Funding Methods Part 1: Federal
Funding is a big buzzword. I have found myself running in circles trying to find it for my own projects, and can safely say that there is no black-and-white approach to finding funding. I wanted to explore some of the shades of gray in the funding world and some mechanisms that can be used by companies to find the funding they need. This post is part of a two-post series.
In this post, I’ll explore the basic funding mechanisms for the mining (and a variety of other) industries, supply and off-take as a funding option, as well as how government incentivize development of projects.
Government Incentives
As technology changes, awareness of the need for specific minerals needed to advance that technology leads us to explore to find and mine these minerals. Finding concentrations of these important minerals benefits the global community, and governments incentivize exploration as well as mining for financial gain in order to ensure a steady supply of these minerals. Rare earth elements, lithium, and cobalt are a few of these minerals that are currently taking center stage.
To begin, what is a funding mechanism? Funding mechanisms are the processes by which funding is found, so simply put, it s a general term used to describe the type of finance or funding a company negotiates in order to proceed.
The way the government approaches incentives is through defining funding vs financing:
Funding is defined as “ the act of obtaining or furnishing money or capital for a purchase or enterprise.” Basically, it is money that will be paid back with interest and stipulations
Financing is defined as “ money provided, especially by an organization government, for a particular purpose.” The money does not need to be paid back if certain conditions are met
When it comes to governments, the majority of incentives are given as funding. These funding mechanisms are further broken down into:
Awards: Funded, and most times do not need to be repaid
Grants: Funded, and most times do not need to be repaid
Contracts and Agreements: Financed
Contracts and agreements are a common site across industries, where capital can come from either governments or private entities. Awards and grants, however, are almost exclusively government-funded (although price awards and grants also exist).
Comparatively grants and contracts accomplish much of the same goal, but with different requirements:
Fundamentally, grants are an award made to fund projects or activities. Grants also have a few details that are specific to this funding type such as: the funding agency takes no active part in the project, a detailed budget estimate is required, grant money must be spent in accordance to the rules of the granting agency (but with flexibility…. You can’t run off and buy a Ferrari with the grant money), financial reporting during the defense of the grant is mandatory, and unused funds are returned to the granting agency at the end of the project.
An example of a successful government grant would be the US Department of Energy Rare-Earth Elements and Critical Minerals Grant:
Granted over $20MM to REE mines and researchers
Economic incentive to target REE’s
Economic incentive to design REE processing technologies
Gives emphasis to critical minerals projects, processes, and development
An example of a successful government award contract would be the Department of Defense: Title III of the Defense Production Act (DPA):
$9.6M contract with MP Materials on the Mountain Pass Mine
MP must refine its current concentrate production:
Create separate REE products
Increase processing and separation capabilities
increase production of neodymium praseodymium (NdPr) to 20 tonnes per annum
Under these grants and award contracts, there may also be agreements for the recipient to contract another participant that will provide substantive work in support of a common goal(s). This is common when a company under contract with the government, subcontracts to another company to complete a specific part of the project. Subawards and subcontracts can be used for research related to the contract, if the contract is research related (i.e. bringing in an experience professional who specializes in a certain field). Subawards/subcontracts must have a defined role in the project with a specific time commitment, and must agree to the terms and conditions from the main award (known as “Float Down”). Lastly, subawardees/subcontractors must include the scope of work, the budget (with justification), and an intent to collaborate.
An example of the Subaward and Subcontracts being successfully implemented would be the DOD Title III DPA:
$9.6MM to MP Materials for the Mountain Pass Mine
Also provided:
$2.3MM to TDA Megnetics to research REE magent supply chains
$0.86MM to Urban Mining Company for REE magnet inventory demonstrations
Engineering studies to re-establish domestic REE processing and production
This brings the total DOD Title III DPA financial obligation to $12MM in the name os securing REE production and processing in the United States. That said, several other government agencies are involved in grants to the mining and mineral industry with the United States Geologic Survey (USGS) and the US Department of the Interior; Office of Surface Mining Reclamation and Enforcement (DOI-OSMRE) being another (links to grant pages, attached).
