Hi all,
There is a recent thread you're probably all aware of which I think raises an important question about financing that any MGT holder should want to have answered - and I don't think anyone has yet tried to answer it fully. That thread has turned into a reasons to "buy" verses "sell" discussion. But if you hold MGT, and believe it's going to go big one day, then you really need to be able to answer this question - it's key to the success of your company. I have started a new thread because holders appeared to strongly dislike the old one and didn't want it continually popping to the top, so I respect that - but the question itself shouldn't be buried; if anything, now the PFS has been released, it should be front and centre. On the other thread, people seemed to have read an article (sponsored by MGT) which stated the capex was "low" and thus thought it would be easy to get funding. I'm not sure it's that simple - but let's work through it objectively.
A few disclaimers to start: No, I don't hold MGT; No I don't plan on ever buying it; No, I don't hold any other IO company (I prefer my battery minerals). But regardless of which part of the mining sector you've invested in, you need to have a good handle over debt financing and how it works. There's no point sitting on a big resource if you can't either a) develop it or b) sell it to someone who can develop it. Now: why do I bother to post on a company I don't hold? Two reasons. One, I try to learn just as much from companies I don't hold, as much as those I do hold. In fact, I've probably learned a lot more from safely observing companies from a distance, rather than the ones I hold (because for the latter, there's always a certain amount of bias that is really hard to shake off no matter how hard to try). When you don't hold a company, and someone criticises it, you're far more likely to take that criticism on board and evaluate it honestly. The second reason is that I enjoy engaging with people who have bought into companies that I would not have chosen to invest in. It helps widen my own investing horizon and makes sure I don't stay forever trapped in my own bias. So those are my reasons for posting. If you don't want to believe this, and think I'm a "paid downramper", or that I'm trying to push the price down to enter lower (i.e. all the usual tripe that comes out by people who feel threatened), please read no further and just stick me on ignore. However hopefully you'll see I'm not here to criticise MGT or its holders, but simply to try to talk objectively about the debt financing side. As I said earlier, debt financing is THE critical part for any explorer who wants to make the big jump into production. You should be able to address it. Finally, I am not a mining expert, and I am not an investment professional. I'm just a layman who likes trying to understand companies/markets, sharing knowledge, and learning stuff in return. And yes, this all just represents my opinion. Some of it will in all likelihood be off the mark - but it's my own views and presented as such. Don't make any investment choices based solely on what I post, although hopefully the whole thread in its eventual entirety (responses, rebuttals, differing views etc) can be useful overall.
So, put simply, the question has been asked, "where will the money come from?". So far I don't think the mechanics of this have been fully addressed. It's not so much "can it be done?" but "HOW can it be done?". Because the latter question helps answer the former one. Let's look through the three main funding options and evaluate them. I will not include 'offtakes', 'pre-selling production' etc, as I do not believe the company could finance debt levels that high by pre-selling their production. If you disagree, that's fine, but please provide past examples where this has happened to this level. That said, the main options seem to me to be as follows:
1. Raise equity from existing/new shareholders
2. Purchase bank debt
3. Issue corporate bonds
Wait - there is actually one more:
4. Government debt/investment
What do each of these options look like for MGT? Well, two of them can be put to bed pretty quickly, in my opinion. One of them is a possibility, but with a lot of possibly long strings attached. I am not considering Option 4 because a) there are too many unknowns, including the potential size of royalty payments etc, and b) even if the State Government was to step up, large elements of the other three options would still be needed. So here we go:
Option One: raise equity
It should hopefully be obvious as to why this will not be possible. MGT have 3.142 billion shares on issue (a funny number by the way - that's 'Pi'!) At the current SP of 5.4c that's a market cap of A$169.6m. The low-end of the capex estimation for this project is A$572m. So if they were going to raise equity to fund the project (just to keep things simple, let's pretend they could do it at the current SP), to raise that amount of money they would need to issue 10.59 billion new shares (i.e. increase their Shares on Issue by over 4.3x). This will never happen; who would buy into that? Junior miners simply cannot raise equity that is multiples of your existing market cap (in fact, I can't think of any company that has been able to do this). There would be widespread revolt if someone diluted their existing shareholders by 430% to finance a project!
Option Two: purchase bank debt
Again, this should be put to bed pretty quickly. Which banks/financial institutions will loan you amounts of money that represent multiples of your current market cap, and even higher multiples of your assets? What could MGT put up as security? More importantly, what management team would possibly want to indebt themselves to financial institutions when there is so much uncertainty on the horizon around interest rates going up, etc. Shareholders would never approve this - can you imagine the interest repayments on bank debt in the hundreds of millions? Tiny changes in interest rates can have hugely disparate impacts on a company's ability to service the debt. The other issue with bank debt is that banks would typically apply very stringent conditions/controls around the debt, even more so when it's not adequately backed/secured by assets. For example, a bank would typically limit the company's ability to take on further loans until their own debt is repaid. They may limit company operations as well, i.e. no further acquisitions are allowed until the loan is repaid. The bigger the number, the less secured it is, the more stringent the conditions are. It is simply not credible for MGT to finance this figure via bank debt, in my opinion.
