Embarking on a new mining venture is no easy feat. It can take years of investment and seemingly endless hurdles before even a glimpse of production can be realised.
Many factors can sway a miner’s ambitions during its lifecycle, such as fluctuations in commodity prices, the introduction of new legislation, and variations in supply and demand.
From junior explorers to mining giants such as Rio Tinto (RIO), all mining ventures are fuelled by investment, which can come in many shapes and forms.
Where does the money come from?
Investment options typically come in the form of equity and debt financing options.
Equity options include initial public offerings (IPOs), secondary equity offerings (SEOs) and private placements — considered the most popular funding option where funds are raised via selling shares to the public market.
Equity financing dilutes a company’s shareholding, but is preferable in the early stages of a mining project’s life, due to the initial stages of a project not generating any revenue.
Later on, while equity financing is still appropriate, debt financing options are more often considered in the form of bank loans and bonds, while alternative financing is also an option in the form of streaming, royalties, offtake financing and leasing.
During production stages, debt financing is preferred given the miner is generating cash flow from production, and it allows the company to retain ownership and control over its assets and operations, whereas equity financing can dilute ownership and control.
Another bonus with debt financing is that it can be less expensive than equity financing, as interest rates are generally lower than the cost of equity. It is important to note that too much debt can be risky, particularly for mining companies, which are often exposed to commodity price volatility and operational risks.
Funding is required at all stages of a mining project, and in the case of ASX-listed Vanadium Resources (VR8), this is particularly pertinent as the company closes in on the production phase of its Steelpoortdrift project in South Africa.
Steelpoortdrift is one of the world’s largest but highest-grade vanadium deposits with mining authorisation.
With project execution imminent, VR8 is actively exploring a variety of financing options across multiple parts of the world to ensure it has adequate resources to bring the project to fruition.
It highlights the significant investment required at all stages of a mining project and the careful considerations required to choose the right financing options for ensured success.
It is important to understand the lengthy process a miner goes through to ultimately reach the goals of production and reap the rewards of years of hard work and risky investments of most involved.
The mining lifecycle
Typically, the stages of a mining project can be broken down into six main phases: exploration, resource definition, feasibility, development, production, and reclamation. Once a miner has picked a site to begin operations, the lifecycle begins.
It involves the deployment of environmental executives to evaluate the potential impact on the affected land, water resources, and environment to better understand the socioeconomic effects of potential mining.
After this, a company will begin geological surface mapping and sampling to identify potential deposits. More detailed surveys, including the use of electromagnetics, are used to determine targets for initial drilling.
Initial drilling determines what type of ore will be mined, and the grade it could yield, with definition drilling providing a very clear understanding of the type of deposit and the in-situ value the project could potentially generate.
Considering the risk and lengthy nature of this stage, it often requires your money. It is considered the stage where most fluctuations are made in a company’s share price — after all, it is the stage that reveals the road ahead for any mining opportunity. This is where share placements might be carried out, considering the project is not yet generating any revenue.
After the exploration stage, a miner will commence its resource definition stage. During this stage, the size of the resource is defined. As a company takes on more drilling, it can begin to report mineral resource estimates for a deposit with varying levels of confidence. These reported estimates are categorised into ‘inferred’, ‘indicated’ and ‘measured’ resources.
Ore reserves are all about the exploration company’s confidence that not only is their material underground worth mining but this material can be sold at a profit. A company will carry out a number of feasibility studies including a scoping study, pre-feasibility study (PFS) and definitive feasibility study (DFS).
These stages include the mine-site design and planning, which will outline the time spent and the amount of ore mined. A miner will also consider safety, environmental impact, economic viability and corporate social responsibility.
Vanadium Resources’ share price rallied back in 2021 after it reached a milestone of beginning its PFS for Steelpoortdrift, with shares surging more than 40 per cent that day. That goes to show the significance and investor confidence in the completion of stages in the mining lifecycle.
In 2021, VR8 completed its maiden reserve for the project — a total ore reserve of 73.85 million tonnes at 0.75 per cent vanadium pentoxide for 560,000 tonnes. The ore reserve was based on the PFS and enabled the company to power through to its DFS.
During that same time in 2021, Vanadium Resources locked in a $4.6 million investment, at a 65 per cent premium to its share price at that time, through a share issue with Johannesburg Stock Exchange (JSE)-listed mining services company Raubex Group.
Under the deal, SPH Kundalila (a wholly owned subsidiary of Raubex Group) will provide drilling, blasting, haulage, equipment supply, and other services to the Steelpoortdrift project in an arms-length mining services agreement.
