Financing Sources of Exploration Works in the Light of Risk Related to their Activity

Abstract

The article presents an overview of the determinants of exploration works and the definition of the role of junior mines in those processes. Junior mines, as special purpose vehicles, focus on the stages of exploration and documenting of the deposits, without going into theoperational stage related to the exploitation. Due to their nature, those entities finance their activities with equity capital in the formof share issues on the capital markets, addressing their proprietory securities to investors who accept a high level of risk. The largeststock exchanges on which the exploration companies obtain the required funds have been identified, and the trends that complementcapital raising, concerning the involvement of private equity funds, have been presented.

Full text

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Inżynieria Mineralna — Styczeń – Czerwiec 2021 January – July — Journal of the Polish Mineral Engineering Society
http://doi.org/10.29227/IM-2021-01-12
1) AGH University of Science and Technology, Cracow, Poland; email: kustra@agh.edu.pl; correspondence author
2) AGH University of Science and Technology, Cracow, Poland; email: bkowal @agh.edu.pl
3) AGH University of Science and Technology, Cracow, Poland; email: rranosz @agh.edu.pl
Financing Sources of Exploration Works in the Light
of Risk Related to their Activity
Arkadiusz KUSTRA1), Barbara KOWAL2), Robert RANOSZ3)
Abstract
e article presents an overview of the determinants of exploration works and the denition of the role of junior mines in those process-
es. Junior mines, as special purpose vehicles, focus on the stages of exploration and documenting of the deposits, without going into the
operational stage related to the exploitation. Due to their nature, those entities nance their activities with equity capital in the form
of share issues on the capital markets, addressing their proprietory securities to investors who accept a high level of risk. e largest
stock exchanges on which the exploration companies obtain the required funds have been identied, and the trends that complement
capital raising, concerning the involvement of private equity funds, have been presented.
Keywords: mining, exploration, junior mines, nancing
1. Introduction
Mining industry constitutes one of the primary sectors of
economic development, especially in developing regions such
as Africa and South America, where it is export leverage sup-
porting the needs of developed economies. Such economies,
which are based on modern and innovative sectors, utilise the
resources obtained and processed in the complex production
processes in the electronics and automotive industries. Japan
is one of the examples, as even though it does not have min-
eral resources of its own, it is still the world's biggest consum-
er of mineral resources, importing them from various parts
of the world. Similar trends are also present in France [1].
Among developed countries, Australia is a unique phenome-
non. Although the country is among the world's nine richest
economies, it is the mining industry that its economic pros-
perity and the gross domestic product growth are based on.
e demand for raw materials has been increasing since
the beginning of the twentieth century and based on the
forecasts for 2050, it is unlikely to decrease [11]. Given the
historical consumption trends, one should assume that the
extraction of natural resources will actually increase. Accord-
ing to Global Resources Outlook, today's consumption trends
indicate that the extraction of such resources as metal ores
will be increasing by about 1.7% annually until 2060 [2]. is
demand can only be met by increasing the production output
of the already existing mines [7]. However, it is possible that
with the current technological developments, the constant
demand for mineral resources could also be met through the
exploitation of the so-called anthropogenic deposits, includ-
ing mining waste storage sites [3], as well as small deposits
[4]. Although recycling methods are also being rened to
help meet the demand for metals, they only supply a limited
amount of them [4].
erefore, obtaining and making new deposits of raw
materials available to support the needs of modern and inno-
vative economic processes is becoming a necessity if the fur-
ther development of advanced technologies is to take place.
is goal is achieved through explorations as well as through
mergers and takeovers of deposits that have already been doc-
umented, which are eective alternatives to launching new
geological-mining projects and providing the necessary raw
materials.
Looking at the entire life cycle of the geological and min-
ing projects, it should be remembered that it oen takes many
years from a discovery of a deposit to mass production [8],
therefore the risk associated with them is usually multifacet-
ed. e specicity of the works seems to justify the need for
an individual approach to the problem of a proper selection
of funding sources [12] and matching them to a specic stage
of advancement in the whole life cycle. When analyzing the
risk related to such a project, it should be noted that the risk
varies and decreases with the progress of work. Undoubtedly,
when analyzing the life cycle of a geological-mining project,
the greatest risk of failure, and thus of incurring outlays which
will not bring the intended economic eects, are the processes
related to the exploration of the deposit and its estimation.
e characteristics of such works in conjunction with their
capital intensity is an interesting topic related to the selec-
tion of funding sources as well as the economic eciency of
the activities carried out in the context of the whole geologi-
cal-mining project.
e market analyses conrm that there is currently a strict
specialization that consists in shiing exploration works from
large mining companies to junior mines, i.e. special purpose
vehicles involved in such activities.
In the context of the above-mentioned issues, this article
aims to present the funding sources of exploration works in
the light of their specicity and conditions, which at the same
time justify and legitimize the functioning of the special pur-
pose vehicles, i.e. junior mines. Such entities are oen listed
on alternative capital markets where they try to raise funds
for their activities
Submission date: 16-01-2021 | Review date: 22-05-2021

