Equity finance provides the most suitable and frequently the only access
to capital during the exploration and evaluation stages of resource
projects when project risk is at its highest. Investors are prepared to
provide equity funds in the knowledge that they are compensated for the
higher risk they take on with higher potential returns or sufficient upside
potential to justify the higher risk. The context of resource projects which
determines the role of equity finance has changed considerably. Prior to
the resurgence of the gold price and the development of new mining
technology many resource projects were selectively mining orebodies by
underground methods frequently with limited reserves proved up in
advance of mining. The limited proved ore reserves base and the volatility
of the gold price all contributed to a higher risk and higher return
investment environment in which the use of equity finance was more
appropriate and frequently the only option for capital raising. The financial risk of a resources project can be transferred to an
underwriter who makes the commitment to distribute the financial risk
between a number of investors. There is also the opportunity for
financiers to use a mix of equity and debt finance to allow a company to
proceed with the development stage where without such a mix the
resource project would not proceed. By using a level of equity finance the
project becomes robust enough in its ability to service the debt finance
facility and the project proceeds with the equity participants receiving a
suitable risk reward return. The liquidity from the establishment of a
market for the company's securities enhances further capital raising and
generally enables the company to satisfy its financial requirements on
more favourable terms particularly during bull markets. The role of equity finance in the management of the financial risk
during the exploration, evaluation, development and mining stages of
resource projects is summarised in Table 1. In more detail the principal
roles of equity finance and the ways in which equity finance impact on
the risk management of resource projects will be considered in turn.