Other Government Financial Assistance
If a grant or government contract is not aligned with the government's need, then typically private or public financing will be needed to advance the project. However, there are a variety of ways a government can incentivize mineral production. Let’s take a look at these types of incentives. Some of the following incentives apply to the mineral industry and some don’t (yet), so I’m including everything I think may be useful to the industry in finding federal assistance.
First, let's break down the primary funding mechanisms and who generally uses them:
Loans : government or private
Bonds: government or private
Private Finance
Alternate financing (offtake agreements): government or private
The use of government or private cash generally depends on what section of the market the company or project falls under. The three main bins that projects or companies are classified under are:
Value Creation
Value Capture
General Tax
Value creation is the riskiest end of the value chain. This is where new projects are being conceptualized and brought into action. Generally, the value creation stage is going to be almost entirely private capital. However, we are seeing cases in the US where exploration may be subsidized if the project falls under the DPA or REE-CM grant realms.
Value capture is the middle of the road with risk. This is where projects have passed most of the risk hurdles and have a clear track to production, or have the potential for government intervention in terms of development hurdles. Value capture is generally a combination of private, public, and federal dollars working to secure production. This is as far as we see government involvement in the US.
General tax is not a bin that US production would fall under, however, in countries with nationalized mining, the general tax bin would classify all projects that are in production and are mostly or entirely de-risked. The general tax bin is entirely funded with federal or public dollars and any profits from operations go back to the governmental agencies or local governments that provide the public dollars for development and production.
Here in the US, the government has two categories for spending the cash in treasury:
Discretionary Spending
Mandatory Spending
Discretionary spending accounts for approximately 31% of the US’s annual federal spending. This spending type is dependent on the amount of annual appropriations. The more cash appropriated to a discretionary budget, the more cash there is to spend.
Mandatory spending accounts for approximately 63% of the US’s annual federal spending. This spending type is created and funded under the same law (think social security), and is often permanent or multi-year.
Programs can be both mandatory and discretionary (essentially sharing a budget) if they share a common purpose.
On top o discretionary and mandatory spending, there are both authorizations and appropriations. An authorization is funds used to create or modify a government program. When the DPA started, for example, it would have been funded with an authorization. Following an authorization, comes appropriations. Appropriations are funds that are used to support government programs. Every year since the inception of the Title III DPA, the cash given to the program would be considered an appropriation.
Other Government Incentives: Revolving Funds
Although relatively pointed in their use, revolving funds provide a unique source of financing. Revolving funds are typically loans offered at below-market rates with flexible repayment options. Loans can be external or internal, meaning if it is a part of a government agency, it could be funded with appropriations from that agency or from private funds. Cashflow is generated from the cleanup, development, or improvement of successful projects. Revolving funds generally target core sectors such as energy, transport, water, and natural resources.
Bond release
project operations
Public wellbeing (conversion of financial value to social value)
I see a practical application of this model in the bond release portion of the mineral industry, where any current operation has to put up a bond prior to operation or expansion in order to cover the reclamation expenses. In some cases these bonds go unreleased and the bond value increases to match inflation and other economic factors. These projects can often be purchased at a discount considering the environmental liability associated with them, and provide a unique opportunity to add social value by ensuring complete reclamation of old or contaminated sites, as well as generating revenue from bond releases. Revenue from bond releases can be used to acquire another project, and so on. The only issue I see with this method is the CERCLA liability of projects is often into perpetuity with the operator or owner, so the cost of an insurance policy to cover operations may negate profits from cleanup and bond release.
Other Government Incentives: Tax Increment Financing
Tax increment financing falls under a similar category to bonds. In this case, the bonds sold are backed by future tax collections from the region classified under a tax increment financing (TIF) district. The financing generated from bond sales goes toward the reimbursement of private developers, but shares the risk in the project by holding the developer to certain contractual obligations.
