Mines and Money: Are we at the bottom yet?

Low mineral prices, overstocked inventories and a general distrust 

of the health of mining companies and their assets continue to undermine sentiment in the sector, but most industry commentators were confident that what has come down, must go up again at some point.

As usual, the focus at the 2014 event was split between the prospects for non-correlated assets such as gold and industrials metals and minerals such as iron ore, copper, lithium and graphite.

Influenced by different macro-factors, both sides of the industry are united by the need to cut costs, which were inflated by bullish commitments during the high times of the commodities supercycle, and the difficulty of raising fresh capital to develop new and existing projects from the pockets of wary investors.

But mining companies were warned that they need to take responsibility for past mistakes and illustrate a proactive approach to spending discipline and reforming business models in order to win back investor confidence, rather than blaming the wider economic climate.

"You can’t rest on a compelling economic backdrop to justify [poor shareholder] returns," Joe Wickwire, portfolio manager at Fidelity Investment Management, told delegates.

He said that many investors no longer believe in "China’s growth story", but that this negative sentiment has already been priced into the market, along with the prospect of higher interest rates that will curtail spending on large infrastructure projects and concurrent raw material demand.

"Things are being looked at from a glass-half-empty standpoint," he said, explaining that this was 

keeping confidence in commodities low for now but would theoreti-cally prevent a larger crash in the future.

Dan Oliver, founder of New York-based Myrmikan Capital, took a more bearish view of the impact slowing economic growth in China will have on mineral prices.

"A rising commodity price forgives a lot of mistakes, but the China bubble is the elephant in the room - when it bursts, prices will go even lower," he warned.

The Mines and Money conference came to London in December 2014

Production-ready projects

According to Joe Foster, portfolio manager at Lombard Odier World Gold Expertise Fund, both bullish and bearish investors are always looking forward to the next leg of the commodities cycle and will seek to back mining projects that are production or construction-ready in order to maximise benefits from anticipated growth in demand.

"They are looking for projects that are about to enter the pipeline and can catch the upswing (…) and have the potential to be scaled up," he said.

Companies with large capex commitments and lengthy development timelines are unlikely to tempt investors, Foster said, hinting that this was a sobering truth for companies that had commenced development projects at the wrong time in the cycle.

As for those companies at the mid-development stage saddled with heavy debt commitments, speakers at Mines and Money said that many miners had found themselves in limbo, unable to raise the finance needed to take projects forward while simultaneously burning through cash reserves just to stand still.

Mark Tyler, senior investment banker at Nedbank Capital, said that contrary to widespread misconceptions, lenders were not in the business of offering punitive financial deals that would cause mining projects to fail when the going gets tough.

"Lenders would rather get their money back than have their pound of flesh," he said, although he admitted that mismanagement of funds often leaves banks with no choice but to call in debts and take over assets when projects run into trouble.

Getting back on track

One notable omission from this year’s conference was the willingness to put a firm date on the recovery of the resources sector, although some were brave, or foolish, enough to suggest that 2016 would see the beginnings of an upturn.

Others were less sanguine, particularly for industrial correlated assets, whose fortunes are tied to factors beyond the control of the mining industry.

"If you’ve been investing in this space in the last three to four years, your portfolio probably looks like a train wreck," Chris Berry, founder of the resources investment advisory firm, House Mountain Partners, said.

"It’s been a rough few years in commodities, and that’s probably going to continue for the next few years," he added.

He pointed out that while mineral prices have fallen from the spikes seen at the beginning of the decade, many are still high on an historic basis. "The challenge is that costs have continued to rise while prices have stagnated," he said.

Berry explained that mineral prices face a number of headwinds, including a strong US dollar, weakness in key markets like the Eurozone and slowing growth in China.

"China is slowing but I don’t think there is going to be a hard landing - it is my opinion that it will be a far more managed and nuanced story than we have seen in the past," he said.

The "good news", according to Berry, is that the current malaise, while painful, is only temporary. "When the various excesses are worked through, be they in inventories, or labour, or whatever, things will start to pick up," he said.

Berry urged resources investors to take a leaf out of Silicon Valley’s book and look for "disruptors" linked to new technologies in the commodities space, such as the lithium, graphite and rare earths stories behind green energy and electric vehicles (EVs) and the growth in demand for oilfield mineral lead by hydraulic fracturing.

Focusing specifically on lithium, Berry told IM that the outlook for this "speciality sector" was positive, but that winners and losers would be determined by companies’ ability to successfully implement cost-cutting, recovery maximising technologies.

"Look for technologies that can compete at the lowest cost and exploit inefficiencies in existing practices," he told investors.