Option Three: issue corporate bonds
This is the most credible option to me. If you're not familiar, issuing a corporate bond is basically where the company buys debt off investors, and the company pays the investors interest over the period of the life of the bond. There are all sorts of types of bonds, but the most basic one is what I've just described - borrow money, pay interest, return money in X years. For example: you borrow A$1,000,000 off me, and in five years time you have to pay it back. You also have to pay me interest payments every twelve months of say 5% or A$50,000. So at the end of the five years, you give me my A$1,000,000 back, and you've also paid me A$250,000 in interest across that period. The benefit of issuing bonds is that, unlike the bank, investors won't impose so many conditions. Unless the bonds are convertible (i.e. at the end of the five years I can turn it into shares), there's no dilution either - you've taken my money, given it back, and you haven't had to give up control of the company or dilute existing shareholders. You've also probably got debt cheaper than a bank would have given it to you. In that time you've also been able to source other debt (maybe from the bank, maybe by issuing equity), you can undertake an acquisition if you want, etc etc. This is the great benefit of issuing corporate bonds. So this has to be where the money comes from, to my mind.
But will MGT be able to raise this amount by issuing bonds? The best way to answer this question is to look at past examples of other companies who have issued bonds to access debt. I'll use just two recent examples, which will demonstrate that it's not necessarily easy, it is most certainly not risk-free to bondholders, and thus it is not cheap for the company. I won't provide sources just to keep it straightforward, but this information is all in the public domain - so Google it if you want to fact-check me.
1. Virgin Airlines (2019)
Virgin issued unsecured bonds in 2019, raising A$325m at a coupon (interest rate) of 8%, for a five-year term. You might think, "great, that's a lot of money, we need a lot of money too". But look at the interest rate - 8% per year of A$325m is A$26m in interest per year. Additionally, this was for a operating company that in the first half of FY2019 had carried 26 million passengers and generated A$3 billion dollars in revenue. Virgin Airlines is/was not a junior mining company, they were a fully-fledged corporate entity with huge revenues and significant assets and a solid operating history. Yet look at the cost of raising that debt via issuing bonds. That's serious coin. PS: any investor who bought these bonds will rue the day they did, as Covid-19 caused the collapse of Virgin.
2. Jervois Mining (2021)
Some explanation needed. The story here is that Jervois Mining (market cap: A$450m) own a cobalt mine in the US that is only 12 months away from producing. Cobalt is a key ingredient in lithium-ion batteries, and is mined mostly from the Democratic Republic of the Congo (a very ironic name), largely funded by Chinese interests. America needs Cobalt for Biden's 'EV' revolution, and they don't want to have to rely on China. The US have also recently declared it a strategic mineral. The mine Jervois own in Idaho has already had over US$100m invested into it by the previous owners. They only need around US$80m capex to get it into production, and it will produce high-grade cobalt for at least seven years. So, on paper, this should be easy enough to get over the line. And they did get the financing done - great work by the team (by the way, I like this company but don't currently hold it, nor have I in the past - just need to add that). But look up the terms of the deal. They have got US$100m of debt via a bond issue, but the coupon (interest rate) is 12.5% per year for five years. The money is accessible to the company in two drawdowns of US$50m each, but in order to access it, the company has to raise US$50m (A$67m) of equity themselves via a capital raise (they raised A$45m in capital towards the end of last year). So all things considered, for a project that looks great on paper and is of national strategic importance to the US, Jervois still had to raise this money at what I think is a high interest rate and with various extra conditions involved.
Jervois, as a junior miner, is more comparable to MGT than Virgin is, so lets use that one as a direct comparison. US$100m is A$133m, so MGT need ~4.3x the amount of funding that Jervois needed to get to their magical A$572m figure. Jervois can get into production inside 12 months, and (hopefully) pay their debt back pretty quickly. Imagine for a moment that MGT could raise the money they needed at the same terms that Jervois just did. What would it look like? MGT would issue corporate bonds to get their A$572m in debt. They would pay 12.5% coupon (interest rate) or A$71.5m per year in interest, across five years that would total A$357.5m in interest payments. They would also have to raise half the amount (A$286m) themselves in equity to be able to access the debt. This may or may not be realistic, I'm not qualified to say, but use it as a rough comparison.
I will leave it there - I'm not here to say whether MGT can or cannot do Option Three (I honestly do not know). Perhaps for a figure this large they will attempt a combination of all four options (but I think that would be complex, expensive, limiting, and dilutive). I simply want to provide some logical, rationale perspective - and some real-life examples of debt financing - so that holders can realistically evaluate the situation, and answer the question, "where will MGT's capex money come from?" I have to answer this very hard question on some of my own holdings. I hope this is useful and I welcome any feedback on debt financing in general, or MGT's ability to raise this capital. To be clear: I'm not meaning to imply it cannot be done. Only economists and meteorologists can tell the future, and 51% of the time they're wrong. As I said at the start, getting significant amounts of funding is the critical step in a mining company's evolution, and to my mind is the key reason why there are heaps of prospective juniors, and not nearly as many successful mid-tiers, and even fewer majors. If you truly believe your company can become a mid-tier, and then one day a major, you really need to objectively understand where the money will/could/might come from. If you've got money in this company, don't just hope: be critically objective.
Wishing everybody all the best, if you made it this far, thanks for reading.
Cheers,
mondy
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