Is the Oil Market Finally Tightening?

Last week, crude oil in London finally surged above the USD80 mark as demands for fuel in China and other parts of the world reached new highs. We say finally, as for most of the year those betting on a tightening oil market have seen those bets come to nothing. Furthermore, the tightening has come at a time when OPEC (for OPEC please read Saudi Arabia and their allies) are engaging in production cutbacks, which will inevitably drain storage tanks across the world.

Experts from the IEA (International Energy Agency) suggest there will be a sharp tightening in the oil market, as they expect seasonal demand to increase which they feel may well convert into an increase in prices as we head into Q3 of 2023. If such a scenario comes to pass, this could also endanger the global economy, which has of course benefitted from declining inflation and a fall in energy costs.

However, certain analysts are still unclear as to whether a return to USD80 a barrel for Brent Crude is the start of a major price rally, as inflation still needs to be kept in check which could mean a further rise in interest rates. Furthermore, there are some unflattering economic indicators coming out of China, and Russia and Iran continue to flood the market with cut-price crude, though Russia has subsequently cut production as outlined below. 

Brent futures (the main international benchmark) are now the highest since May this year, with experts predicting a stronger market in Q3 and Q4, with some even pronouncing that it was the “tipping point” the market was expecting. The crude market “is heating up” seems to be the common theme among analysts, as they suggest this is due to output cuts amongst the OPEC members (Saudi Arabia et al) finally having an impact. 

Even Russia, who for the most part of this year has boosted exports of crude to fund the war with Ukraine, has jumped on the OPEC bandwagon and reduced output. This was confirmed by the release of tanking tracking data that showed Russia had reduced exports by circa 25% for the four weeks from June 10th to July 9th. Indeed, figures recently released show the balance of supply and demand in June swinging from a surplus to a deficit. 

Some traders still remain bearish as they feel demand is somewhat at the mercy of an economic environment that still produces figures that bring a justifiable uncertainty to the market. This includes sluggish growth in Europe, contracting manufacturing in China, and a possible recession in the United States. Even the IEA has reduced their forecast for global fuel consumption.

However, many analysts and experts still feel the price will increase, especially as Saudi Arabia needs oil revenue for their much vaunted social and economic transformation. Many believe the de facto ruler Crown Prince Mohammed Bin Salman may well prolong the current cuts in output, along with the other members of OPEC. Some experts even predict a rally to USD90 per barrel. Evidently, the next few months will be an interesting time in the oil markets.

Is the European Central Bank about to Cool its Stance on Interest Rate Hikes?

This Thursday 27th July, the European Central Bank, ECB, is expected to hit the rate hike button once again, but beyond the end of July, markets appear unsure of what is going to happen next. Currently EuroZone interest rates stand at 3.5% the highest in the last 22 years, having risen by 400 basis points in the last year. However, many experts suggest that interest rates have come close to topping out as headline inflation begins to cool along with a weakening economy.

What many analysts and traders are saying is that the ECB has always offered fairly exact guidance as to what will happen at their next rate meeting. However, this time around guidance for the September meeting is somewhat opaque so the markets are ruminating as to what is going to happen. As far as this Thursday goes, economists suggest that there will be a 25-basis point rate increase to 3.75% as non-core or headline inflation remains just high enough to justify a move of a ¼%, and anything higher will be a surprise. 

 A consensus amongst various experts and analysts suggests that a rate hike in September is no longer a certainty and expects the ECB president Christine Lagarde to stress uncertainty in regard to further tightening of monetary policy. However, there is a feeling that after July there may be one more hike to 4% where EuroZone rates will have reached their zenith, though as to when rates begin to fall, we may have to wait and see. Some experts are predicting rates to be circa 2.4% by the end of 2024 with rates beginning to decline in Q2. Indeed, recent bank lending data would appear to suggest that the upward surge in the cost of borrowing (the steepest in the ECB’s history), shows that loan volumes have come down sharply which may facilitate a decline in economic output, which is further fuelling speculation that rates are finally peaking.

