Blockchain — dismantling predatory pricing within the mining industry
Technology is delivering miners innovative and independent finance options
Financing options for junior miners have traditionally been predatory, benefiting financiers at the expense of smaller miners and the wider society. The current situation did not occur by chance but rather represents a logical response from a finance industry for whom enormous profits create control paradigms that deliver even greater profits.
Fortunately, in 2020 there are now innovative opportunities changing the way miners can raise finance. Before we look at solutions it’s important to understand where we stand and why there are so many problems with the existing situation.
Oligopoly: a state of limited competition, in which a market is shared by a small number of producers or sellers.
Some participants view the mining industry as an oligopoly where a few large operators have the resources and finance to control the majority of the market. Access to finance is a key factor in defining who is accepted by the “club” of miners. It is conceivable that the actual shareholding of both the miners and the financiers is controlled by an even smaller group of private individuals, but that is beyond the scope of this article. However, it is evident that members of all oligopolistic markets remember the famous quotation:
“Competition is a sin.” — John D Rockefeller
There is no money in healthy competition and the throttling of finance has helped consolidate the mining industry into fewer and fewer hands. Traditionally there were two primary routes to raise financing for junior miners: issuing stock in the company or taking debt finance (loans). Neither of these options represents the best interests of junior miners shareholders, and both assist in consolidating the industry for the big players.
As in the traditional banking system, if a mine operator wishes to raise finance they are at liberty to search for a loan. Like all loans, collateral needs to be provided and interest paid on the principle. However, access to loans is becoming increasingly restricted and the interest payments are cost-prohibitive. If the loans are not carefully managed they have the potential to cripple miners in interest repayments which cannot be met.
The other traditional method for raising mine financing is through the issuance of more shares in the company, effectively diluting the existing ownership. If a miner dilutes their shareholding enough they become a prime target for absorption into the wider oligopolistic system. Both methods of traditional mine financing are precarious operations exposing junior miners to the risks of being targeted by market predators.
These two traditional paths to mine financing have adversely impacted the industry for all but the biggest miners and financiers. Through the throttling of finance options, the industry has been consolidated into fewer and fewer hands, creating the oligopolistic market characteristics we see today.
However, now we are beginning to see change happening within the industry, bringing a third and innovative financing option to junior miners. The development of blockchain-based security tokens that are asset-backed by future metal streams, has the potential to impact the entire financial landscape of the sector, and halt the consolidation of the industry into a true oligopoly.
Canamex Gold Corp. has recently signed a forward purchasing agreement with MetalStream Ltd, which is the issuer of the innovative MSGLD tokens. The value of MSGLD is derived from the future gold metal stream from its Bruner gold project, in Nevada USA. This model delivers value, security and liquidity for all market participants.
Security tokens represent physical assets on the blockchain and offer an immutable record of ownership. The ability to realize liquidity on gold resources and reserves, which are yet to be mined, brings vital financing needed for miners to undertake mining operations. Safety is intrinsic within the security token architecture as tokens can be reissued in the event of hacking or loss of access. These value propositions are ultimately enhanced by the fact that MetalStream Ltd is able to deliver gold to market at a minimum discount of 30% to the current spot price of gold. In addition, the model delivers value to all market participants circumventing the problems discussed above, associated with traditional mine financing.
Technology is bringing opportunities to junior miners which have not been available before. Gold is a vital ingredient in our economic systems and irreplaceable for numerous manufacturing and health applications. Access to this precious resource should not be restricted to only a few players profiting from an oligopoly. As the market begins to utilize the value proposition of gold metal stream backed security tokens. we can expect a more competitive future market where the opportunity to own gold is available for a wider segment of our economy, whilst providing a more cost-effective financing solution to junior miners.