Rise of digital finance: Tokenising mining & metals assets - Can tokenised mining royalties and metal streams unlock a new investor base?

White & Case LLP
Contact

White & Case LLPThe authors would like to thank Arnoud Star Busman, Chief Executive Officer of MineHub Technologies, Inc. (formerly Innovation Lead at ING), Alison Mangiero, President of the Tocqueville Group (TQ), Prat Vallabhaneni, partner, and Laura Kitchen, associate of White & Case LLP, for their contributions to this article.

Rapid advances in blockchain technology are reinventing the way companies operate and deliver products and services to their clients. These changes are particularly visible in the mining & metals industry, a sector that has been traditionally slow in adopting technological innovations. Yet blockchains and smart contracts, which to this point the sector has focused on as a source of productivity and transparency gains for the mining & metals global supply chain, could herald new sources of finance too. Miners face a persistently challenging environment to raise equity and equity-like capital to fund ventures. According to the State of Mining Finance 2019 Report produced by the Prospectors & Developers Association of Canada and junior financing tracker Oreninc, funds raised via equity in 2018 were at the lowest recorded level in the past decade, with equity funding dropping approximately 40 per cent from 2017 to 2018. Could blockchain-based digital finance techniques provide a funding solution to miners?

~40%
drop in equity funding in global mining finance from 2017 to 2018

Source: State of Mining Finance 2019 Report, Prospectors & Developers Association of Canada

 

Digital token offerings have emerged in the last few years as a new way to fund the development of emerging technologies. With their unique benefits, they are well placed to emerge as an alternative or a supplement to traditional financing options available to mining companies.

ICOs: a recap

The first example of a blockchain-based digital token offering was an initial coin offering (ICO) by Omni Layer, formerly known as Mastercoin, in early 2013. Omni is a digital currency and communications protocol built on the Bitcoin blockchain. Since the first ICO in 2013, ICOs have, in short, exploded. An ICO is a method of raising capital in which investors participate in the fundraising by transferring government currencies (fiat), and/or cryptocurrencies to the issuer in exchange for digital tokens. The tokens represent a holder's right of benefit or performance vis-à-vis the issuer.

We need to reinvent ourselves… we are an old industry and there is no doubt we have changed and modernised… But we have not changed to the same extent that we have seen other industries reinvent themselves…
Jean-Sébastien Jacques, Rio Tinto CEO, October 2018

The underlying technology of the tokens is based on blockchain, which is maintained by a distributed network of computers and participants. Using cryptography to record transactions, blockchains such as Bitcoin and Ethereum process, verify and track the trade of the relevant virtual currency (e.g., Bitcoin or Ethereum) securely across independent network components on a "peer-to-peer" basis. In summary, blockchains, and in particular public blockchains, can remove the need for a variety of intermediaries, at least from a technical point of view. Legally, what is necessary will be facts and circumstances specific and dependent on the jurisdictions involved (cf private blockchains, which are hosted by central parties and are by definition more controlled in a "walled-garden" style approach which can be desirable from a variety of standpoints, such as compliance).

From ICOs to STOs

Digital token offering structures have evolved—at a great pace—from initial coin offering to initial exchange offering (IEO) to security token offering (STO). ICOs have gained the most publicity out of those structures as an innovative "peer-to-peer" financing mechanism, raising more than US$5 billion in 2017 and more than US$11 billion in 2018, with some estimates of more than US$20 billion. But following the bursting of the "ICO bubble" in early 2018 and the negative press around various ICO scams, the (mostly unregulated) ICO market has been gradually drying out, while IEOs and STOs have been gaining traction. Issuers and investors are turning to more refined digital capital-raising solutions, giving more thought to compliance as regulators all around the world begin to formulate and crystallise their approaches to digital token offerings.

 

Digital token offerings are relatively easy to structure because of technologies like the ERC20 token— issued on the Ethereum blockchain—which simplifies the process necessary to create and distribute a new cryptographic asset. This allows issuers to prepare and launch token offerings quickly and effectively.

Miners keen on creative financing structures

As challenging financing conditions continue to persist, miners have been looking for creative financing options to fund their ventures, and in particular their growth projects. While traditional financing options—bonds, loans, project finance, prepayment, convertible bonds, equity—remain generally the most attractive and understood, it is now common for companies to access multiple financing sources to diversify their capital structure, combining traditional financing options with alternative financing sources—royalty, streaming and/ or private debt. Mining royalty and metal streaming financings have been particularly popular with miners in the last decade as an alternative financing source for growth projects, allowing access to early-stage capital without diluting equity ownership.

US$ 11+bn
raised via ICOs in 2018 globally

What is mining royalty finance?

A mining royalty is a right to receive payment based on a percentage of mineral production or of the revenues or profits generated from the sale of those minerals at a mine. A royalty typically involves an up-front payment to the mining company from the royalty holder (i.e., investor) in return for a contractual undertaking from the mining company to pay a specified percentage of future revenue for a specified period. This can be based on a percentage revenue based on, for example, profit, net smelter return or production. The up-front payment received from a mining royalty investment can be used for many purposes, from general corporate purposes and capex to acquisitions and even exploration.

The flexibility and profit-sharing mechanism of mining royalty finance is particularly attractive as it allows mining companies, at various stages of their life cycle, to access up-front funding as a substitute to an equity raise to fund feasibility studies or debt in order to fund the development and construction of an asset.