90 Inżynieria Mineralna — Styczeń – Czerwiec 2021 January – July — Journal of the Polish Mineral Engineering Society
2. Materials and Methods
For the purposes of this publication, a literature review
was carried out to present the role of junior mines compa-
nies in the processes of carrying out exploration works. e
publications were searched for using several search engines
such as: Science Direct (Elsevier), Scopus or Gate Research.
Each of them gave dierent search results. Terms such as
"junior mines", "life cycle", "nancing" and "stock exchange"
were used to search for "title", "keyword" and "summary" of
the indexed literature eld. Initial searches and research in
search engines resulted in a total of 136 publications that were
of interest to the authors of this publication.
In the next step, a selection of publications was made, re-
jecting those that were not relevant to our questions and re-
search considerations regarding the role of junior mines com-
panies and sources of nancing for exploration works. As a
result, the focus was on 35 publications (including 16 articles
and 16 reports) constituting the nal dataset. On their basis,
the characteristics of special purpose vehicles of the juniors
mines type, exploratory works being part of the geological and
mining project life cycle and nancing of these works, taking
into account the mine development phases, were made. Most
of them were published between 2019-2020. A large part of
them, in terms of geography, is related to Canada (TSV-X),
Great Britain (AIM) and Australia (ASX), because there are
the largest stock exchanges on which juniors are listed. ese
countries attracted mining companies to their nancial mar-
ket, providing opportunities for them to accumulate capital
and develop them in the eld of mining and related industries.
3. Results
In this section, the main results are described starting
with the characteristic of eects in exploration work. Subse-
quently, it was presented the main type of enterprises, which
are identied as junior mines. ey carry out the explorations
works, becoming the specialist ones in these processes.
3.1. e characteristics of eects in exploration works
Extraction works are part of a geological-mining project
life cycle and constitute its vital element, as they determine
its subsequent stages. e project life cycle is dened within
the time horizon determined by the beginning and the end
of a project.
A geological-mining project can be dened as activities
carried out in the mining industry such as searching, sharing,
extraction, dressing of the minerals and selling the enriched
product [23]. e implementation of such a project is related
to a mineral deposit, the extraction of which is the object of
the operating activity of a mining company. Mineral deposits
are very characteristic, which is evidenced by the rarity and
the uniqueness of their occurrence both in terms of geologi-
cal conditions as well as their location, non-renewability and
uncertainty about the construction of resources and geologi-
cal characteristics. erefore, implementation of the geologi-
cal-mining project is not only related to nding a deposit but
also to obtaining licenses and permits to extract them. Imple-
mentation of such a project diers from the implementation
of any other project in technical, technological and nancial
terms. e particularly distinctive features include [24]:
• long pre-production period which consists of search-
ing for deposit and its evaluation, sharing and pre-
paring for mining,
• long mining period,
• complex geological-mining conditions,
• high capital intensity,
• high cost of capital nancing the project (long pay-
back periods),
• production inexibility,
• high operational risk (high xed operating costs),
• price unexpectedness on natural resources market.
erefore, the implementation of the discussed geologi-
cal-mining works consists of several stages: exploration and
recognition of mineral deposits, evaluation of a deposit,
Fig. 1. Mine life cycle stages [22]
Rys. 1. Fazy cyklu życia projektu geologiczno-górniczego