The TIF model is used to increase value in communities through encouraging the development of projects that will add value. That said, I see the potential for this to be applied to the natural resources sector as mining companies often spend significant sums of cash on community development. In this case a TIF plan could be applied to blighted rural communities, and the mining company could focus on community improvement projects in return for a reduced tax rate to balance the funds being spent in the community by the company. Instead of wading through red tape for a new community center, for example, a mining company could step in, fund the project immediately, and get it built much faster than the local or state budget may have been able to do. These expenses would then be reimbursed through a lower tax rate for a set period of time so long as the company maintains their community spending. After all, private companies are more efficient and cost-effective than the government.
Other Government Incentives: Private Finance Incentives & Public Private Partnerships (PPP)
PPP’s and private finance initiatives (the finance portion of a PPP) are a collaboration between the public and private sector for a project. The collaboration can be for finance, construction or operation, and comes with concessions for tax revenue, operating revenue, liability protection or partial ownership (on public services). Most commonly, we see PPP’s and PFI’s for parks, transportation, prisons, arenas, convention centers, etc…
In PFI’s, funding is usually provided by a private company for the development of a public project. There is no government burden and no taxpayer burden for the project, but the project will be used for public benefit (railways, for example). The government pays back the loan with interest (or through other concessions/incentives). Again, private firms are more efficient and cost effective than the government, however, some PPP-PFI projects have lead to significant overspending and the private firm bears all of the risk on the project (i.e. if the firm goes bankrupt, there isn’t much recourse and the public is still missing the facility).
PPP-PFI’s are common in the mineral sector across the globe, however, we don’t see much use (if any) in the United States for minerals. Given the need for critical minerals and the fact that China dominates the REE and critical mineral market, this may change as the US begins to drive a wedge in China’s market dominance. PPP-PFI incentives may be structured as to provide tax incentives and operational incentives in return for some quantity of production when it comes to these critical mineral.
Other Government Incentives: Offtake Agreements
Given the current state of the critical minerals supply chain, offtake agreements seem to be another easy step the government may take to get involved in ensuring a strong domestic supply. Essentially, the government can provide funding for a project in return for a certain amount of production from the future operation. This type of agreement is known as an offtake and has been used by the federal government in the past for stockpiling copper. We are currently seeing EV manufacturers such as Ford purchase lithium in offtake agreements in order to ensure their production demands are met before that demand even exists (through strongly backed economic indicators and prediction).
These offtake agreements remove the product from the market through the sale of the product prior to mining (hence off-take). These agreements:
Guarantee that a percentage of the tons are purchased (quantity and purchase price are negotiated)
Provide security for potential finances because there is already a buyer
Buyers benefit from locking in prices and receiving minerals by a specific date
Buyers can agree to fund equipment, or various stages of mine development as a way to secure certain benefits in the agreement as well.
As alluring as offtake agreements can be, especially in periods of strong demand or challenging economic times, it can come at a cost. A certain amount of production has already been sold by the mining company for an agreed-upon price, so the mining company loses exposure to future market upside for that quantity of production, for one. The details of an offtake agreement are critical and the most common terms to negotiate in these contracts are:
Percentage of tons (or quantity of production to be purchased)
Market price, and mechanisms to address a changing market
Mechanisms to address the possibility of less or decreased production
Mechanisms to address a clear ending to the agreement
Ability to opt-out, with a fee attached
Options for renewing agreement during production, but also option not to renew
There is a lot to consider and a lot to negotiate when it comes to offtake agreements, but they can be a critical source of materials for manufacturers and governments, while providing critical funding for development or growth stage operators in the mineral industry.
In conclusion, there are already clear paths to federal funding for mining as long as it is for a critical mineral. It is clear there are a multitude of ways for the government to get involved in the mineral industry, and paths that may be opening up in the future for federal involvement in securing supply chains for domestic production of minerals.
