Key points:
- Beowulf has been able to gain debt financing to progress Kallak
- This is a reduction in perceived risk
- Less risk usually does mean a revaluation
Beowulf Mining (LON: BEM) shares are up 5% in London this morning on the back of financing news. They've achieved a 22 million SEK loan to aid in development of Kallak. The actual amount – £1.76 million perhaps – isn't quite the important thing. It's that Beowulf is able to raise debt finance that is. This is an important stage in a mining company's life, when it is not necessary to pay for everything with equity.
It's still true that this is a fairly small loan, it comes from a Norwegian institutional investor. But it does make the fact that Kallaq, the Swedish iron ore project, is becoming bankable in a certain sense. That's something of a valuation event here.
There's still the considerable uncertainty as to whether Greta and the environmentalists are going to be able to derail the project. But the very fact that debt is now on offer shows that at least one institution thinks that problem can be solved. They may, of course, be right or wrong but it is an indication of progress at the company and therefore for Beowulf shares.
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The background here is that Beowulf Mining is prusing an iron ore project at Kallak in Sweden. Swedish iron ore has been known for centuries to be good quality material. There's little doubt that the iron ore is there, that there's a market for it and so on. The problem is gaining the licence to be able to exploit the deposit. This is being held back by environmental concerns – one of those times when a seemingly small issue becomes a campaign. The mine would interfere with reindeer herding grounds apparently. This has the likes of Greta Thunberg up in arms.
Well, maybe there should be such concern and maybe now. The Swedish government seems to be supportive of the project at present.
But this financing news starts to change how we might view Beowulf. Early stage mining companies have to be exclusively funded from equity. Simply because the work to be done in those early states is to find out whether there's anything there worth mining. The risk is high that is. So, debt, loans, they're just not the appropriate method – for taking the risk people want to have a share of the rewards is the other way around of making the same point.
As work proceeds and milestones are reached – confirmation of resources, then reserves, processing options sorted and so on – then the risk declines and debt becomes ever more viable as a financing source and equity ever less necessary. Which means that we can also use this the other way around. If debt is becoming a viable financing source then risk has declined. Which is how we might well look at this loan to aid in financing the next stage of Kallak. That an investor will offer debt, not demand equity, is a sign that risk has diminished.
Things that are less risky are more valuable, thus the Beowulf share price rise.