Historically, gold mines raised their capital through the stock market. Homestake in the United States, for example, was first listed on the New York Stock Exchange in 1879.  The South African mining houses evolving in the late nineteenth century also looked to the London stock market, although many of the investors at that time were in Belgium, France and Germany.

Today the stock exchanges in Johannesburg, London, New York, Paris, Sydney, Toronto and Vancouver (for junior companies) remain important sources of finance with specific indices on gold stocks.

Since the mid-1980s, however, the raising of finance for exploration and development of new gold mines around the world has become a more complex matter of financial engineering between mining companies and bullion banks. Above all, mining finance has seen the greater adoption and integration of risk management practices as a means of access to new and possibly cheaper sources of funding.

Gold loans were an initial development that became popular in the early 1990s, involving up to 150 tonnes (4.8 million ounces) in peak years but that vogue soon declined and most have now been paid back, although new loans are taken out occasionally.

Hedging programmes of increasing sophistication and complexity, involving a mix of forward sales and options, were then devised by bullion banks. These strategies often stretch out for eight to ten years, taking into account both the gold price itself and currency exposures.

Such funding has become crucial to large mining companies looking for growth, whether in terms of opening new mines or, as is the current trend, by the acquisition of rival mining companies.

The disappointing gold price of recent years has also forced mining companies to go for growth to maintain investor interest. The annual funding requirements of the gold mining industry worldwide are estimated at $4-$5 billion annually to cover exploration, project finance, mergers and acquisitions.

While the mining companies' own cash flow provides up to half the investment funds and equity markets continue to help, the bullion banks play a major role, especially in project finance.

Two international agencies, the International Finance Corporation (IFC) and the European Bank for Reconstruction and Development (EBRD) have been instrumental in helping to underwrite some projects, the IFC notably in Africa and the EBRD in Russia and Uzbekistan.

source:  Pamp