Finally, the villains of the piece, headline inflation and core inflation (core inflation represents the change in the cost of services and goods but does not include those figures from the energy and food sectors). Whilst headline inflation fell across the Eurozone for the third straight month in June, core inflation (which is considered a better guide on the underlying trend) only fell slightly from 6.9% to 6.8%, which is not what the policy makers within the ECB wish to see. There will probably be little comment from the ECB until new economic projections come out in September. 

USD500 Billion Corporate Debt Distress Hangs over the Global Economy  

As a decade of easy money and low interest rates came to an end, and with fears of a credit crisis seemingly receding, experts are advising that globally a wave of corporate bankruptcies may well come to pass. Top corporate debt experts are ringing the doom bells as they say apart from the early days of the pandemic, large corporate bankruptcies amounting to USD500 billion are accumulating at a pace second only to the global financial crisis in 2008.

Such experts suggest that the amount of corporate debt will continue to grow, straining credit markets that have been recovering from some of the biggest losses seen in twenty years and could threaten to slow economic growth. Many commentators just see the tip of the iceberg, as empty offices sprawl from Hong Kong to San Francisco, where many workers now work remotely from home. However, the underlying problem is debt built up throughout an era of cheap money, now costing much more to service as central bank’s monetary policy dictates increases in interest rates.

For example, in the United States from 2008 to 2021 the size of leveraged loans and high yield bonds, (owned by lesser creditworthy and riskier businesses) more than doubled to circa USD3 trillion. One interesting figure that has also been released for the time span 2008 – 2021 is that debts belonging to non-financial Chinese companies soared relative to the size of the Chinese economy. 

Elsewhere in Europe, in 2021 junk bond sales increased by circa 40%, a number of which are coming due for payment adding to the already outstanding debt of USD 785 billion that will have to be paid. In London, HSBC has its headquarters in Canary Wharf along with a number of other large financial institutions, where the once completely derelict site became a major financial centre. HSBC has already announced they are vacating the site in 2026 and prior to the Covid-19 pandemic banks were already scaling back on their working space. As a result, and not forgetting the impact Brexit had on office working spaces, two buildings in Canary Wharf owned by a Chinese property developer were seized by receivers due to non-payment of loans. 

In the world of private equity some of the companies they bought now have a debt level in excess of USD70 billion and are trading at distressed levels. For many years private equity enjoyed low interest rates and easy credit, and their business plan was to buy a company, then borrow money and then cut costs, thereby making a profit. Sadly, these companies were often left laden with debt, and more often than not with floating rate loans on the books. Like many companies throughout the world some private equity firms thought near zero interest rates would last forever, so they never bother to protect their companies with lost cost hedges. Today, with higher interest rates these companies are close to receivership.

As all these debts grow and more companies become distressed, other sectors such as advertising companies are affected, as this is the first area where companies reduce their budgets. Another sector feeling the pinch is real estate, where most of the distressed debt is related to the property problems in China, where companies such as Dalian Wanda Group have seen their debt price collapse and China Evergrande Group who have had to restructure their debt.

The collective global economy will have to hold their breath to see if central bank policies will allow for a reduction in interest rates as inflation is hopefully brought under control. However, with Russia having pulled out of the Black Sea Grain Initiative (implemented in July 2022), this may or may not negatively impact inflation, we will have to wait and see.

Across the World the Falling US Dollar is Benefitting Risk Assets 

As inflation in the United States begins to cool, it is accelerating a decline in the US Dollar, which in turn is benefitting risk assets* across the globe. In September 2022, the US Dollar surged to a record high on the back of increasing interest rates, today against a basket of currencies the US Dollar is down circa 13%, its lowest levels for 15 months.

*Risk Assets as the words imply are those assets that carry a certain amount of risk and are quite susceptible to price volatility. Such assets are generally recognised as emerging markets, currencies, equities, commodities and high-yield bonds.

The global financial system is underpinned to a great extent by the US Dollar, so as the US Dollar declines, so US Treasury yields ease, making the US Dollar less attractive. However, on the other side of the coin, this gave a boost to foreign currency across the board such as the Mexican Peso and the Japanese Yen.

