levels you can expect from a broker and the price paid for them. Dealing and settling trades in UK mining stocks especially should not be a problem and even in foreign markets difficulties are often exaggerated. But UK brokers, mindful of compliance and regulatory issues, may have a tendency to direct clients into FTSE100 mining shares as these are easy to deal in, instead of recommending smaller stocks or foreign shares outside the main markets.

The nuts and bolts of dealing in FTSE100 mining shares and middling UK or foreign AIM-listed mining stocks, and settling the trades, should not be an ordeal.

Ask yourself whether you need personal registration (in order to be in direct contact with the company in which you are investing) or whether you are happy to accept registration in the broker�s nominee name.

Some UK private investors have personal CREST (London Stock Exchange settlement system) membership sponsored by their broker, meaning they get all the usual corporate communications and dividends directly. Such an account is an electronic one without paper certificates or the need for transfer forms. Some foreign shares can be held through CREST but these are in the name of the sponsoring broker.

One issue to note is that on AIM some mining companies remain incorporated in their country of origin and have retained a listing, often primary, in their home market. Such shares are usually Australian, sometimes Canadian. A broker with an order in an AIM-listed Australian mining company may attempt to transact in London as it is cheaper for him - but not necessarily for you. The London market (if the time difference means the Australian market is closed) will offer to deal on a wider spread and in smaller volume than the Australian market would. Placing such an order in the Australian market for execution the following day would be better for the investor as long as market movements do not negatively impact the delayed trade.

Offering dealing only, online brokers are one option for the large markets with many automatically registering foreign shares in their nominees� names.

The other negative to buying on AIM rather than registering foreign stock is that stamp duty is charged in the UK.

AUSTRALIA

Called �Chess�, Australia also has a paperless settlement system. UK brokers will tend to direct clients towards nominee registration. In Australia companies sponsor registration of their shareholders with their registrars. When a shareholder deals he gets a statement and shareholder number. On buying or selling more stock, he informs his broker of his account details. On settlement the registrar makes a book entry changing the shareholder register.

Over a third of all ASX-listed companies are now resource-based and, collectively, they make up some 22% of total ASX market capitalisation and account for a third of all trading volume.

Resource float activity has continued unabated since 2003 - the number of floats in 2006 was an increase of 55% on 2005 and 69% on 2004. The 115 resource companies floated in 2006 represented more then half of all ASX floats and raised more than A$1 billion.

The market�s support for follow-on capital raisings has also been impressive. In 2006 resource companies raised over A$8 billion in follow-on raisings - a 28% increase on 2005 and 96% increase on the previous year. The total capital raised by the resources sector in calendar year 2006 represented 16% (approximately A$9 billion) of total capital raised by all ASX-listed companies.

In 2006 the ASX launched resource industry specific indices - the S&P/ASX Gold Index and the S&P/ASX Metals and Mining Index. The Metals and Mining Index has been structured to be investible from a fund management perspective, with the expectation that institutional investors will be able to benchmark funds against it.

Another key ASX focus is the capital-raising settings in the listing rules. The ASX seeks to provide for greater flexibility within the listing rules to facilitate capital-raising for mining companies in the exploration and pre-production stage.

The ASX also says it recognises the failure of the Australian tax system in denying investors in exploration companies deductibility for investment in high risk exploration, and strongly supports the local industry in its quest to get a �flow through share� concept adopted in Australia.

Australian mining legislation is a complex combination of Commonwealth and state legislation, the principal provisions of which are generally legislated and administered at a state level. Most states' mining policies encourage mining as the preferred use of the state's land.

In the case of mining exploration and mining extraction companies, ASX listing rules require quarterly reports on various production, development and exploration activities which, if they relate to exploration results or mineral resources or ore reserves, must be in compliance with the Australian JORC code.

The continuous disclosure rules under the ASX listing rules have helped to create a view of the ASX as a transparent market. Accordingly, foreign investors in listed mining companies should always be mindful of the continuous disclosure regime, particularly if they wish to negotiate an investment in confidence prior to any market announcement.

The Australian corporate tax rate is 30%. Dividends received by a non-resident from an Australian resident company may be subject to Australian withholding tax, depending on the extent to which the dividend is franked (franking credits attach to dividends that are paid out of profits on which company tax has been paid).

Australian capital gains tax may apply to non-resident shareholders in Australian companies depending on the status of the Australian company and the percentage of shares held. Portfolio interests of non-residents (less than 10% holdings) in listed public companies are exempt from capital gains tax.

No stamp duty is payable on transfers of Australian-listed company shares (nor on transfers of shares in private companies incorporated in Victoria and Western Australia).

