In light of the global financial crises and the subsequent difficulty in raising funds for the development of mining projects, Venmyn Deloitte has investigated some alternative capital raising options available to the industry. One such alternative is the issuing of Commodity Bonds.
A Commodity Bond is a bond with coupon payments and/or a par value stated in units of a commodity. The bonds can be linked to a commodity index or require physical delivery of the underlying commodity. Commodity Bonds differ from conventional bonds in that they have a quantity denominated return structure. Thus, regardless of the price level of the commodity, the number of units of the commodity required to service the bond is known.
Since a mining company has a long position on its commodities in the ground, issuing a Commodity Bond serves as protection from decreases in the prices of a commodity. Thus, the Commodity Bond acts as a hedge but, unlike in a forward contract, the opposing party in the transaction pays for the underlying commodity upfront. The effect of this is that, as the price of the underlying commodity decreases, the debt burden on the company decreases. However, the flipside to this is that as the price of the underlying commodity increases, the portion of the Mineral Reserve committed to the servicing of debt stays the same.
In the current global economic climate, one of the greatest advantages to a bond holder is the fact that investment in a Commodity Bond almost entirely eliminates currency risk. This is because the units of the commodity received can be exchanged in any currency where there is a market for the commodity. The addition of options and covenants to Commodity Bonds can also cater to the specific needs of bond holders and bond issuers.
The investigation by Venmyn Deloitte into the use of Commodity Bonds as a financing tool indicates significant potential for increasing the value of projects, lowering risk and giving stakeholders access to additional involvement opportunities. Governments, for example, could provide guarantees on the bonds. Downstream commodity users, such as automobile manufacturers using platinum in auto catalysts or nuclear power plants requiring uranium, could also secure supply of a given mineral through these means.
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Established when professional services firm Deloitte acquired mining services consultancy Venmyn in November 2012, Venmyn Deloitte creates a strong minerals industry service offering within one of the four largest auditing and professional services organisations’ globally, while maintaining Venmyn’s ethos of “independence you can trust” using its mineral industry specialists. Venmyn Deloitte’s mission is to provide integrated solutions to enable sound investment decisions in the minerals industry. Its unique independent specialist expertise links technical and economic criteria to deliver insights that can be trusted.
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