From a corporate standpoint, some US companies will benefit from a weaker dollar as this will allow multinationals to convert overseas profits back to dollars more cheaply, whilst at the same time making exports more competitive in overseas markets. For example, in the US technology sector, where some companies are enjoying high growth and have recently led the markets higher, they have, according to experts, generated circa 50% of their revenue from overseas markets.

In the currency world, throughout the foreign exchange markets, as the US Dollar declines technical levels are being broken, and across the globe those currencies that are risk-sensitive are ticking up. Certain foreign exchange strategies will benefit from a falling US Dollar such as a Dollar Funded Carry Trade*. Experts in the dollar funded carry trade market expect these trades to thrive against a bleak outlook for the US Dollar. 

*A Dollar Funded Carry Trade is where a higher yielding currency is bought against the sale of US Dollars, allowing the participant to pocket the difference.

The fall in the US Dollar will be a boon to some central banks and their monetary policies as they can withdraw support for their own currencies. In Japan for example, the US Dollar has fallen by 3% in the week ending 14th July and has dented expectations that as an import reliant economy, the government would have to intervene in the currency markets.

Figures from the S&P Goldman Sachs Commodity Index (S&P GSCI) have ticked up 4.6% this month reflecting the declining dollar reflecting raw materials being more attractive to foreign buyers. Emerging Markets are also benefitting from a fall in the US Dollar, making any debt corporate or sovereign easier and cheaper to service. This has been reflected in a 2.4% increase this year in the MSCI Emerging Market Currency Index.

The outlook for the US Dollar is essentially very bearish with many experts predicting the currency will fall to levels before the Federal Reserve started hiking interest rates and may go even weaker. But bears beware, a sudden unexpected increase in inflation could change strategies across the globe.

Declining Inflation in the Eurozone as the UK Continues to Struggle

Whilst the United Kingdom still struggles to keep inflation in check, inflation surprisingly fell to 5.5% in the Eurozone, down from 6.1% in May, which is the lowest since January 2022. However, before policymakers could start popping champagne corks, the mood was tempered as figures showed a small uptick in core consumer price growth, with core inflation (excludes food and energy) having increased from 5.3% in May to 5.4% in June. This was clearly a disappointment for the ECB (European Central Bank), as until the underlying price pressures fall to the target of 2%, the ECB has confirmed they will keep raising interest rates.

Meanwhile, in the United Kingdom, contrasting figures with the Eurozone show inflation at the end of May at 8.7%, and with the Bank of England raising interest rates by 50 basis points on 21st June, there are fears that in order to keep battling inflation, a subsequent rise of the same amount is in the offing. Furthermore, recently released figures show that amongst the G7 countries, the United Kingdom’s growth rate for Q1 was the slowest (apart from Germany) and as of May, the annual inflation rate of 8.7% was the highest.

Experts point to emerging differences between the United Kingdom and the Eurozone, where the ongoing shortages of labour, plus the energy price crisis, make for a toxic combination resulting in inflation being more stubborn to shift than the Eurozone and other G7 countries. 

Regarding labour shortages, there are a record number of job vacancies, and the United Kingdom is facing additional inflationary pressure as companies across the land increase salaries/wages in attempts to fill these vacancies. Post-Brexit immigration laws are cited as one reason for a declining labour market, whilst post the Covid-19 pandemic, there are record levels of long-term sickness amongst adults of the working age.

Expert analysts also point to the United Kingdom’s governments Energy Price Guarantee (EPG), where for a typical household, electricity and gas bills have been capped at £2,500 pa (1st October 2022 – 1st July 2023). However, similar caps were not introduced in the Eurozone, therefore the recent decline in global wholesale electricity and gas prices are better reflected in their current inflation rate.

Furthermore, economists suggest another divergence between the Eurozone and the United Kingdom is that the UK’s economy is more service based than manufacturing based as opposed to those economies in the Eurozone. This leads to a more balanced economy which is reflected in the fact that inflation across the Eurozone is declining (apart from Germany and Croatia) whereas the United Kingdom is struggling on the inflation front. 

