Alternative Financing models – service providers raising risk profile

Alternative Financing models – service providers raising risk profile

A typical reaction to difficult times in the resource sector is to hunker down, cut costs, and wait for the economy to pick up. Instead of doing this, local and global service providers are turning to alternative financing methods to win lucrative work.

“Over the last five years we’ve seen crowds of investors abandon small resource companies, drying up investment and putting the brakes on good projects,” says Argonaut Managing Director and Head of Corporate Finance Eddie Rigg.

The Small Resources Index (ASX: XSR) supports Rigg’s claim. The index peaked at around 7,000 points in January 2011. By January 2016, the indicator had collapsed to 1,215 points, representing an 82 percent decrease in value.

Rigg says what we are seeing happening now is service providers with a strong balance sheet and excellent track records are searching out good projects stuck in neutral and offering to charge at cost and agreeing to receive the difference – along with overheads – as shares later down the line.

“Around mid-2013, West African Resources (ASX: WAF) share price dropped from 19 cents to five cents per share. A discovery based on funding and research provided by Ausdrill helped elevate that to a peak of almost 40 cents by mid-2016,” he said.

The key for small mine operators has been partnering with service providers to convert a capital cost into an operating cost.

“A company such as Kalgoorlie Power Systems can build and run a power station far better than a single mine operator. This type of outsourcing gives operators access to professional, expert and high-quality services; saving time, effort, manpower and capital costs,” continues Argonaut’s Managing Director.

Other examples include payments for front-end crushers being made per tonne and service providers acting as a working capital banker by deferring payments for pre-production strip for six to twelve months.

Caterpillar and other international equipment suppliers have provided operators with similar flexibility. However, the most innovative financing techniques have come from the R&D field.

The R&D tax incentive encourages companies to engage in R&D benefiting Australia, by providing a tax offset for eligible activities.

“From an engineering perspective, there’s been an R&D boom in Australia with companies exploring new ways to harvest metals – such as cobalt, lithium, and graphite – which were previously seen as waste.”

The research and development tax incentive provides a 38.5 percent tax offset for eligible R&D expenditure of up to $100 million a year to businesses with revenue above $20 million. Companies with revenue below $20 million receive a more generous 43.5 percent offset in the form of a cash refund.

“To continue work in this field, service providers have deferred a portion of their costs or utilised intermediary finance to fund R&D work, agreeing to receive the balance in a lump sum payment from the tax office.”

Rigg is quick to point out that the cyclical nature of the resources sector means that different financing methods apply in bull and bear markets.

“When the market is buoyant, and money is easy to raise, alternative methods of funding fall by the wayside. During times of boom, a decent size company can raise funding from start to finish in about two weeks, with no strings attached.