Focus upbeat after meetings

Elsewhere, Focus Graphite confirmed to IM in an interview that while it was focusing on the battery market, it was also working on value-added products.

And, despite the fact the presentations were gloomy, Focus president, Don Baxter, told IM that the company had had some positive conversations at the event with investors.

"[In terms of] financing a graphite project in the market I think this will be easier than financing projects like gold or base metals," he told IM.

"We’ve had some meetings based around that and follow up meetings and there’s definitely interest in what we are doing. As financial types look at projects that are not happening and not exciting they are seeing the graphite space as having potential," he added.

The Canada-based company expects to begin construction at its Lac Knife flake graphite deposit by next summer.

"We’re just about ready to start detailed engineering, which should allow us to put a shovel in the ground next June pending financing," Baxter said.

The company filed its Environmental and Social Impact Assessment (ESIA) with the Quebec provincial authorities on 1 December 2014, in which it outlined the potential benefits of the project, stating how it would mitigate any risks involved.

This follows the completion of its feasibility study in August and the signing of a pre-development agreement with the Uashat mak Mani-Utenam (ITUM) First Nation, an indigenous group to the area.

Fragile graphite prices approaching 2015 have led to some fears there may be an oversupply in the market. However, this is a view that Focus does not subscribe to.

"I do not really buy into the whole oversupply situation [argument], if anything goes into oversupply it will be the [flake] fines, the majority of the companies out there will never build a mine," Baxter said.

Highfield Resources Ltd. lodge mining concession application

Highfield Resources Ltd. told IM on the sidelines of the conference that it had lodged its mining concession application with the Navarra and Aragon autonomous community authorities for its Spanish Muga potash project.

The plan contained an edited mine plan that is capable of producing more than 1m tpa muriate of potash (MOP).

"In the next 12 months we’re looking at getting our initial project into a construction ready state," Highfield’s managing director, Anthony Hall, told IM, adding that the company hopes to enter production at Muga between late 2016 and early 2017.

Highfield estimated that its new mine plans will give an initial production life of 19 years for the Muga project. Two declines will be constructed under the plans, which include two 400 tonnes ore per hour processing lines, which will be upgraded to 800 tph after 19 months.

The 100% Highfield-owned project, which covers a 300 metre deep sylvinite resource over 110km², will also require approval by the Spanish government.

Spain has improved as a mining district over the last year, Hall told IM.

"Spain changed its environmental approvals legislation in November last year, and it actually shortened the timelines from 8-10 months to six months," he said, adding: "The other thing people don’t mention about Spain is that it does actually have mining tax incentives."

"There’s an accelerated depreciation regime for mining projects. In addition to that, there’s a capital reserve fund where you can effectively allocate funds to provide capital support for mining projects," said Hall.

Highfield owns four potash projects — Muga, Vipasca, Pintano and Sierra del Perdon — in the Ebro potash producing area of northern Spain, which collectively cover nearly 400km². Sierra del Perdon includes two formerly operating mines.

Hall also noted that Israel Chemicals Ltd. (ICL) already operates mines locally, and suggested to IM that this, combined with the Sierra del Perdon brownfield project which operated for 34 years until 1996, means that Highfield’s mine plans can be drawn with relative certainty.

"The nice thing about that [Sierra del Perdon] is that we know that it operated via a decline into its mineralisation — effectively there were three declines. The other three projects that we’re trying to [bring forward have] identical mine [plans] to the way that one operated," said Hall.

Prices

"We’re in a very fortunate position that we can build potash projects at fantastic margins at (…) current potash prices," Hall said, adding: "We also take the view that potash prices are unlikely to get back to where they were eight to ten months ago."

Potash prices fell significantly in the period that followed the Belarusian Potash Co. (BPC) split, as Uralkali increased its output at the expense of prices to gain market share.

"There’s going to be some — ultimately — price management by the majors that effectively try to keep out a lot of other non-producing projects. You’ve got to take the view that it’s an oligopoly — which it really is — with five majors controlling the majority of the output," Hall told IM.

"Oligopoly pricing tends to suggest that you price it to a point where you keep everyone else out to maximise profit, which is not where they [the majors] were 8-10 months ago; I think they had actually, perhaps, got a bit too aggressive with pricing," he said.

Despite industry wide financing woes, Hall told IM that the company has a "strong cornerstone investor that has certainly given us indication of being favourably disposed to continuing to support the projects

See IM’s interview with Anthony Hall online:

http://www.indmin.com/Article/3409594/VIDEO-Highfield-Resources-lodges-potash-mining-concession-application.html