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Inżynieria Mineralna — Styczeń – Czerwiec 2021 January – July — Journal of the Polish Mineral Engineering Society
building a mine, land exploitation and enrichment as well as
liquidation and reclamation [25].
As a part of the exploration stage, the deposit is exposed
and the mineral deposit is documented. e next stage, the
assessment of the deposit, is reached by approx. 5% of the
projects implemented in the exploration stage [26]. e anal-
yses carried out in this stage are aimed at identifying the pa-
rameters that characterize the deposit. e works focus on
determining whether the extraction of mineral resources is
technically feasible and commercially reasonable (feasibility
study). is stage ends with a decision to build the mine. is
is the most capital-intensive stage, which requires the investor
to obtain several permits, which may result in extending the
stage in time. It requires identication of complete assets that
would be t for use and would ensure the exploitation at the
level of the designed extraction capacities. Aer the mine is
constructed and the preparation of the deposit for exploita-
tion is completed, the mining production begins. e produc-
tion process produces a mineral raw material with appropri-
ate characteristics of a commercial product, which it obtained
in the process of enrichment. is is a long-term stage. e
last stage is a closure of the mine and reclamation of the area
where the exploitation was conducted.
Given the above, it is noted that the life cycle of the geo-
logical-mining project is identied directly with the life cycle
of the mine (Fig. 1). A mine's life cycle includes the following
stages [22]:
• prospecting and exploration,
• development,
• extraction,
• closure/reclamation.
It is worth noting, that it may be dicult to distinguish
the individual stages of economic activity as some processes
may overlap or occur in parallel during certain periods.
Exploration works consist in nding and documenting
mineral deposits; in particular, they include:
• analysis of historical geological data,
• topographical analyses,
• geological analyses,
• geochemical and geophysical analyses,
• exploratory drilling,
• sampling.
Such exploration works can only be performed aer the
relevant rights and licenses have been obtained.
Since as much as 95% of projects never go past the explo-
ration stage and reach the deposit evaluation stage, explora-
tion and identication of deposits bears the highest risk of
failure. e relationship between the investment risk and the
stage of a mining and geological project's life cycle is present-
ed in Figure 2.
When analyzing the entire life cycle of a project, it is evi-
dent that the risk changes depending on the stage of its imple-
mentation (g. 2). e initial stage, being mostly exploration,
is characterized by a high risk of failure, demanding at the
same time high investment assets, related to the necessity of
relevant research and analyses. Investment outlays typical-
Fig. 2. e relationship between the investment risk and the stage of a mining and geological project's life cycle. Source: own study
Fig. 3. Changes on the global mining market at the beginning of the 21st century [35]
Rys. 2. Zależność pomiędzy ryzykiem inwestycyjnym a fazą cyklu życia projektu geologiczno- górniczego
Rys. 3. Zmiany na światowym rynku górniczym od początku XXI wieku