In 2022, the company embarked on its DFS, carrying out a bulk sampling program from trial mining and also completed pilot plant test work.
Following the completion of DFS, companies are generally well-placed to commence discussions on debt and offtake. This step is a critical next step to advance the project from the study phase into development.
After the completion of a DFS and financing has been secured, the development stage begins. Development involves building roads, processing facilities, putting in place environmental management systems, employee housing and any other facilities.
VR8 completed its DFS in late 2022, confirming the world-class potential of Steelpoortdrift to become a vanadium producer with competitive financial metrics. The DFS revealed the project has a 25-year life of mine with a post-tax net present value (NPV) of US$1.21 billion (A$1.9 billion) and an IRR of 42 per cent.
NPV is an important tool for mining investors as it provides a way to assess the potential profitability and risks of a mining project, estimate the return on investment, and make informed decisions about allocating capital.
IRR is another important financial metric for mining investors as it provides a way to evaluate the potential profitability of a project, compare it to other investment opportunities, and assess the risks associated with the project.
Finally, production can begin at a mine. This is the stage where investors that have stuck by will begin to reap rewards. At that point, the company will then be able to process ore and generate revenue. Investment analysts will re-rate this deposit to help it attract more attention from institutional investors and the public. Meanwhile, existing investors can choose to exit here or wait for potential increases in revenues and dividends.
VR8’s opportunity at large as it targets production
Steelpoortdrift is host to one of the world’s largest undeveloped vanadium deposits with a mineral resource of 680 million tonnes at an average in situ grade of 0.70 per cent vanadium pentoxide for 4.74 million tonnes of contained metal.
The project has a proven and probable reserve of 77 million tonnes at an average in situ grade of 0.72 per cent vanadium pentoxide for 0.55 million tonnes of contained metal. At current throughput rates, the mineral resource has a life of more than 180 years.
Having powered through its feasibility studies, Vanadium Resources is working towards a final investment decision (FID) and is exploring potential funding options to carry out the pivotal stages toward production.
Vanadium Resources said it was currently engaging with multiple interested parties in Asia, Europe, North America and South Africa to secure project financing and offtake agreements for the Steelpoortdrift vanadium pentoxide flake.
An offtake agreement is where an agreement that is struck whereby a buyer/trader agrees to purchase an amount of future production from a mine at either a fixed price or at an agreed rate relative to the commodity price. A miner might choose to opt for this as it locks in a volume of future sales and revenue to assist with raising debt financing.
These discussions also include strategic investment opportunities, potential collaborations to develop downstream processing options, and other financial partnerships.
Having run a process to reach out to various funding groups and potential partners, Vanadium Resources is assessing proposals received on both their quantitative and qualitative impact on shareholders and the project, ultimately aiming to select the right funding cocktail to deliver the mine and processing facilities at Steelpoortdrift.
A significant step forward for Vanadium Resources came earlier this month when they announced a $5.91m strategic placement to Matrix Resources at 11 cents per share, which represented a 40 per cent premium on the 30-day average share price. The placement was completed on May 26 and the company is progressing into offtake discussions for 40 per cent of the Vanadium products produced in phase one of the Steelpoortdrift project.
The placement and potential offtake to Matrix Resources provides validation to the project and assists with future funding as Matrix looks to maintain its shareholding as the project progresses.
The demand for vanadium is rocketing, so when in production, all involved could reap mighty rewards.
There are arguably two drivers of the demand for vanadium: steel and alloys, and vanadium redox flow batteries (VRFBs).
Currently, 90 per cent of vanadium demand is for steel and vanadium alloys as it helps to reduce the weight, increase flexibility and improve strength. Its performance benefit has seen demand consistently grow, which is expected to continue with imminent construction regulations mandating a higher per cent of vanadium in reinforcement steel to help build higher and stronger buildings.
High-grade vanadium is used in the aerospace industry. For example, Boeing’s fleet of 787s and A350s includes up to 100 tonnes of lightweight vanadium alloys, improving fuel efficiency and making them more environmentally friendly.
As for VRFBs, they use vanadium electrolytes to store energy and enable the wider use of renewable power such as wind and solar. There exist a few VRFB facilities in operation, though many more are being built, such as the Dalian VRFB 100MW / 400MWh facility commissioned in October last year.
These types of facilities will play a major role in grid-scale power generation and the globe moving away from fossil fuels for power generation. Given the worldwide sales of vanadium are predicted to rise rapidly at a CAGR of 8.5 per cent from 2023 to 2033, VR8 is poised to make the most of its demand as it powers through to its production phase at its Steelpoortdrift vanadium project in South Africa.
Source: the market herald