Crash Course: Equity Financing in the Mining Sector

CRASH COURSE VISUAL CAPITALIST Equity Financing in the Mining Sector HOW IT WORKS Defining a Resource Mining exploration companies use large amounts of capital in: Finding Discoveries Moving to Production ATTRACTING FUNDING DIJ 113.44 + Because mining exploration In 2011, mining companies raised over $12.4 billion on the Toronto Stock Exchange (TSX) and Venture Exchange (TSX-V). YCH 140.97 I companies tend to have little or no revenue, they GGL 22.16 periodically go to the market for new capital for their projects. To do this, they issue new shares to sell to investors in a PRIVATE PLACEMENT A prospectus is a document, filed and approved by regu- lators, that outlines in detail the business of a company Every distribution of securities requires a prospectus unless an exemption is available. to investors. Offering memorandums are similar in purpose but do not require the same levels of regulatory approval. An offering memorandum is one exemption that can be used. Alternatively, certain investors are exempt from investing in the securities of a company without a prospectus, and these include: Many criteria can qualify as an investor as 'accredited', but in general it amounts to a signifi- cantly high net worth. Institutional investors are organizations such as hedge funds or insurance companies with enough money and financial literacy to not be subject to protective regulations. Accredited Investors Institutional Investors Employees & Associates Next, companies choose the way they'd like to sell shares. NON-BROKERED The company can forgo a broker and can sell the securities directly to investors. The issuing company saves on costly brokerage fees. BROKERED Alternatively, the issuing company can use a broker during the private placement to help sell the securities. A stock broker acts as an agent for the issuing company and sells the securities to his/her network of investors. Brokered Private Placements can be organized in 2 ways: 24 The broker purchases the securities from the Broker promises to sell as many securities as possible for a flat fee, but is not re- issuing company at a discount and then re- sponsible for unsold shares. sells them to investors. "BOUGHT' DEAL "BEST EFFORTS' DEAL There are 3 types of securities typically sold in a private placement. COMMON SHARES WARRANTS Common shares are the basic units of company equity. Common shareholders have a vote in the election of the Board of Directors and carry the profit / loss risk. A warrant gives the holder the right, but not the obliga- tion, to buy a common share at a certain price until a specified expiry date. FLOW THROUGH SHARES UNITS Flow through shares offer the holder the same ownership rights as a common share, but also offer tax deduction to the investor These securities are holding them. Resource companies can “flow through" the mining exploration tax breaks they receive to these investors. arranged and sold in 'units' - typically one share is pack- aged with one war- rant, but other combinations exist. New shares added in a private placement will dilute the share structure for people previously invested, but add new capital for the company. HOLD PERIODS Securities purchased in a private placement cannot be resold or exercised for four months after the official closing. EXAMPLE Mr. Brimley, an accredited investor, wishes to buy shares in VC Mining Inc. (Ticker: VCX), a fictional exploration company. SCENHRIO 1 He can purchase shares for VCX on the open market. He bids $0.12 per share and buys 100,000 common shares. Profit $0.15 $0.10 Price Paid $0.05 One Year $0.00 VCX does well and the share price rises to $0.18. After 1 year, Brimley decides to liquidate his position. ADVANTAGE No holding period means Brimley can sell when he likes. SCENARIO 2 THE TERMS 4 month hold period The following year, Brimley hears VCX has opened a private placement. Because he is accredited, Mr. Brimley is eligible to participate. Flow-through unit price: $0.10 Where each flow-through unit consists of: 1 common share 1 warrant (entitles holder to purchase 1 common share for $0.15 and expires in 2 years) Profit |from Warrants Warrant Price $0.15 Profit $0.10 Flow Through Price Paid $0.05 One Year $0.00 4 month hold period ADVANTAGES VCX does well and the share 5 10 15 20 25 Flow-through tax credits price rises to $0.18. After 1 year, Brimley decides to liquidate his position. Warrants offer additional upside potential Private Placements allow mining companies to raise additional capital and can potentially provide investors with more upside and higher returns than investing in the same company in the public market. Cambridge House VENTURE RADAR VISUAL CAPITALIST INTER NATIONAL visualcapitalist.com vadar.ca cambridgehouse.com The Venture Radar (aka. VADAR) is a FREE web application for investors seeking private placement opportunities and information about mining companies listed on the Toronto Stock Exchange and TSX Venture Exchange.