Better times are coming for mining investments

By Antonio Torrisi
Published: Monday, 28 April 2014

Japan experiencing an economic upturn; Investors expect increasing prices; China to play crucial role in mining development

Investors and analysts spread some optimism in the mining industry by saying that better times lie ahead for the sector as economies in the US, Europe and Japan improve.

Speaking at the Global Mining Finance Spring Conference 2014 in April in London, UK, Damien Hackett, vice chairman of mining advisory at global investment bank, Canaccord Genuity, showed that in the past 12 months the world’s economy shifted from an accelerated contraction to a quick expansion.

Signs of economic expansion worldwide, recovery of equity markets and alternative forms of financing can inject new liquidity in the mining sector and help it to exit the stagnation experienced in the past four years since the global economic crisis.

“This will be good for mining equities funding,” Hackett said at the conference.

Hackett added that the Japanese economy has seen a “spectacular improvement”, with quantitative easing (QE) three times that of the US, while the EU and US have also expanded their economies in the last three and six months, respectively.

Together, the three nations represent 31% of global mineral consumption.

China, which accounts for 51% of global mineral consumption, has also recorded a moderate economic expansion, although there is uncertainty about its future growth, Hackett added.

He also pointed out that China’s self-sufficiency in natural resources has decreased between 2008 and 2012, a fact which might play favourably for new mining companies and mineral producers outside China, if the country increases its imports of natural resources.

New funding opportunities

Hackett explained that global equities increased steadily between 2000 and 2009 as a result of a five-year commodity super-cycle which pushed commodity prices up by 600%.

“This was a great time for mining industries,” Hackett said.

Andrew Raca, head of corporate finance at London-based investment bank VSA Capital, said at the conference that from 2009 to 2013, the performance of commodity prices decreased rapidly and mining equities has been the lowest performing sector in the global economy.

However, Hackett showed that despite a plunge in equities after the global economic crisis in 2009, the equity market did not fall to the levels seen prior to 2000, when capital was undervalued.

Raca echoed Hackett’s optimism, saying that equity valuations are expected to increase gradually as there is greater capital availability in the market and that the alternative investments market (AIM) has been recovering during 2013.

He also said that following a trend characterised by a 50 to 60-year periodic cycle of peaks in commodity prices, a new increase in prices should be expected in the near future.

Additionally, investment in the form of streaming and royalty financing have demonstrated themselves to be more convenient and provide more flexibility in repayments, Raca added.

Successful projects

Investors’ perception of the supply-demand balance in the market remains a critical factor to invest in new mining projects, stressed Raca. He included rare earths within a list of hot commodities for positive future investments.

Carl Noack, from investment management company Altus Capital Ltd, added that timing in entry-exit strategy, injection of liquidity and risk tolerance are other important factors in the development of a successful mining project.

Noack said that, to be profitable, a mining project must be technically robust, have a flexible mine plant, pit optimisation and a management team with interests aligned with shareholders.

Closing the conference, Raca said that China’s role will be crucial in the development of the mining industry in the near future, as the country has a huge amount of available capital, totalling $3.7 trillion in foreign reserves, and shows a continuous demand of resources.

“Chinese investors take a long term approach and want to structure development in such a way they can control risks,” he added.

“China looks for assets geographically close, with particular attention to East Africa, and prefers to take a majority stake in acquiring resources,” Raca said.

Chris Gale, managing director of ASX-listed junior exploratory Latin Resources Ltd, noted that China will invest up to $100bn in Latin America by 2020.

Barclays Bank pulls out of commodities

Despite the optimism in the market, rumours abounded at the time of going to press that along with JPMorgan Chase and Morgan Stanley, Barclays would exit part of its metals, agricultural and energy business.

Barclays is one of the top five banks in commodities, which, according to the Financial Times controlled about 70% of all commodities trading last year.