Figures for the end of July will show if this divergence is continuing, however, within the ECB’s rate setting council members have acknowledged that criticism by members of the UK press regarding the Bank of England’s handling of inflation, has served as a cautionary warning to the wise.

Inflation and the United Kingdom

As recently as last week, core inflation (excludes energy and food prices) in both the Eurozone and the United States was easing slightly, whilst in the United Kingdom inflation remained 8.7%, but core inflation increased to 7.1%, the highest since 1992. So why is it when the United States and the Eurozone get a drop off in core inflation, Great Britain suffers an increase?

Without a doubt all Remainers blame Brexit for the inflation problems with the ex-governor of the Bank of England, Canadian Mark Carney, being their standard-bearer. The fall in the pound after Brexit is usually trumpeted as a reason for inflation, but that was seven years ago, and since then, sterling, apart from the odd blip (the Liz Truss regime stands out), has remained relatively steady and in 2023 has gained in strength.

Other reasons from the Remainers camp is trade with Europe is now more expensive and difficult with the end result being costlier imports. The lack of access to labour and skilled workers from Europe is yet another reason put forward by Remainers, but with immigration actually having increased this argument is redundant. However, it cannot be denied that leaving Europe has contributed to the weakness in business investment, but is that a contributing factor to an increase in inflation? Probably not.

The Bank of England has received many derogatory comments regarding the increase in core inflation, and it is argued that their attitude towards inflation was lethargic, and they are therefore responsible for the problems that beset the nation today. Blaming the Bank of England is the easy way out, and they have acted in concert with many other central banks throughout the world. In fact, they were the first to raise interest rates.

Experts suggest that there are a number of influential factors responsible for the increase in core inflation and these can be seen in;

  1. Pay Inflation – The United States is running at 4.3% and the Eurozone is running at 5.2%, whilst in the United Kingdom it is running at 7.2%, helped along by increasing the National Living Wage in 2022 by 6.5% and by 9.7% a year later.
  1. Supply Performance – The United Kingdom is suffering from a poor supply performance, and as opposed to other G7 countries their GDP is still well below pre-Covid-19 levels.
  1. Workforce – There has been a massive fall-off in the workforce, with Covid being the major instigator of this scenario, but Covid was a global shock that has left its mark and can take some responsibility for where the United Kingdom (and many other countries) are today.

The United Kingdom is not alone in fighting inflation, and according to experts, the root cause of the massive increase in global inflation is found in a series of supply shocks, resulting in higher prices and the probability of a wage – price spiral. Central Banks would have to use monetary policy to fight this spiral, with the end result of bringing down inflation and hopefully wages. 

Sadly, the United Kingdom was hit particularly badly as the supply situation was much more severe than many other countries, and this is the real criticism of the Bank of England, as they did not act quick enough to keep the lid on the wage – price spiral.

There is only one monetary supply policy available to the Bank of England, and if increasing interest rates is the only way to fight inflation, the United Kingdom may well fall into recession. It will be painful, but we can only hope the current policy will bring down inflation at a faster rate than is currently predicted.

European Equity Investors Go Small

Despite the fact the economic outlook looks gloomy across the European Union, the low valuations of European small and mid-cap stocks have caught the eye of many an investor, as their relatively low valuation has ignited long-term interest. Whilst recent banking upheaval promoted thoughts of a credit crunch, and recent anxieties regarding an economic slowdown favoured “defensives over cyclicals” *, the smaller European companies have seen valuations sink.

*Defensive stocks are those companies that are recognised to have defensive earnings, that do not really equate to the economic cycle. Such companies usually supply necessities that consumers will not cut back in times of a downturn in the economy. These necessities are typically power, such as electricity and gas, healthcare and certain foodstuffs. 

 *Cyclical stocks are those companies that are recognised as being more exposed to the economic cycle. Thus, when economic conditions are on a downward cycle, these companies are likely to see a drop off in earnings, but if economic conditions are on an upward cycle, then conversely earnings will increase. Such companies are recognised as being in the travel, construction and luxury goods sector.

