As the global mining market continues to decline, nearly all greenfield projects worldwide are facing the risk of being abandoned due to the inability to secure funding for exploration. In this mining bear market, the two major global capital markets for risk exploration—the Toronto Stock Exchange and the Australian Securities Exchange—also appear increasingly powerless. As a result, numerous junior exploration companies are left in a state of desperate anticipation, eagerly awaiting the arrival of a mining spring. Meanwhile, China’s recent boom in mineral exploration is also gradually waning, driven by the downturn in the mining market and the gradual withdrawal of state financial resources from commercial mineral exploration activities.

Starting from the year before last, China’s investment in mineral exploration—after maintaining a steady growth trend for 14 consecutive years—experienced its first-ever decline. In 2013, the nation’s total funding for geological exploration amounted to 46.3 billion yuan, a decrease of 4.7 billion yuan compared to 2012, representing a year-on-year drop of 9%. Among these, investment from social sources declined most significantly, falling by nearly 30%. In 2013, the volume of drilling work decreased by 5.3 million meters compared to 2012. A survey report completed by the Development Research Center of the China Geological Survey indicates that in the first half of 2014, the national mineral exploration market continued the downward trend observed in 2013, with investment in non-oil and gas mineral exploration declining by 13.7% year-on-year and drilling volume dropping by 21.7%. Although the full-year data for 2014 and the data for 2015 have not yet been released, the author speculates that the downward trend in investment is unlikely to reverse.

China’s mineral exploration system is shifting from a heavily state-led model to a market-driven system in which private capital takes full charge. Unfortunately, on the one hand, the market is not yet fully prepared; on the other hand, the mining industry is currently experiencing a downturn. Mining professionals are deeply feeling that their exploration rights have transformed from highly coveted “hot commodities” into “burning hot potatoes.” This shift has particularly profound implications for geological survey institutions: the previous path of relying on state-funded projects to sustain and maintain their own mineral rights has been cut off. As a result, rational private capital, faced with such high-risk projects, is increasingly adopting a wait-and-see attitude—or even outright rejecting them. “How exactly can we raise the funds needed for mineral exploration?” has become a major challenge confronting all holders of exploration rights.

To crack this challenge, we must first gain a sufficient understanding of the fundamental characteristics of mineral exploration and social capital.

First, let’s analyze the characteristics of mineral exploration: First, it has a long cycle—exploring and uncovering an industrial ore body can take anywhere from three to five years at the shortest, to over a decade or even several decades at the longest. Second, it involves high risks—less than 1% of mineralized occurrences discovered will eventually develop into mines that are economically viable for industrial extraction. Third, it requires substantial investment—in the lengthy process of mineral exploration, continuous financial input is needed, ranging from several million to tens of millions, or even hundreds of millions of yuan.

Second, let’s examine the characteristics of capital: First, its profit-seeking nature—the primary mission of capital is to continuously enhance its own value. Second, its liquidity—capital requires smooth channels for fluid movement, facilitating its transfer from low-yield projects to high-yield ones. Third, its safety—before entering any investment, capital must thoroughly identify and effectively manage risks.

By comparing mineral exploration with capital characteristics, it is not difficult to see that although mineral exploration cannot do without capital support, capital itself finds it hard to proactively "embrace" mineral exploration. The combination of the two requires external assistance—mediation by a third-party intermediary. Such an external medium must possess the ability to monitor, identify, and control risks associated with mineral exploration while also enabling capital to flow freely and generate profits. The Multi-Commodity Exchange and the Australian Securities Exchange are undoubtedly two exemplary models in this regard. Although they have shown signs of "anemia," the market mechanisms they have developed over the years for risk-based exploration and investment financing are worthy of recognition and emulation.

In China, developing a sophisticated risk exploration capital market—similar to those in the U.S. and Australia—is a promising direction for growth. However, this cannot be achieved overnight; it will still take several years, or even longer. Until then, where our mineral exploration rights holders can find funding remains an unresolved question.

At the end of 2013, as I was pondering this issue, I came up with the idea of using private equity funds to open up financing channels for mineral exploration. However, after more than a year of research, I found that private equity funds cannot effectively solve the financing challenges faced by mineral exploration. The reasons are as follows: First, private equity funds have strict limits on the number of investors—no more than 200 in total—thus failing to achieve sufficient risk diversification; second, private equity funds generally place extremely high demands on the safety of capital and tend not to invest in projects with unclear investment returns; third, private equity funds have limited patience and typically adopt a “spotting opportunities and cashing in immediately” mindset; fourth, currently there is no established exit mechanism for mineral exploration projects.

What on earth should we do? Actually, a small number of daring pioneers have already begun forging a new path for financing mineral exploration—“crowdfunding.”

“Equity crowdfunding” may well be a “new prescription” for solving the current financing challenges in mineral exploration. The characteristics of crowdfunding align remarkably well with the requirements of mineral exploration. For instance, crowdfunding has no minimum investment threshold and no strict limit on the number of participants, allowing it to diversify exploration risks to the greatest extent possible. Investors in crowdfunding can transfer their equity holdings at any time, facilitating the fluidity of capital. Crowdfunding funds exhibit strong risk tolerance—investors typically contribute only small amounts of spare cash, making them relatively forgiving even if their investments turn out to be unsuccessful. Moreover, once mineral exploration achieves a breakthrough, it can yield substantial returns—a feature that is particularly attractive to crowdfunding investors who are driven by the mentality of “achieving big gains with small investments.”

For the incubation of exploration projects, if “crowdfunding takes the lead” to identify resource volumes, followed by “funding support” for feasibility studies and preliminary preparations for mine construction, and finally “the securities market steps in” to complete mine construction and industrial-scale mining—wouldn’t we then have paved a fully integrated path for equity financing in mineral exploration?

Source: China Nonferrous Metals News