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Investors see opportunity as miners seek alternative finance


From fund giant BlackRock to activist shareholder Julian Treger, mining investors seeking predictable returns and better cash flows are stepping into mine finance. Mine developers often face funding gaps because of a shortage of bank finance and lackluster public markets. This has left alternative sources of financing - royalty deals, stake sales or debt that converts into shares - accounting for an increasingly significant proportion. Among the alternatives are mine royalty agreements - favored by BlackRock and the focus of UK-listed Anglo Pacific (APF. L), which Treger is now running. These deals offer cash in exchange for a share of future revenues."The scarcity of capital today... has created a huge opportunity for non-traditional sources of finance," said Catherine Raw, portfolio manager for the BlackRock World Mining Trust (BRWM. L). "That is where we step in."For investors, a royalty deal means regular future payments and the ability to benefit from a rise in commodity prices, an increase in reserves or better production capacity. All with arguably less risk than a share investment and no exposure to pitfalls like poor dividends, or cost inflation. For miners, the advantage is a source of upfront cash with less dilution than through selling shares at depressed prices. North American firms like Franco Nevada (FNV. TO) or Silver Wheaton (SLW. TO) have long struck streaming deals, providing cash for future production in return for exposure to by-products. These deals have been for precious metals, particularly when they are produced as a by-product by big miners focused on base metals or bulk commodities. Royalties though were less attractive in better times, as miners sought to avoid eating into revenues from their mines and set tough terms. They are now within reach for investors. BlackRock secured its first royalty agreement last year, with a deal that paid London Mining LOND. L $110 million in exchange for 2 percent of iron ore revenues from its Marampa mine in Sierra Leone. The deal became one of the World Mining Trust's biggest investments, just below its equity investment in copper miner First Quantum (FM. TO).

It is also finalizing a more modest, $12 million deal with copper and gold firm Avanco Resources (AVB. AX)."You are getting a slightly more interesting risk/reward scenario through investing in royalties," Raw said. And BlackRock, the world's largest asset manager, is pushing further into royalties. In August, it sought approval from investors in its one billion pound World Mining Trust to increase its ability to invest in non-quoted investments, specifically in order to bet further on mining royalty deals. These already make up almost 10 percent of the trust portfolio, but the portion can now be doubled. In a further reflection of the growing interest in royalties, Treger last week took the reins as chief executive of Anglo Pacific, the only UK-listed royalty firm. He also took a roughly 1 percent stake in the firm, which in 2012 reported 11 employees, 4 of whom are executive directors.

Treger made his name as an activist investor who played hardball with executives at firms including British department store Liberty."I think this is a very interesting time...because there's obviously a shortage of capital both equity and debt in the mining space," he told Reuters in an interview."Therefore together with a significant amount of disposals occurring by the majors, I think there is a real opportunity to do some very interesting transactions."STILL GROWING Alternative finance remains a tiny sliver of the financing used by the industry, which still relies more heavily on traditional options like equity, debt, bank financing. Royalties and streaming deals - similar to royalties but more frequently relating to by-products - also face competition from increased interest from strategic investors and private equity.

According to consultants PwC, in 2012 only 1.1 percent of all money raised was from royalty and streaming, compared to 0.8 percent in 2011 and even smaller slices before that. But there is room for growth. Treger - co-founder of Audley Capital and known for using initially small stakes to push for change, as with Western Coal, a deal that netted sale proceeds of more than $700 million - sees opportunity to refocus and scale up Anglo Pacific, whose core asset is currently a slice of royalty receipts from Rio Tinto's Kestrel coal mine in Australia. Last week, it struck a partnership deal with FlowStream, a streaming and royalty firm focused on oil and gas. There are shortcomings, of course. Royalty deals are not liquid - unlike shares - and cannot be sold on by investors. For miners, there is an effective limit to how much revenue they can hive off in advance, without hurting the ability to raise debt or equity in future."There is only a certain level of royalty that a project can support before you're using all your profit margins and you're not returning anything to shareholders," said Dan Betts, chief executive of Hummingbird Resources (HUMR. L), which last year struck a $15 million royalty financing deal with Anglo Pacific to fund its Dugbe 1 gold project in Liberia."I think that in every project there's a balance."

Money markets an ecb key rate cut could deter bank to bank lending


A cut in the ECB's refinancing rate could push benchmark bank-to-bank Euribor rates to record lows, but it could also reduce trading in money markets, something the central bank would rather avoid. European Central Bank President Mario Draghi said last week the central bank was ready to act to support the euro zone economy, prompting speculation that it could reduce its benchmark refinancing rate by 25 basis points to 0.50 percent. The comments have boosted Euribor futures , which rise when market participants expect the three-month benchmark to settle at lower levels over time. When central banks cut interest rates they hope that commercial banks will follow by easing borrowing costs for their clients, boosting lending to the real economy. But in the euro zone, where official rates are already at record lows, it could have the opposite impact, as even lower rates may reduce the incentives banks have to participate in the money market where they lend to each other, analysts say. Reviving money market activity is crucial for the euro zone economy because banks need to feel confident they can find funds before taking on the risks of lending to businesses.

A lower ECB refinancing rate means banks that need cash would have access to cheaper money from the central bank, putting pressure on those that have cash to offer in the market to lower their own rates. However, with the three-month Euribor already at 21 bps , lenders would probably be reluctant to compete and may decide to deposit their money for a zero rate with the ECB - seen as the safest place in the region to keep cash."Euribor rates could revisit record lows, but it could also lead to a decline in actual turnover volumes in money markets," Commerzbank rate strategist Benjamin Schroeder said."The corridor (between the ECB's refi rate and the deposit rate) is in a way a penalty for those who don't participate in money markets and do their business only with the ECB. You basically cut the penalty."

The three-month Euribor rate hit a record low of 0.181 percent last year. Barclays Capital strategists see it heading towards 0.15 percent. UNCLEAR CONSEQUENCES

While lower interbank volumes are undesirable, it is difficult to say whether cutting the refinancing rate and lowering the premium it offers over the ECB's deposit rate would do more harm than good to the euro zone economy."The three-year (ECB emergency loans) are based on the refi rate so if they cut it, that makes them a little bit cheaper," said Emil Cardon, market economist at Rabobank. "Also it could cause Euribor rates to go down and most of the Spanish mortgages are based on Euribor." A debt overhang from a property crash is a major factor in perpetuating Spain's recession. An option to keep the ECB rate differential steady is to lower the deposit facility rate to negative levels, effectively penalising banks for keeping money with the central bank. But several ECB policymakers have expressed reluctance to make such a move. ECB board member Peter Praet has pointed to how Danish banks started charging consumers and firms more for loans after Demark's central bank pushed its deposit rate into negative territory. Expectations of where overnight interbank rates will settle later this year have remained steady at levels of 8-10 basis points, which analysts say suggest market participants do not expect the ECB to make such a move."Cutting the refi rate is already difficult for some (ECB) members, so I don't think a deposit rate cut is likely," said Rabobank's Cardon.