Many European focused investors suggest that while the current economic slowdown persists, the current price of SMIDs (Small-Mid Capitalisation), have already had much of the risk factored into their price. The thinking therefore is that should Europe enter into a prolonged recession, SMIDs will have less downside than the larger companies or stocks.

In the AI (Artificial Intelligence) sector, breakthroughs in generative AI (algorithms that can be used to create new content such as images, text, simulations, video and audio), have in recent months kept investors focused on mega-stocks. However, from an AI angle those SMIDs that have available resources to invest in AI will hold an advantage over those who lack the same resources.

Expert analysts suspect that European economic data will get worse over the next three months especially as data recently released shows the EuroZone suffering from a technical recession, where there has been negative growth in real GDP in two consecutive quarters. When the data shows an economic upswing across the EuroZone, the revival of small caps will begin, and the same analysts suggest that this will provide a rich hunting ground for those long-term focused investors.

Interest Rate Hike of 0.5% by the Bank of England 

On Thursday 22nd June 2023, defying market predictions, the Bank of England put up interest rates by a full half percentage point, to 5%, the highest level since 2008. Both the Prime Minister Rishi Sunak and the Chancellor of the Exchequer Jeremy Hunt backed the Bank of England to the hilt, confirming Andrew Bailey’s (Governor of the BOE) uncompromising attack on inflation. 

Apparently recent data showed that there were stronger inflationary pressures on the UK economy, thus the Bank of England’s Monetary Policy Committee (MPC) voted seven to two to increase interest rates by 0.5%. The Bank of England is committed to their policy of reducing interest rates to 2% by raising interest rates 13 times since December 2021.

The Bank of England’s expectation that inflation would fall in May failed to materialise with inflation staying at 8.7% well beyond and above the intended target of 2%. Many experts and analysts are suggesting that the rate rises are doing more harm than good and figures confirm that inflation in the UK is the highest of any G7 country.

Such interest rate increases have pushed lenders to reprice their “Fixed Rate” mortgage deals pushing up prices whilst at the same time putting increased pressure on homeowners, which may result in a swathe of repossessions. The Chancellor, having already announced there will be no help for homeowners, did a u-turn on Friday and announced an agreement with lenders where homeowners struggling with repayments would be given a 12 month grace period before any repossessions take place. This agreement encompasses mortgage holders extending their current agreement or moving to an interest only plan.

Due to interest rate increases, the circa two million mortgage holders on tracker rates have seen their monthly outgoings rise every six weeks since December 2021. UK data shows that there are six million households tied to fixed rate mortgages with 800,000 due at the end of the year 2023. We can only hope the Government’s and the Bank of England’s monetary policies can finally start to eat away at inflation avoiding a mortgage time bomb at the end of 2024.

Finance for Mining

Investing in Sustainable Mining

The International Finance Corporation (IFC), aids mining operations across the globe via various finance methods, focusing on mitigating social and environmental risk. It is hoped that come 2023 – 2024 that the amount of debt (bonds) and equity investment will increase in the mining sector, especially from green financing as they reduce their carbon emissions and adopt new technologies.

Start-up mining is the high end of risk in the mining sector, followed closely by junior miners. Some venture capital firms are looking at start-ups and junior miners who are offering more sustainable and environmentally friendly mining opportunities. The use of new technology such as data analytics combined with new sensor technology help understand the many variables a start-up or junior miner is confronting.

Raising Capital in the Mining Sector via ICS

At IntaCaptial Swiss we have provided many financial services and advice to our impressive list of clientele – ranging from bond issues, mergers and acquisitions, structured finance, IPO’s and acquisitions, as well as raising capital through the means of Collateral Transfer.

We demonstrate the ability to provide access to loans and lines of credit utilising our financial model, the Collateral Transfer Facility. Collateral Transfer as the name suggests is the transfer of collateral from one company to another. In this instance, to provide access to credit facilities, the collateral is a Demand Bank Guarantee.

