The future of mining post-pandemic

 

The metals and mining industry has entered an unprecedented period of economic uncertainty. Rocketing costs for exploration and production have impacted profit margins and left investors reluctant to engage with new mining projects. Learn how legal finance can enable mining companies and commodities traders rethink their allocation of legal resources (both time and money) and reevaluate their appetite for risk.


 

While the top 40 mining companies have been well-positioned to weather the impact of Covid-19,¹ the broader resource industry is grappling with different challenges brought about by the pandemic—including commodity price volatility, supply chain disruptions, uncertainty of the global economic outlook and increasing geopolitical unrest. But as the world slowly emerges from the pandemic, mining companies and commodities traders will have an opportunity to reevaluate how they pursue litigation and leverage legal assets for strategic business purposes.

Navigating economic uncertainty

The metals and mining industry has entered an unprecedented period of economic uncertainty. Rocketing costs for exploration and production have impacted profit margins and left investors reluctant to engage with new mining projects, especially with smaller companies. And costs concerns have only been exacerbated by Covid-19 due to the added expenses of new procedures, protocols and health testing equipment for workers, as well as increased costs due to global supply chain disruption. Meanwhile, global economic conditions have resulted in unprecedented pricing volatility, putting financial strain on commodities traders that already faced narrow profit margins and making it difficult for mining companies to make long-term decisions about demand.²

In recent years, ESG investing has also become a popular boardroom topic. For companies operating in the “wrong” industries (such as coal mining), established and cheap sources of funding for projects deemed to fall outside the relevant investment parameters could suddenly be put at risk.

While considerable disparity exists between the large-cap multinational mining companies and small single-asset operators, the economic impact of the past year is changing the way mining companies and commodities traders of all sizes are doing business.

Expanding business growth

The lack of certainty over the availability and cost of capital is a perennial problem constraining the growth and operation of the smaller companies within the industry.

As a result, companies in the space are often thinly capitalized and rely heavily on external borrowing, making it difficult for them to pursue new projects.

Historically, the financing options available to companies have failed to adequately address the needs of smaller miners and commodities traders. To embark on mining projects that will take years to reach production, for example, miners rely heavily on borrowing or else partnering with larger players to gain access to necessary project capital. However, these avenues invariably have risk associated with them: A bank may deny a loan, decline to cover full project costs or impose onerous covenants, and a partnership can go awry, exposing individuals and companies to legal and economic risks. Similarly, for commodities traders sitting in the middle of the supply chain and operating with tight profit margins, the only way to meaningfully increase revenue is to significantly scale up their market exposure. Doing so would generally require the businesses to take on significant leverage, thus increasing their reliance on bank facilities and trade finance.

Given the sensitivity of these companies to disruptions to all parts of the supply chain, unfulfilled contractual obligations are common among metals and mining companies. The prevalence of large-scale disputes therefore makes these companies good candidates for legal finance.

Increasingly, companies are optimizing their legal assets as a way to gain access to project finance. Resource companies may gain cash advances against the future value of pending claims—called monetizations—and use the capital for any business need. While some large claims may unlock significant capital—for example, the $75 million monetization Burford provided to a Fortune 100 company recently—resource companies with multiple qualifying matters can also secure a large capital facility that pools these matters in a single funding vehicle. Capital provided via this type of portfolio financing structure may be used for virtually any business purpose and, like most forms of legal finance, is provided on a non-recourse basis: A funder’s investment and return are recovered only from successful resolutions of underlying legal matters.

In this way, legal finance provides an innovative source of capital that carries none of the economic risks and operational constraints associated with bank loans, inventory-backed financings or project partnerships.

Maintaining competitive advantages

Over the last year, Covid-19 forced mining companies to fast-track innovation projects.³ In the months and years ahead, the world’s largest mining companies will face continued pressure to innovate, whether by identifying and investing in new technologies or by focusing on exploration to find resources that will be seen as resilient in a transition to a lower carbon world. While some companies may have the war chests needed to embark on such projects, legal finance offers an alternative for companies with less financial resources to pay for more speculative ventures from their balance sheet. By leveraging capital against a pool of cases, companies can help ensure they remain competitive, innovative and profitable in the decades to come, without added risk.

In addition, the process of obtaining operating capital through legal finance can often be faster as the due diligence carried out by the capital provider would generally be on the relevant legal matters, therefore reducing the need for extensive counterparty credit or project operational risk assessment typically required when obtaining bank financing. Quicker access to capital is of critical importance particularly in the context of volatile commodity markets.