CANADA

Junior mining companies on the TSX Venture Exchange had a tremendous year in 2006. According to data from PricewaterhouseCoopers (PwC), their total market capitalisation rose to C$27.6 billion, a dramatic 86% increase on 2005.

Dealing in US and Canadian markets should present few problems for UK investors and this will most commonly be accomplished by a UK broker�s agent in the local market. Other options include opening up a dealing account with the London office of a US broker, usually online, or approaching a locally-based North America broker whose commissions will typically be lower than in the UK. Stock will usually be registered in a nominee name and held to the dealing broker�s account, incurring a charge.

Different listing standards are in operation on the TSX and TSX-Venture exchanges. They have been designed to reflect the different strengths and weaknesses of all sizes and stages of companies from majors with producing mines, through those with proven deposits beginning mine development to junior explorers looking for discoveries.

The TSX-V is well suited for early-stage mining companies looking to raise smaller amounts of capital to finance ongoing exploration. Certain disclosure is required, such as audited financial statements, and some minimum exploration work must have been carried out.

If the company has a later-stage mineral property or a producing mine and wishes to raise greater capital a TSX, as opposed to a TSX-V, listing will be required. Listing criteria are much more stringent than for the TSX-V, requiring the submission of a fully compliant NI 43-101 technical report examining stated mineral resources and mineral reserves. The key provisions of this instrument relate to reliance on the accuracy and balance of the technical report of a qualified person in good standing of a professional association, and with at least five years' experience in the industry.

A similar function to AIM�s Nomad is carried out by participating organizations in the TSX listing process, though they do not assume as central a role.

If a company is contemplating a listing on the TSX or TSX-V, it will have to prepare a prospectus in the event of an IPO. For non-Ontario reporting issuers on the TSX-V, an exemption to the prospectus requirement may be available.

On March 19, 2007, as part of its annual budget, the Canadian government announced fundamental changes to Canada's international tax rules.

On the negative side, the changes restrict the deductibility of interest in respect of foreign affiliate investments and acquisitions, thereby prejudicing Canadian multinationals that wish to make foreign acquisitions.

On the positive side, withholding tax on US and Canadian source interest will be eliminated under the Canada-US tax treaty for both arm's length and (on a phased-in basis) non-arm's length recipients.

SOUTH AFRICA

STRATE, the South African system, is paperless too, though not as simple. Investors may choose to hold stock in their broker�s nominees but this means paying additional overseas annual holding charges. Under South Africa�s �dematerialised� system personal registration is still possible and certificates issued, but before dealing certificates must be dematerialised by the Johannesburg Stock Exchange and the holding recorded electronically. This usually takes two or three days and then the stock can be sold, although if the certificate emanates from the UK several days may to be added to the process. Brokers may insist the shares are dematerialised before placing an order in the market.

Stock may be borrowed in South Africa to fulfil the three-day requirement but the expenses of doing so will be included in the price a seller in London receives.

One year after the discovery of gold on the Witwatersrand, the original Johannesburg Stock Exchange (JSE) was founded in 1887 to trade gold mining stocks. The JSE remains a resources-heavy market to this day, with over 40% of the total market capitalisation made up of mining and resource stocks. The vast majority of the market capitalisation, as much as 36%, is made up of only 10 major mining companies.

The largest of these companies have as their antecedents the old-style South African mining houses, which had dominated South African mining for over a century. In the 1980s and 1990s some venerable mining houses ceased to be a force in South African mining while others consolidated separately listed subsidiaries and re-invented themselves as single commodity-focused companies.

Further significant change to the way mining companies operate in South Africa followed the end of Apartheid. Firstly, all mining and prospecting rights and title reverted to the state, and a �use it or lose it� principle was introduced, mirroring policies in countries like Canada and Australia. Secondly, any foreign company or local white company would have to acquire a black equity partner holding at least 26% of the company or mineral property.

There are no exchange control requirements that prevent a foreign investor from owning shares on the JSE.

Foreign companies have been able to list on the JSE since 2004. Likewise, South African citizens can invest in a foreign company listed on the JSE with no limits imposed. Between 40% and 50% of daily trade on the JSE is currently concluded by foreign investors.

As part of the listings requirements, a competent persons report is required that must be in accordance with SAMREC�s requirements and is vetted by an independent SAMREC committee. SAMREC is the South African Code for Reporting of Mineral Resources and Mineral Reserves.

The JSE recently launched the Alternative Exchange (AltX) for small and medium-sized businesses. It has some of the elements of AIM on the LSE. The market has a number of quality controls including the appointment of a designated adviser for each listed company, an advisory committee that determines the suitability of companies for listing and a director�s induction programme.