Collateral Transfer and Mining

Many mining companies, big, small or aspiring may not have heard of the term Collateral Transfer. This is probably because the term used in everyday life is Leased Bank Guarantee, which is technically incorrect but has become embedded in the everyday global “financial speak” when referring to Collateral Transfer.

For a company to obtain a Demand Bank Guarantee they must sign a contract referred to as a Collateral Transfer Agreement with a Provider. Providers tend to be sovereign wealth funds or hedge funds, who because of the return, are happy to lend part of their balance sheet into the Collateral Transfer market.

IntaCapital Swiss work hand in hand with many providers and are therefore able to offer companies who are unable to find credit facilities access to Demand Bank Guarantees.

Over the years, IntaCapital Swiss has facilitated corporate loans for many mining ventures across the globe. The funding has benefited many aspects of mining, ranging from the discovery of precious metals to raising capital to purchase machinery for extraction processes and the infrastructure involved. We welcome companies seeking capital to grow their projects, whether that be expansion to another country or increasing operation, to get in touch. Our financial advisors will explain the requirements and the processes involved to raise the capital your project needs.

The mining industry as a whole is involved in the extraction of various geological materials such as iron ore, copper, gold, silver, aluminium, platinum, palladium, chromite, lead-zinc, coal, bauxite and various precious stones such as diamonds and emeralds. The three most-mined minerals in order are coal, iron ore and bauxite.

Mining finance will differ from mine to mine as there are five different types of mining. These types of mining are classified as Mountain Removal, Highwall Mining, Dredging, Open Pit Mining, Strip Mining and underground mining. We will deal with each individual type of mining, followed by an overview of global mining finance.

The Monetisation Process

To explain the monetisation process in further detail… In the world of Demand Bank Guarantees, the format or verbiage contained therein dictates the end use of the instrument. For example, it could be a customs guarantee where the verbiage confirms that customs duties will be paid in the event the applicant, (the company requiring the goods from customs and deferring duty to a later date) will be paid.

Therefore, when a Demand Bank Guarantee needs to be monetised it will contain verbiage that’s is absolutely precise so that lenders know they are 100% covered in the event of default by a borrower. All Demand Bank Guarantees are payable on first demand, which means in the event of a non-repayment, the lender can claim from the issuing bank, by producing the requisite documentation showing the lender is in default.

Hence, a company with a Demand Bank Guarantee on their account, can request credit facilities from their bank, offering the Demand Bank Guarantee as security for a loan or line of credit. It has been known for banks to refuse a loan application where a Demand Bank Guarantee is being offered as security.

On the odd occasion when a loan or credit line is refused, IntaCapital Swiss can make available third-party lenders. These lenders are happy to take the place of the beneficiary’s bank and make available credit facilities using the Demand Bank Guarantee as security.

Mountain Removal Mining

Mountain removal mining (MTR), also known as mountaintop mining (MTM), can be found at either the summit or the summit ridge of a mountain. The overburden is removed in order to access the mineral, in this case mostly coal, below. The overburden is referred to as material, rock etc that lies above what is known as an area that can be economically exploited. If the overburden cannot be replaced, it is moved to neighbouring valleys, which are referred to as valley fills or holier fills

The main source of finance for mountain removal mining came from banks. Many well-known banks financed this form of mining, Barclays Bank, BNP Paribas, Wells Fargo and JP Morgan to name but a few. However, strong pressure from environmentalists and harsher regulation in the mining industry stopped this controversial mining sector in 2015 as banks pulled finance and mining companies withdrew from mountain removal mining.

Highwall Mining

Highwall mining is where underground mining and surface mining are linked together by extracting minerals in open-pit mines from the exposed horizontal seams. This form of mining is achieved through a mobile system which utilises a continuous miner controlled by an operator. A retractable conveyor system is utilised together with a vertical conveyor that readies and stacks the coal for onward transportation.

Dredging

Dredge mining or dredging is a process whereby placer deposits are excavated by utilising floating equipment. Placer deposits or placers are desirable and valuable minerals. They are usually formed during the sedimentary period from a source rock. Examples of dredging equipment that remove placer are the bucket-line or the bucket-ladder.

