Why should mining companies consider joint ventures?
March 28, 2014
Joint ventures (JVs) have been an important part of the mining industry for decades and have been instrumental to the development of many major resource projects.
Oil and gas JVs vs. mining JVs
The oil and gas sector has been using JVs to mitigate exploration risk for some time. The initial costs associated with oil and gas exploration, such as hiring a rig and sinking wells, are significantly higher than in mining. This has created a need for a JV structure to spread exploration risk in oil and gas. The amalgamation of acreage into fields has also encouraged JV structures.
The rise of JVs in mining addresses a different risk to that in oil and gas. For mining companies the risk being mitigated by JVs is development risk. This is largely associated with the capital outlay required to develop Tier 1 deposits. Development risk includes technical risk, sovereign risk and, in particular, the financial funding risk. Oil and gas doesn't have the same development risk because the production of oil or gas can be near instantaneous when a well is sunk.
Development risk factors manifest themselves in a few ways:
- A reluctance by managers to commit to large mergers and acquisitions;
- Difficulty in funding large resource projects, particularly those with commissioning risk;
- Risk of asset misappropriation;
- Pressure to reassess the viability of existing or near term projects; and
- Renewed focus on cost cutting and risk sharing.
De-risking is taking place across the mining industry. Companies need to keep finding ways to grow their reserves and secure future production. Instead of all-out takeovers, many miners are collaborating through JVs. By advancing a project together, miners don’t have to assume all of the risks associated with making a full acquisition on their own.
The reasons to seek out a JV vary and can include:
- Mega projects where a number of parties share the financial and development risk;
- Transactions being undertaken between companies with existing cash and funding capacity and those with quality development projects or existing production with growth potential; and
- Investors (particularly in Asia) seeking to secure off-take agreements as part of their funding of an investment into a resources project.
Ideally, these arrangements feature each participant bringing particular expertise to manage specific risk elements and an allocation of capital that allows each organisation to focus absolutely on what it does best.
Typical JV terms:
- proportion of capital to be committed and timing of capital injections;
- board representation and decision making process;
- operator agreement;
- anti-dilution and buy-back terms for failure to make capital injections.
What is the outlook for JVs?
I expect JV activity to increase in 2014 as companies search for growth, or capital, without having to go it alone. These will be predominantly in deals for mining assets at a development or “phase 2” stage.
JVs may not only arise around just the resource base. For instance, Rio Tinto has announced that it is looking at investment partners for the infrastructure portion of the giant Simandou deposit.
Financial investors will become important JV partners in 2014. These will range from sovereign wealth funds to private equity and downstream conglomerates.
Have you entered a JV? How did it work? What benefits did it bring? Share your thoughts and experience below.