92 Inżynieria Mineralna — Styczeń – Czerwiec 2021 January – July — Journal of the Polish Mineral Engineering Society
ly amount to about a few percent of the value of the whole
project (approx. 10-15%). e highest level of risk out of all
project stages is due to the exploration works undertaken
during this stage, including the drilling of exploratory wells,
which does not always result in a deposit being discovered. In
practice, one can never be certain that such works will lead
to the discovery of commercial deposits. As the works on the
exploration and the development of the deposit progress, the
business risk decreases, although, in fact, it accompanies the
investor until the end of the operation of the project.
en, for projects that go further to the assessment stage
of the deposit, the risk decreases signicantly. e lowest risk
occurs at the stage of the mine construction, the exploitation
and the enrichment, i.e. once all parameters are known, the
knowledge of the mineral is high enough and appropriate
research and analysis have been carried out. Potential inves-
tors and capital providers pay attention to nancial aspects,
but above all, to technical or technological data concerning
geological and mining information, the most of which occur,
as mentioned, at the exploration stage. e decisions to start
the investments in exploration, development and subsequent
extraction of minerals from the deposit require a large initial
capital commitment, while the economic benets of the proj-
ect are usually generated aer a few or more years from the
discovery of the deposit. erefore, it is the characteristics of
the deposit (the rarity of occurrence, the natural limitation,
the lack of a possibility of estimating them unequivocally)
that determine the nancial success of the investor. e size
of the deposit and resources is the basic condition for invest-
ment activity in mining. And the geological conditions of the
occurrence of the mineral (the form of the deposit, the size of
resources and the quality of the mineral) and the possibilities
of its extraction determine the protability of this investment.
e deposits located close to the surface, with large resources
and large thickness, are more economical than the small ones
with a complicated structure, located much deeper.
3.2. Junior mines as a special purpose vehicle dealing with
exploration works
Global consolidation of the mining industry (a global
process of taking over and merging) which occurred aer the
rst decade of the 21st century created more concentrated
and limited mining market. Big companies using horizontal
diversication model with diversied production and geo-
graphical location, identied with individual business seg-
ments within a specic business model started to dominate
the market. (Figure 3)
e changes made most oen through processes of merg-
ing and taking over led to shaping the specic market struc-
ture of mining companies in which one can distinguish three
types of mining companies:
• senior mines,
• medium mines,
• junior mines.
e classication border between the classes of individual
companies is blurred and the criteria for the division are dif-
ferent. For example, M. Dougherty uses the size of its assets
as a classication criterion, i.e. senior mines would be mining
companies with assets exceeding $3 billion, medium mines
Fig. 4 Exploration expenditures on particular types of raw materials between 1975-2018 [36]
Fig. 5. Changes in exploration expenditures in the four countries that represent the largest market for exploration [36]
Rys. 4. Wydatki eksploracyjne w zależności od rodzaju surowców w latach 1975-2018
Rys. 5. Zmiany w wydatkach na eksplorację na przykładzie czterech krajów reprezentujących największe rynki eksploracyjne

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Inżynieria Mineralna — Styczeń – Czerwiec 2021 January – July — Journal of the Polish Mineral Engineering Society
between $1 billion and $3 billion, and junior mines below $1
billion [28]. D. Cranstoun, on the other hand, distributes the
classes by a source of income assuming that: seniors would
generate revenues mainly from the extraction and sale of min-
erals, juniors would depend primarily on eective processes
of exploration and sale of documented deposits without pro-
duction, and the mediums would generate revenues in a com-
plementary manner from both sources [18].
In the light of the cited classications, it can be concluded
that the structure of the mining market has been determined
by the revenue generated but also by the specialization of
works within the life cycle of deposits identied as geologi-
cal-mining projects.
e increase in exploration expenditures over the years
has become a necessity for extending the life of mining op-
erations but also for increasing of future mining. (Figure 4)
e gure shows that the successive increase in exploration
expenditures had its highest value in 2012, and the value of
exploration expenditures was approximately $34.9 billion. As
for the type of raw materials that absorbed the highest capi-
tals at the exploration stage, it must be admitted that gold is
invariably the leader. Base metals such as copper, zinc, lead or
aluminium also have a signicant share. In the last two years,
i.e. 2018-2020, according to the PwC report, we can observe
a transfer of high exploratory intensity to lithium and cobalt,
which are necessary for new technologies very oen related to
the broadly understood electromobility.
As far as the countries with the largest exploration expen-
ditures are concerned, they can actually be considered to be
the largest in countries where regulations encourage this type
of activity and at the same time where exploration companies
can count on raising capital for such activity. Figure 5 displays
the domination of four countries - Canada, Australia, USA
and China.
Most of the investment expenditures made in the explo-
ration works were made by junior mines companies. Figure 6
shows the share of exploration companies in the total global
exploration eort; this share has been systematically increas-
ing since the 1980s. In the last decade, more than 65% of all
discoveries of new deposits were made by junior mines.
e rapid growth of junior mines was caused by special-
ization and the desire to separate the risks of existing mining
businesses from exploration. e transfer of risk to special
purpose companies has become eective for the largest min-
ing concerns. Due to their specicity, junior mines compa-
nies need to nance their signicant investment expenditures,
which is why they participate in the capital market, where they
try to obtain the necessary funds by issuing shares, most oen
Fig. 6. Increasing the share of junior mines in global exploration [36]
Fig. 7. Mine development stages and traditional sources of funding [32]
Rys. 6. Wzrost udziału junior mines w eksploracji na świecie
Rys. 7. Fazy rozwoju projektu geologiczno- górniczego a tradycyjne źródła nansowania

