Historically, gold mines raised
their capital through the stock market. Homestake
in the United States, for example,
was first listed on the New
York Stock Exchange in 1879. The South
African mining houses evolving in the late nineteenth century also looked
to the London stock market, although many of the investors at that time were in
Belgium, France and Germany.
Today the stock exchanges in
Johannesburg,
London,
New York, Paris, Sydney, Toronto
and Vancouver
(for junior companies) remain important sources of finance with specific indices
on gold
stocks.
Since the mid-1980s, however,
the raising of finance for exploration
and development of new gold mines around the world has become a more complex
matter of financial engineering between mining companies and bullion
banks. Above all, mining finance has seen the greater adoption and integration
of risk management practices as a means of access to new and possibly cheaper
sources of funding.
Gold
loans were an initial development that became popular in the early 1990s,
involving up to 150 tonnes (4.8 million ounces)
in peak years but that vogue soon declined and most have now been paid back,
although new loans are taken out occasionally.
Hedging
programmes of increasing sophistication and complexity, involving a mix of forward
sales and options,
were then devised by bullion banks. These strategies can stretch out for ten or
more years, and typically take into account both the gold
price itself and currency exposures.
Such funding has become crucial
to large mining companies looking for growth, whether in terms of opening new
mines or, as is the current trend, by the acquisition of rival mining companies.
The disappointing gold price
of recent years has also forced mining companies to go for growth to maintain
investor interest. The funding requirements of the gold mining industry worldwide
are estimated at $4-$5 billion annually to cover exploration, project finance,
mergers and acquisitions.
While the mining companies’
own cash flow provides up to half the investment funds and equity markets continue
to help, the bullion banks play a major role, especially in project finance.
Two international agencies,
the International Finance Corporation
(IFC) and the European Bank for Reconstruction
and Development (EBRD) have been instrumental in helping to underwrite some
projects, the IFC notably in Africa and the EBRD in Russia
and Uzbekistan.