A bucket-ladder is the process of removing deposits from a riverbed or any waterbed by utilising a series of buckets that are mounted on an endless loop. They scoop up materials from the waterbed, which are accordingly deposited on a barge via a chute.

Open-pit Mining

Open-pit mining, also referred to as opencast mining, is recognised as a surface mining technique. It is the process whereby minerals are extracted from an open pit in the ground. This type of mining is utilised when commercially viable mineral deposits are found close to the surface. To identify where the deposits are located, probes holes are drilled into the ground then their locations transferred to a map.

A typical version of an open-pit mine that can be seen in everyday life is a quarry. Many of the deposits are used as aggregate for construction purposes. The largest open-pit mine in the world is the Bingham Canyon Mine located in Salt Lake City, Utah, USA. This produces copper, and is over 1.2km deep, and about 4km wide.

Strip Mining

Strip mining is the process whereby a thin strip of overburden located above a desirable deposit is moved and dumped behind the deposit. Once the deposit has been removed or mined, a similar second trip is created and that overburden is dumped into the first strip. This process continues until all the deposit has been mined.

Underground Mining

All the above definitions of mining are related to above-ground mining. Underground mining is utilised when desirable deposits, (such as coal), are far too deep for surface mining techniques. In order to extract or mine the deposit miners open shafts or portals that will intercept deposits such as coal seams. The deposits are removed and conveyed to the surface by conveyor belt. The entry to an underground mine from the surface is usually via a tunnel referred to as a decline, adit or shaft.

Currently the deepest mine in the world can be found south-west of Johannesburg in South Africa and is known as the AngloGold Ashanti’s Mponeng gold mine. Currently the depth at which this mine has reached is in excess of 4km. The second deepest mine is also located in South Africa in Gauteng Province. Referred to as the Driefontein Mine, this mine has reached depths of 3.42km.

Mining Finance

Mining finance is highly specialised and banks and other financial institutions dedicate whole departments or subsidiaries to financing this sector. Mining takes place all over the world from South America to Africa, to Canada, the USA and Australia. Therefore, approval committees for loans and investments into the mining industry will not only have to look at the borrower’s historicals, balance sheets and business plans, but for certain countries, they will analyse political risk and any other country factors that may impact the lending/investment process.

There are many investors and lenders in the mining industry. Such investors/lenders are banks, hedge funds, sovereign wealth funds, private equity funds, vulture funds and venture capital to mention but a few. Today, London remains the global centre for raising capital for investment in the mining industry, where there is easy access to both retail and institutional finance. The industry’s global representative body, the International Council on Mining and Metals (ICMM), is based in London, along with British firms Anglo American and Rio Tinto. Non-UK miners who also base themselves in London are the Swiss conglomerate Glencore, Polymetal (Russia), Antofagasta (Chile), and BHP (Australia).

These companies make up the biggest mining companies in the world and because of their size and balance sheets can raise capital direct from banks or bond issues in the capital markets. However, how do the smaller mining companies and start-ups obtain financing?

Financing Mining Start-ups and Junior Miners

Access to capital from banks by mining start-ups and junior miners is almost non-existent. Therefore, many of these miners have turned to those companies financing larger miners, hedge funds, sovereign wealth funds, state-owned agencies, export credit agencies and private equity. Also, since banks are not funding this sector, specialist mining funds have appeared, which like all funds have an internal hurdle that the client has to clear.

In order to clear this hurdle, the fund will offer debt and some alternative financing like royalty financing. Royalty financing is where the lender signs a contract with the miner, giving them in return for an up-front loan or payment, a percentage of the production or revenue stream. In essence it has replaced the debt/equity lending so favoured in the past.

There is a start-up fund in South Africa that is investing in local mining projects – The New African Mining Fund (NAMF), which is a closed fund with a 10-year life cycle. The first six years is the commitment period with returns being seen thereafter. The fund will accept up to USD 175 million. Once production has started, owners can look for expansion capital (if needed), from the above-mentioned sources.

