Wednesday, September 01, 2010

Mixed Lending News For Miners

In recent months I've listened to several investor relations pitches from junior mining firms, primarily gold and oil explorers.  Something they should all spend more time elaborating upon is how they'll handle the environmental risks of their projects.  Banks are already looking at those risks and are declining to take any chances:

After years of legal entanglements arising from environmental messes and increased scrutiny of banks that finance the dirtiest industries, several large commercial lenders are taking a stand on industry practices that they regard as risky to their reputations and bottom lines.

In the most recent example, the banking giant Wells Fargo noted last month what it called “considerable attention and controversy” surrounding mountaintop removal mining, and said that its involvement with companies engaged in it was “limited and declining.”

Banks already take big risks in lending to exploration firms that hit nothing but dry holes for years.  They are reluctant to revise their risk tolerance upward in an environment where credit is constrained by the banks' own weak balance sheets. 

The mining community will have to adapt.  Here are some points I'd like to hear mining executives discuss in their presentations. 

The effect of lending restrictions on the cost of capital.  This doesn't just mean setting a higher discount rate in your mine's NPV.  It means incorporating sensitivity analysis on the effect of loan covenants that lenders may demand if a project hits unexpected environmental problems. 

Emphasize your track record in environmental stewardship.  Junior mining investing is a lot like venture capital behind a startup; it "bets on the jockey, not the horse."  Mining executives with twenty or thirty years of experience in finding ore are great to have running the company.  Mention that they also have years of experience in mitigating spills and pollution.  Talk about how you've avoided or resolved EPA complaints. 

Have an environmental remediation plan for your sites.  Investors like to see a prospective site that has access to three things:  roads, water, and electricity.  The company's environmental impact statement always takes into account the condition of the local environment before work begins.  The firm should also publish a preliminary mine / well closure plan that addresses how they will restore the site at the end of its expected life. 

The good news is that this presents a golden (pun intended) opportunity for exploration and extraction firms that make environmental stewardship into a core competency they can trumpet.