Mines and Money '14: Industry recovery is years, not months, away

By Laura Syrett
Published: Tuesday, 02 December 2014

Gun shy investors are still skittish about capital mismanagement and low mineral prices. These need to change demonstrably before confidence can return, leaving a bleak outlook for exploration stage mining companies.

Miners have been warned not to expect a recovery in project funding for at least the next year, as the drought in public funding continues and private investors look to cherry pick assets with existing or imminent cash flow.

Mines & Money Conference 2014
Recovery of projects funding in the mining industry may take years, investors said at Mines and Money 2014 conference in London.

Speaking at the Mines and Money 2014 conference in London today, a panel of bankers, fund managers and industry analysts said that the current climate for resource investing was still bearish as a result of oversupply and low prices in many commodities, combined with a legacy of capital mismanagement by mining companies.

"We are paid to be patient," said Mark Sawyer, senior partner at private equity group, Greenstone Resources.

"The days of the two week roadshow and $20m in the bank at the end of it are over," he said, noting that many miners are struggling to secure the investment they need just to stand still.

Bert Koth, managing director for metals and mining at Denham Capital Management, said that the gross misallocation of capital by mining companies in recent years had left investors gun shy of new projects in particular.

He pointed out that commodity prices need to recover significantly before financiers feel confident in funding exploration again.

"Eventually, we will see price spikes and a recovery from the current market, but this is years away, not months," he said.

Koth also acknowledged that the bearish climate had left a pool of assets with attractive valuations, but that investors were generally focused on projects at an advanced development stage rather than greenfield opportunities.

Rajat Kohli, global head of mining and metals at Standard Bank, said it might take "another year or two" before equity begins to return to the mining industry in force.

"Even then, it won't be a universal return - different commodities will have different cycles," he said.

Private equity 

Discussions on the subject of whether private equity funding could plug the gap left by the public markets identified some opportunities for cash-hungry companies, but broadly reinforced the message that opportunities are slim.

"Talking about private equity in mining is probably more important now than at any time in history," Koth said, but added affirmatively that private sources of capital will not fill the gap left by public funding.

Speakers generally agreed that while funds may include "one or two" early stage projects in their portfolios, their attention was given almost exclusively to post-pre feasibility study, partly or fully permitted, construction ready projects.

Sawyer said that investors were closely focused on knowing and minimising their exposure to risk and that few were interested in projects with large outstanding capex requirements.

More positively, Sawyer explained that, while private capital is highly selective, such deals are often easier to consummate that public financing.

"Execution of a public deal requires shareholder approval, and that's when dilution can become an issue," he said.

Kohli attempted to reassure miners that the current painful funding scenario was being mitigated to some extent by corrective capital management measures and management restructuring, but reminded delegates that it was part of the resources cycle - a point reinforced by Will Smith, portfolio manager at CQS.

"Funding is difficult right now (...) Production will be constrained by future growth, and this is sowing the seeds of the next bull market," he said.

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