94 Inżynieria Mineralna — Styczeń – Czerwiec 2021 January – July — Journal of the Polish Mineral Engineering Society
in alternative markets. e largest and most eective markets
for such companies are found on the London, Toronto and
Sydney stock exchanges. At the same time, the valuations of
junior mines on the stock exchanges are generally low for the
mineral sector, and their appreciation is conditioned by in-
formation about the mineral potential of the sought-aer ar-
eas and the progress of projects" [30]. e implementation of
projects by these companies or, more precisely, the possibility
of nding economically viable extraction resources is signi-
cantly limited. erefore, investments in these companies are
subject to high risk. e risk also results from possible manip-
ulation of information disclosed by mining companies [31]
4. Discussion
In the light of the presented models for the realization of explo-
ration works, this chapter presents the types of funding and trends
in the nancing of exploration works carried out by junior mines.
Exploration works as the rst stages in the implementa-
tion of projects generate expenses and potential revenues (or
possibly prots) appear only in the operational stage related
to the operation of the project. A drawing showing the gen-
erated assets, cash ow and nancing sources at each stage of
the life cycle is presented below.
As Figure 7 shows, the sources of funding in the explo-
ration stage basically focus on equity only, which can come
from the owners' contributions as well as form the issuance
of shares on the capital markets. It is only at the stage of both
technical and economic feasibility studies that it is possible
to raise foreign capital and debt nancing. e consequence
of the presented trends and their conclusions is that junior
mines dealing with exploration works have to raise equity for
their activities, looking for opportunities to enter capital mar-
kets and distribute shares to potential owners. e funding
structure for the individual life cycle phases of mining com-
panies (Figure 8) in the years 2015 to 2018.
Figure 8 conrms the share of foreign capital in the -
nancing of geological-mining projects with an increase in
their advancement and a simultaneous reduction of invest-
ment risk. foreign capital nancing at individual stages of the
life cycle. In the case of juniors companies, which are mainly
interested in the rst stage (exploration), equity nancing ex-
ceeds 90% (except for 2016, when equity nancing was at the
level of approximately 74%).
Within the framework of stock exchanges, these compa-
nies may issue shares on the capital markets, and in particular
on the so-called alternative markets. [30]. e choice of such
markets for juniors companies is due to the fact that they do
not meet the requirements to enter the main market.
e biggest quotation markets for juniors companies in
the mineral sector are:
• Toronto Stock Exchange (TSX) in Canada, the TSXV
alternative market.
• Australian Securities Exchange (ASX) in Australia,
• London Stock Exchange (LSE) in England, AIM al-
ternative exchange
e location of stock exchanges in these countries is pri-
marily due to the predictable and stable regulatory environ-
ment and the proximity of some areas rich in minerals, i.e.:
the proximity of London to Africa, Canada to all the Americas
and Australia to Asia, Africa and Australia. ese countries
have attracted mining companies to their nancial market by
providing opportunities to raise capital and develop them in
mining and related industries.
Fig. 8. Level of nancing of juniors mines with equity and foreign capital in 2015-2018 [20]
Rys. 8. Poziom nansowania spółek typu juniors przy wykorzystaniu kapitału własnego i długu