Conclusion

For over a decade IntaCapital Swiss has been working hand in hand with providers so that companies who are being refused loans and lines of credit by their bankers and other financial institutions, can access credit facilities through the use of Demand Bank Guarantees

IntaCapital Swiss can proudly boast a high success rate with those companies that have passed due diligence. If you are a mining company that requires a capital injection or needs finance to start a new mine, and you have been refused credit facilities, contact us today. Remember, utilising Demand Bank Guarantees to access credit facilities does NOT dilute equity.

Aviation Collateral Transfer

IntaCapital Swiss in the Aviation Industry 

For over a decade we have been providing access to capital for companies who are finding it difficult to raise loans and lines of credit from traditional sources. 

Our dedicated management team at IntaCapital Swiss have a unique knowledge of global markets. Our most popular financial product, which is in constant demand is our Collateral Transfer Facility. This facility has provided cash-starved companies across the globe access to fresh capital be it a loan or lines of credit. 

Aviation Collateral Transfer 

What is Collateral Transfer? To many companies who have not heard of Collateral Transfer, they may well have heard of leased bank guarantee, which is a very common phrase used in finance circles daily. However, Collateral Transfer is the correct technical wording for leased bank guarantee, which is the transfer of a Demand Bank Guarantee from one company to another. 

If a bank refuses to underwrite the cost of a private jet for a company, then IntaCapital Swiss can offer access to the necessary capital to purchase the aircraft. IntaCapital Swiss have a database of Providers, usually hedge funds or private equity funds who are happy to provide Demand Bank Guarantees to the Collateral Transfer market. 

Those companies looking to raise capital (referred to as a beneficiary), will after successful due diligence, be asked to sign a Collateral Transfer Agreement with a provider. They will have to pay a fee to the provider for the use of a Demand Bank Guarantee which is commonly referred to as the Collateral Transfer fee. Once the fee has been received the provider will instruct their bankers to transfer a Demand Bank Guarantee to the account of the beneficiary. 

Financing a Demand Bank Guarantee  

A Demand Bank Guarantee can be used for many purposes such as an advance payment guarantee or a customs guarantee. Many companies are unaware that a Demand Bank Guarantee can in effect be turned into cash via a loan or line of credit

The International Chamber of Commerce ICC was set up many years ago to assist in cross border trade and finance. Now based in Paris, it has over 40 million members, including banks in over 200 countries. Whilst not law, the rules and regulations laid down by the ICC are adhered to by all members, including rules for Demand Bank Guarantees.  

A Demand Bank Guarantee is subject to the verbiage contained within the format. Therefore, for a Demand Bank Guarantee to be used as security for a loan or a line of credit the verbiage must be so precise that any lender will be completely covered in the event of a default. The rule the ICC has laid down for Demand Bank Guarantee is known as the Uniform Rules for Demand Bank Guarantees, (URDG 758) and all banks adhere to this rule. 

Once the Demand Bank Guarantee has been applied to the beneficiary’s account, they may request a loan or line of credit from their bank offering the Demand Bank Guarantee as a security for any credit facilities that may be granted. The bank now has a Demand Bank Guarantee as collateral for the loan, and the company may now go and buy the requisite aircraft. The provider will lien the aircraft in the event the Demand Bank Guarantee is called. 

Conclusion 

Since the global pandemic started the airline industry has lost an estimated USD118 billion net. Most of 2020 saw airlines going out of business, some being restructured, rentals being deferred, government bailouts and debt raising. Many banks have withdrawn from financing the aviation market; thus, capital markets have become a vital source of cheap financing especially to lessors who were known to raise funds in the bond market in early 2021

The general feeling is that purchases of aircraft are going to decline while leasing of aircraft will increase. This is due to the elevated level of borrowings that airlines are currently enduring, which effectively impacts their capital expenditure. 

Whatever the state of the aviation market IntaCapital Swiss stands ready to help in securing new capital for clients, be it through Collateral Transfer or indeed syndicated loans which is yet another option available to their clients.