Finance As A Tool For Leverage In Gold Mining
How liquidity is used to influence the junior mining industry
The mining industry is vital for supplying the materials we use every day and in the case of gold, it is an ancient industry. Many parallels between financing for gold miners and finance in our wider society can be drawn.
Like most mining sectors, gold miners are divided into junior and senior participants. Senior miners are a handful of the biggest operators and are intimately connected to the global financial system. Junior miners are more independent and do not have the financial backing of the senior miners.
It is no secret that much of the world’s global industry is controlled by a tiny percentage of financial institutions. A 2011 Swiss study looking at the interrelationship of the world’s largest companies identified this financial domination. One of the study’s members James Glattfelder said this in referring to the global economy:
“In effect, less than 1 per cent of the companies were able to control 40 per cent of the entire network.”
The situation has not improved since 2011 and the influence of the financial sector is as prevalent as ever. An analysis of how finance is used to impact junior gold miners may hold insights on the impact of finance in other industries.
A junior gold miner will spend a lot of private money on the process of forming a company, employing skilled technicians, identifying claims and securing mining rights. The amount of money spent represents a significant risk for the junior miner but often the risk is acceptable for the possible reward. Liquidity issues are often encountered after this groundwork has been undertaken and the requirement to build a mine arises.
Mines are bespoke constructions. Each potential mining site is different and presents a specific set of requirements. Power delivery, water usage and access for transport all have to be carefully considered along with compliance for safety regulations. The largest gold mine in the world is the Grasberg mine in Papua, Indonesia which took many years to build an access road for.
These considerations all combine to ensure that constructing gold mines is an expensive undertaking and it is at this point that the impact of the financial institutions becomes prevalent. As the senior miners are connected to the larger financial system liquidity does not impact them but it leaves junior miners vulnerable to dilution from the financial industry.
Traditionally there have only been two options for junior miners to raise the money they need to overcome the final hurdle of constructing a mine. The first option is to raise interest-bearing loans and this carries all the risks of traditional loans. Once the loan is taken a change in economic or business circumstances can mean that the interest payments might not be met and this can potentially destroy a business, allowing it to be sold off to larger buyers. The second option for miners to raise liquidity is through the issuance of shares. Diluting the share ownership of the company allows the finance industry to purchase significant portions of junior miners after the risk has been taken.
This bottleneck of liquidity is a significant issue for the economy as a whole and adds a layer of profit for the financial industry, raising the price of gold for everyone. Private equity is spent by junior miners to undertake all the risky activity of prospecting and once gold is identified the financial institutions can purchase into the business before it becomes profitable. All of this influence is the result of a lack of liquidity to build the mine.
The tokenization of gold is helping to change the finance model for junior miners. In a sense, it is bringing the ability to fund the development of mines to the wider society similar to crowdfunding. Unlike crowdfunding though the tokens are cryptographically secure smart contracts and backed by and redeemable for gold. Not only does this negate the control of the financial industry it also allows the wider public to enjoy the financial benefits of funding junior miners as the additional layer of costs are removed.
This powerful hold that the finance industry has on gold mining is not unique. Liquidity bottlenecks are an easy way to absorb value from any industry. Perhaps the wider development and implementation of blockchain technology can be used to provide community sourced funding for other industries in the future? We at MetalStream hope so!
MetalStream is the issuer of the innovative gold-backed MSGLD token. Please visit our website for more information, and contact firstname.lastname@example.org for enquires related to the purchase of tokens.