Dating back to the beginning of 2020, the natural resources sector has been extremely active at both ends of the economic cycle. With oil prices dropping steadily since January 2020, Appleby has been involved on a number of large scale restructurings and refinancings, representing lenders, bondholders and oil and gas companies (in particular, services and offshore drilling companies, but also upstream exploration companies). Not only has the oil industry been battered by the Covid-19 virus, it also faces strong headwinds as the industry tries to transition towards low-carbon energy.
Conversely, and as a response to the high degree of uncertainty gripping international markets, gold has seen a steady resurgence going back to January 2020, gaining further momentum in February/March with the onset of Covid-19. With the price of gold rising strongly over the course of the past year, it is no surprise to see plenty of focus on the yellow metal with a large proportion of the deals in the sector involving gold mining or gold exploration services. In addition to gold, we are also seeing increased focus on copper and other battery metals (including cobalt, lithium and nickel). In the mining sector, while we have seen an increase in M&A activity, including mergers, investments and joint ventures, we have also seen a large flow of new financings from both traditional lenders and royalty companies, which are growing in prominence.
While much of this is interesting and topical, very little of it is novel. The natural resources sector is cyclical in nature. While the circumstances that we find the world in now are very different to anything we have seen in our lifetimes, many of the trends follow common patterns. That brings us to the burning question, where is the market headed?
Technology and commodities
Commodity tokenisation has been an emerging trend for investors in 2020 and we anticipate this trend will continue into 2021. Converting physical commodities such as grains, natural gas or precious metals into their digital equivalents provides holders of those tokens with greater liquidity, flexibility and transparency while removing the intermediaries from the commodity management process. Digital representations of commodities eradicate the complexities surrounding actual ownership, storage and administration of the real-world versions, and allow holders to benefit from receiving spot prices that enable immediate trade and execution. Mining companies (including companies such as IAM Gold and Yamana Gold) are also now looking to blockchain solutions to track the provenance of gold and fill a demand for responsibly sourced gold.
Appleby advised Tether on the launch of Tether Gold, which enabled fractional ownership of real gold. Each Tether Gold digital token (XAUt) represents ownership of one troy fine ounce of physical gold on a specific gold bar, providing holders with the combined benefits of both physical and digital assets while avoiding the drawbacks associated with owning physical gold, including high storage costs and limited accessibility.
Technology and Energy
The energy sector has also looked to blockchain for potential solutions. The traditional method of electricity supply is built on a centralised system operated by major energy and utility companies whereby a main grid distributes power to consumers through a wide transmission network.
In 2020, we have seen challenges to this traditional supply model and, in particular, an increase in the adoption of microgrids, where communities disconnect their energy supply from the main grid and operate autonomously. Microgrids use local sources of energy, such as solar, to serve local users, integrating the supply of energy from various producers. Consumers with their own energy production capabilities can sell their surplus energy production back to the community in the microgrid, on a pay-per-use basis. Blockchain technology provides these newer virtual microgrids with a reliable, lower-cost digital platform for making, validating, recording and settling energy transactions in real time. With home and remote working on the rise during the Covid-19 pandemic, we expect to see the use of microgrids become increasingly popular in 2021 as workers look to maximise their energy efficiencies.
Role of offshore - international investment
Corporate vehicles incorporated in offshore jurisdictions are an important structuring tool used by a large proportion of the extraction industry to help facilitate inbound investment into developing countries. The reasons for their popularity are very broad and extend well beyond tax neutrality. Some of the key factors favouring the use of offshore vehicles include non-prescriptive corporate governance requirements, limited reporting requirements, neutral and stable judiciaries based on English common law, well-defined director duties and statutory flexibility to incorporate an appropriate level of shareholder protections. In addition, some offshore jurisdictions such as Jersey and Mauritius benefit from double taxation treaties with certain African jurisdictions (with Mauritius also benefiting from a number of bilateral investment treaties). For these reasons, offshore companies remain a critical component in the global economy, facilitating inbound investment into the developing world.
Role of offshore - digital assets
While fears of increased financial regulation following past global recessions have stifled innovation, we expect innovators to look for 'regulatory-light' solutions to get new products and service offerings to market. Innovative financial services solutions often hinge on the capacity of their innovators to fit within predetermined regulatory landscapes that are outdated and ill-adapted for emerging technologies. Many of our offshore regulators have looked to reduce the regulatory burden so that regulated entities can focus on product development, innovation and customer experience, whilst maintaining sufficient regulatory oversight.
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