Offloading legal cost and risk

Metals and mining companies frequently are involved in litigation and arbitration on both sides of the “v”. And yet many smaller miners and traders do not provision resources for litigation—potentially leaving them financially vulnerable, especially during parts of the economic cycle when the demand for commodities is weak yet the need for investments remains. The financing of legal fees and expenses provides an attractive way for companies to relieve the pressure on their balance sheets brought to bear by litigation and arbitration.

By financing fees and expenses for single highvalue disputes or for portfolios built around multiple claimant and respondent matters, mining companies can recover the asset value locked up in these matters without facing the often-significant upfront costs or downside risk of pursuing them. Companies can also free up capital to be used for various business purposes by monetizing a pending claim or claims, in which case a finance provider like Burford essentially advances capital on a nonrecourse basis that would otherwise be tied up until the resolution and payment of the matters in question.

Navigating geopolitical uncertainty

Ever increasing global demand in resources, coupled with technological advances, means that the most financially attractive, or at least commercially viable, project opportunities for mining companies are located in new geographies. Mining companies regularly operate in less familiar countries, where access to projects is made possible by bilateral investment treaties. Political risks (such as the risk of expropriation of assets) and other forms of country risks are therefore important considerations with far-reaching financial consequences for global mining companies. The investment landscape is made more complicated by the rise of resource nationalism and economic protectionism in recent years, accelerated over the past year by Covid-19.⁴

The natural resource sector will likely see increased state interventionism as governments try to buffer the economic impact caused by the pandemic or address fiscal imbalances resulting from large-scale relief measures. While resource nationalism has always been a risk the mining industry has had to contend with, it is manifesting itself in more explicit ways, with governments becoming more prepared to intervene in the economy, use indirect expropriation or demand increases in local content requirements as a way of gaining control of natural resources. Against the backdrop of protectionism, the mining industry is likely to bear the brunt of this trend in the coming years. Mining companies will need to anticipate potential policy changes and be prepared to pursue dispute resolution as needed.

Financing costly investor-state disputes

After being expropriated or otherwise inhibited from doing business, single-asset exploration companies may be deprived of their ability to generate revenue once that asset is taken away, which in turn could cause them to default under their financing or commodity supply agreements relating to the project. Should companies be unable to negotiate new terms to continue their operation, they may have to make the difficult decision to pursue meritorious disputes against governments. Securing legal finance from a third party may be the only option that companies have as the costs of bringing these claims could be prohibitively high and they have no other means of revenue generation.

Outsourcing legal expertise in investor-state disputes

Because investor-state disputes are complicated and time-consuming matters to pursue, a sophisticated finance partner like Burford can add value beyond simply supplying capital. With an in-house underwriting team drawn from GAR 5 firms, Burford has deep expertise in funding investor-state disputes and has accumulated considerable experience from having financed more than 50 high-value arbitration matters in the world’s leading arbitral institutions, including ICSID, and vetting many multiples more. While control of strategy and settlement decisions ultimately remain with the client, working with Burford would give the client a host of other benefits, including our thoughts on the case strategy, our ability to assess enforceability against the counterparty, develop damages estimates and identify top-tier local counsel. By drawing on the expertise of a financing partner, legal teams gain an additional level of predictability in the management and direction of their matters.

Reevaluating legal assets post-pandemic

Despite some level of optimism relating to Covid-19, the economic challenges from the pandemic are expected to remain for some time. But the disruption of the past year and the innovation it yielded show that metals and mining companies should think more broadly about how to maximize their returns and reduce risk going forward. Legal finance enables mining companies and commodities traders to rethink their allocation of legal resources (both time and money) and reevaluate their appetite for risk—helping to ensure that they won’t miss out on new opportunities as a result of taking a complacent or conservative approach to allocating capital.

 

Quentin Pak is a Director who leads Burford’s office in Singapore with responsibility for expanding Burford’s resources to support clients in Asia. Prior to joining Burford, Mr. Pak was most recently the head of the Asia commodities business at Commonwealth Bank of Australia

Matt Lee is a Principal at Burford with responsibility for leading its businesses in Australia. An Australian- and USqualified lawyer with trial, arbitration and appellate experience around the world, he works with companies, law firms, funds and investors engaged in complex commercial litigation and arbitration in Australia and in multijurisdictional disputes.