No V-shaped recovery for mining industry

By Laura Syrett
Published: Monday, 27 April 2015

Cycle is nearer the bottom than many people think.

The mining and exploration industry is probably "near the bottom" of the cycle, but any foreseeable recovery in the market will not be as sharp as its decline proved to be, according to investment management firm, BlackRock.

Speaking at the 121 Mining Investment Conference in London in April, Tom Holl, a portfolio manager for BlackRock’s natural resources team, said that the mining industry is "probably closer to the bottom than the majority of market commentators think".

"I don’t think the recovery will be V-shaped (…) I think that part of the reason commentators are so bearish is because they know how long it takes for the supply side to work itself out."

Scott Marsh, portfolio manager for private equity find Hawke’s Point Capital, said he thought that there was "more pain to come in the mining sector", but denied that companies like his were deliberately painting a negative picture in order to take advantage of cheap company valuations.

"That is hedge fund investing, not private equity," he said.

One of the routes to riding out the bumpy market floor, and appeasing dissatisfied investors in the process, is cost-cutting, the financial panellists said, but noted that for companies with mining projects in developing countries, reducing staff wages is usually not an option.

"Investors often turn around to management and say, 'cut costs’. Try cutting salaries in an emerging economy," Holl said

Marsh said that while trimming salaries was an appropriate measure in places like Australia, which saw unsustainable levels of wage inflation during the mining boom years, miners should really be looking to reduce capital costs wherever possible and stressed that companies needed good management in place to execute this effectively.

Lithium is no field of dreams

In the lithium market, the present euphoria around potentially stratospheric demand growth for lithium compounds from battery makers hasn’t made it any easier for companies in the sector to surmount the practical challenges of getting projects into production.

Speaking at the 121 event, Anthony Tse, managing director of ASX-listed Galaxy Resources Ltd, told IM that the "build it, and they will come" mantra does not apply to lithium, where final product specifications are strict and difficult to achieve and customers can afford to be picky.

"For a high purity lithium carbonate project, there are lots of steps you need to go through to get the product that the market wants," he said.

"All the euphoria about Tesla and electric vehicles is great, but lithium companies need to show not only that they can get into production, but also that they can make the high grade products".

Over the last two years, Galaxy has clawed itself back from crippling levels of debt, which contributed to the closure of its Mt Cattlin spodumene project in Western Australia – a situation which Tse put down to mistakes made by previous management. 

The miner is now developing a lithium brine project at Sal de Vida in Argentina and a pegmatite project at James Bay in Quebec, Canada.

Galaxy recently closed the sale of its 17,000 tpa Jiangsu lithium carbonate plant in China to Sichuan Tianqi Lithium Industries, putting it in the "fortunate position" of having $30m cash in the bank, having been left with a gross balance of Australian dollar (A$) 50m ($38.6m*) from the sale.

The company has also lately signed a three-year lease agreement with General Mining Corp. to restart
Mt Cattlin project in Western Australia for tantalum production. Under the terms of deal, Galaxy will receive
a 10% royalty on all production
from the site with the exception
of spodumene, which is subject to a 50/50 split and will be marketed by Galaxy.

Tse explained that even though Galaxy has observed some "tightness" in the lithium compounds market as South American supply has so far not ramped up in step with projected increases in demand, customers can still be "fussy".

"Buyers are very precise about their product needs and it takes a lot of expertise (…) to make sure you can meet these," he said.

There is also relatively little concern about global lithium supply at present, Tse conceded.

Graphite industry run like MI6

According to Manoli Yannaghas, managing director of UK AIM-listed StratMin Global Resources Plc, the opacity of the graphite industry is a functional barrier to progress for many junior producers and explorers.

"The graphite industry is run like MI6," Yannaghas told IM. "It wants expertise and there isn’t much of that to go around."

He said that he expected to see "some sort of corporate activity" – or consolidation – within the junior sector in the next year. "There will have to be for companies to survive," he said.

StratMin commenced production at its past-producing Loharano graphite mine in Madagascar in March 2014 and has an offtake agreement with a major Northern Hemisphere buyer, but is yet to get over the "final hurdle" of making profit from its operations.

"We’re getting there," Laurie Hunter, the company’s non-executive chairman, told IM. "But getting graphite to [a purity] of 94% C without destroying your flake size is a black art."

The failure of investors to understand the nuances of niche, speciality minerals was lamented by many producers and market commentators at 121. However hopes remain that for battery minerals like lithium and graphite, "contrarian opportunities" – investment options that present themselves when company valuations are at an all-time low while end markets are seeing unprecedented growth – will prove attractive enough to secure cornerstone investment for some projects.

*Conversion made April 2015