95
Inżynieria Mineralna — Styczeń – Czerwiec 2021 January – July — Journal of the Polish Mineral Engineering Society
According to J. Bhandari, Canada has the highest number
of junior mines listed on the stock exchange [13]. us, the
Toronto Stock Exchange Venture (TSXV), as an alternative
market, are leaders in raising nances for exploration compa-
nies. Many of the companies listed on these stock exchanges
do not come from Canada, but they take advantage of the fa-
vourable regulatory and market conditions oered by Canada
to obtain nancing. It is about the stability of not only legal
regulations but also investment incentives, created by the
state to purchase shares of junior mines companies by poten-
tial shareholders. is includes several editions of the "Flow
through shares" program (Figure 9)
In turn, by analyzing the Australian market in the context
of exploration and potential incentives created by the state, it
is also possible to identify programs of which two were the
most signicant:
• Plan for Accelerating Exploration (PACE) for the
South Australia region, under which over 40 million US dol-
lars were spent in 2004-2015;
• Exploration Incentives Scheme (EIS) supporting
the Western Australia region, within which approximately
100 million US dollars have been spent between 2009-2017.
In each of them, there has been an intensication of
searching and strengthening of the sector of Australian junior
mines operating on the market.
In recent years, specialized private equity funds have also
been very expansive in funding exploration works, comple-
menting traditional sources of capital from the capital market.
ese funds are an alternative form of nancing and are tar-
geted at investments in the early stages of geological-mining
projects. e most active ones include Orion Mine Finance,
Resource Capital Funds, Taurus or Greenstone Resources.
Private equity oers funding to junior mines in exchange
for minority shares in projects. ey are also given inuence
on management and operational decisions to increase their
protability in the context of nal sales.
e funds have also recently recognized opportunities to
lengthen the value chain when nancing projects and have
combined investing in the exploration of new deposits with
opportunities to secure priority in debt nancing at subse-
quent stages of geological-mining activities; e.g. Orion ob-
tained rights for debt nancing for the Curraghinalt project,
just like Greenstone Resources in the case of two copper proj-
ects, Coro and Excelsior [34].
Creating opportunities to earn money by oering dier-
ent types of nancial products for private equity funds at dif-
ferent stages of projects seems to be benecial for the mining
market and oers an opportunity to attract similar types of
nancing on a wider scale
5. Conclusions
Currently, mining companies operating on the market
have to face challenges related to the general downturn, de-
crease in raw material prices, maintaining cost eciency, and
nally the need to implement new and innovative solutions to
improve their geological and mining processes.
In the early stages of geological-mining activities, the
identied exploration processes require nancial expendi-
tures, while incurring a very high investment risk, associated
with the failure of exploration. In the light of the conditions
and risk management, which determines the cost of raising
the necessary capital, the exploration works are mostly carried
out by junior mines special purpose companies. ey usual-
ly raise equity through share issues on alternative markets,
the largest of which operate in Toronto TSXV, London AIM
and Sydney ASX. However, equity does not ll the existing
nancing gap at the earliest. Recently there has also been an
observable activity of equity private funds, which oer fund-
ing to exploration companies. Having minority shareholding,
they gain inuence on the implementation of geological-min-
ing projects, bringing them to the stage where a project with
documented deposit can be resold. Nevertheless, some of the
funds have seen opportunities of extension of licenses to earn
money by ensuring the provision of capital at further stages
of project development. Such an extension of the value chain
for nancial products owned by private equity funds is eco-
nomically justied, but on the other hand, it should also have
a positive impact on the development of the mining market.
Fig. 9. Canadian exploration nancing (2011-2018) [33]
Rys. 9. Finansowanie prac eksploracyjnych w Kanadzie

96 Inżynieria Mineralna — Styczeń – Czerwiec 2021 January – July — Journal of the Polish Mineral Engineering Society
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Źródła nansowania prac eksploracyjnych w świetle ryzyka związanego z ich realizacją
W artykule przedstawiono przegląd uwarunkowań prac poszukiwawczych oraz określenie roli spółek typu junior mines w tych pro-
cesach. Junior mines, jako spółki celowe, koncentrują się na etapach poszukiwania i dokumentowania złóż, nie wchodząc w fazę
operacyjną związaną z eksploatacją. Ze względu na swój charakter, podmioty te nansują swoją działalność kapitałem własnym
w formie emisji akcji na rynkach kapitałowych, kierując swoje papiery wartościowe do inwestorów akceptujących wysoki poziom
ryzyka. Zidentykowano największe giełdy, na których spółki eksploracyjne pozyskują żródła nansowania oraz przedstawiono ak-
tualne tendencje pozyskiwania kapitału, dotyczące zaangażowania funduszy private equity.
Słowa kluczowe: górnictwo, eksploracja, spółki junior mines, nansowanie