Digging deep: Mining finance and blockchain

March 31, 2020 | Derek Hoffman, Hasith Andrahennadi

Banks to blockchains

Historically, the mining industry has relied on traditional institutions such as banks and capital markets for financing needs.  However, times are changing.  More recently, mining companies have found it increasingly difficult to obtain financing through such traditional sources.  These challenges have resulted in the growing popularity of alternate financing options such as royalty and streaming arrangements.

The rise of streaming and royalty arrangements as financing options have paved the way for cash-strapped mining companies to see the value in adopting alternate financing options which offer access to alternative sources of capital.  One such alternative involves the use of blockchain technology which provides a new and creative method of financing and is accessible to those in the mining industry.

Blockchain technology

Generally, blockchain technology is a de-centralized system used to record and verify transactions to create a transaction ledger.  Each transaction is time-stamped and verified by consensus between the blockchain participants.  Data is stored on numerous distributed computer systems which makes it difficult for any one person to gain advantage over another through the network.  Blockchains can be public, with transactions available and visible to all users, or private.

Private blockchains allow parties to create and administer their own transaction networks.  While the security of private blockchains is more susceptible to hacking since they involve a reduced number of participants to verify transactions, the adoption and use of private blockchains in various capacities is growing.  One example of the use of private blockchain is the creation of ‘smart contracts’ which can be used to automatically complete transactions when the underlying conditions of the smart contract, which are programmed into the blockchain, are met thereby eliminating cumbersome review and clearing of such transactions.

Blockchain financing

While blockchain technology has been popularized by the creation and use of cryptocurrencies, such as Bitcoin, it can also be used to create digital tokens which are developed and exist in respect of a particular blockchain.  Digitization, also referred to as tokenization, involves dividing a traditional asset into digital ‘tokens’ that are tracked as part of a blockchain.  This allows such digital tokens, representing the various rights and privileges associated with the underlying asset on which they are based, to be transferred and owned separately from the traditional asset itself.

A digital token offering (“DTO”) involves participants exchanging cash consideration for digital tokens created by a company, with such digital tokens being tracked and monitored via a specific blockchain created for the purpose of the DTO.  The digital tokens may represent various tangible or intangible assets such as mining claims, royalties, other quantifiable asset, or a combination thereof.  Such digital tokens confer on the owner of such token all of the rights and privileges (on a fractional, and proportionate, basis) related to the particular asset underlying the digital token.  The digital tokens can have specific smart contract terms and conditions programmed into them, such as buy/sell conditions or associated payments, with any such terms and conditions being administered through the specific blockchain.

DTOs are a tool which can provide mining companies with access to capital.  For example, a mining company can tokenize a mining royalty such that the royalty, or more accurately the rights and privileges granted under the royalty, is divided into a defined number of digital tokens.  This can be used to enhance the liquidity of a relatively illiquid asset.  Such digital tokens can be bought and sold by numerous parties, instead of a single or small group of royalty holders, with the ownership of such tokens, along with any fractional royalty payment rights associated with such tokens, being tracked and executed via a private blockchain ledger.

Conclusion

Historically the mining industry has been slow to adapt to the latest technological innovations given the extensive planning, costs and timelines associated with mining operations.  However, with the advent of blockchain technology and its increasing adoption by various industries and companies, combined with a movement by investors to hold ‘real’ assets, cash-strapped mining companies have access to a new tool which can assist with financing needs.  As a valuable alternative method of financing blockchain technology, specifically DTOs, can be used by mining companies in combination with other sources of capital as part of their overall financing program.

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