Taking the traditional mining royalty finance model and combining it with an innovative digital financing wrapper in the form of an STO could provide a very attractive business model for both mining companies wishing to raise capital and for investors. Similarly, the mining stream financing model—a metals prepayment structure commonly used in the sector—would be potentially amenable to tokenisation. This may require the investor to accept a physical commodity settlement and is likely to evolve after "royalty tokenisation" has taken hold.

Royalty mining token: Structure and legal framework for an STO

There are many ways and options to structure a mining royalty token which includes investment from both US investors and non-US investors. For instance, a mining royalty token issuance could be split into two simultaneous token offerings—"Series A Tokens" and "Series B Tokens"—to ensure a "light regulatory burden" in compliance with US Securities Regulations. Series A Tokens could be issued only in the US to specific targeted investors who do not need an immediate liquid market and would be happy to hold onto the tokens, while Series B Tokens could be issued in another jurisdiction with favourable token issuance regulations towards non-US investors.

…maybe there needs to be a new way of funding mining projects…
Jean-Sébastien Jacques, Rio Tinto CEO, October 2018

Series A Tokens could be issued privately in the US by way of an STO to a select few investors through Regulation D Rule 506(c). In such a private US issuance, there is no limit on the amount of money that can be raised. It also allows the company to access a larger pool of investors via general solicitation. In addition, the filing process is relatively light. One limitation of this structure is that it's only open to accredited investors—investors earning above US$200,000 or with a net worth above US$1 million. The other one is that such securities would also be "restricted securities"—the investors would only be able to resell the security tokens into the market by using an effective registration statement under the Securities Act or a valid exemption from registration for the resale, such as via so-called Rule 144.

Series B Tokens could be issued to non-US investors in reliance on US Regulation S through an STO. Series B Tokens can be potentially listed on an exchange in a non-US "token friendly" jurisdiction, where such an issuance may allow for quick secondary market liquidity. Under US Regulation S, there is also no limit on the amount of money that can be raised, and general solicitation is allowed as long as it does not target any US investors. The cons are that Series B Tokens have resale restrictions on them with respect to US investors.

The royalty token offering gives greater control to the mining company in raising royalty-linked capital and potentially diversifies the sources of royalty finance away from the select group of listed royalty companies and specialist funds that have traditionally dominated this realm of mining finance.

 

All hype and speculation?

The recent rise of blockchain-powered digital financing tools in the form of ICOs created considerable hype and fuelled significant speculation. Some ICO scams tarnished the reputation of the underlying technology underpinning these digital financing tools.

The beauty of gold is that it's a solid asset. It’s been around for a very long time and will continue to be around. The problem with cryptocurrencies is that the market is always changing and you constantly have to watch it.
Randy Smallwood, CEO, Silver Wheaton

However, blockchain and the digital financing tools built on it are showing signs of a paradigm shift from speculation to application. We are entering a phase in which there is a realisation that unregulated— and in certain cases—speculative ICOs without any economic rationale may not be best suited to succeed as a widely adopted digital financing structure, especially by traditional investors. Rather, digital financing structures, such as STOs compliant with regulation and structured with a sound economic purpose, are more likely to succeed.

Recent tokenisation of real-world assets by Elevated Returns—a financial group focused on digitising traditional financial assets—through an US$18 million STO is a sign that regulated blockchain-powered digital financing tools will be embraced to raise capital by financing "real-world assets" and not only to raise capital for technological innovations, such as funding the development of source code.

Tokenisation will also come to the mining & metals industry. Traditional mining royalty financings, wrapped in an STO, are likely the first blockchain-based digital financing structures that will be widely applied in the mining & metals industry.

However, imagine the powerful combination of solid mining assets underpinning tokens (cryptocurrencies)…

 

Practical tips

 

A question of when, not if

The rise of digital financing structures will have profound implications for the mining & metals industry. Miners will be able to access alternative funding methods, which will be a welcome development, given the decline in equity funding into the sector. Industry players will now need to fully understand digital financing structures before engaging with miners who are raising such capital. For example, royalties and streams already give rise to unique inter-creditor considerations, as the interests of royalty and stream holders do not always sit comfortably with those of traditional senior creditors in an enforcement scenario. The added STO wrapper may further give rise to potential complications that may be important to the various financiers, and any implications should be dealt with as early as possible in the financing. Similarly, M&A transactions involving a mining company with an existing tokenised royalty in its capital structure will involve a slightly different due diligence process, which is likely to involve a blockchain technical adviser.

Will digital financing structures based on blockchain technology disrupt the mining sector ecosystem? It may take some time for the traditional ecosystem to change, but it's a question of when, not if.

 

Click here to download PDF.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© White & Case LLP | Attorney Advertising

Written by:

White & Case LLP
Contact
more
less

White & Case LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide

JD Supra Privacy Policy

Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at www.jdsupra.com) (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

  • Email
  • First Name
  • Last Name
  • Company Name
  • Company Industry
  • Title
  • Country

Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at privacy@jdsupra.com.

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to privacy@jdsupra.com. We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to privacy@jdsupra.com.

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at: privacy@jdsupra.com.

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at www.jdsupra.com) (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit legal.hubspot.com/privacy-policy.
  • New Relic - For more information on New Relic cookies, please visit www.newrelic.com/privacy.
  • Google Analytics - For more information on Google Analytics cookies, visit www.google.com/policies. To opt-out of being tracked by Google Analytics across all websites visit http://tools.google.com/dlpage/gaoptout. This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.