Mines and Money ’15: Financiers urged to have patience with mining investments

By Laura Syrett
Published: Tuesday, 01 December 2015

Piling in when stock prices are up then pulling out when market cap starts to decline is the typical model for investing in mining equity, but this can be detrimental to promising projects subject to the vagaries of the commodity cycle.

Funding groups have been told they need to persevere with investments in the mining sector and allow companies time to deliver on promises, rather than pulling their cash out of operations that don’t bear fruit immediately.

 Mines and Money 15_Carlos Soublette
Investors have been urged to be patient with mining investments (source: Carlos Soublette). 

Speaking at the Mines and Money 2015 conference in London today, a panel of industry experts discussing how fund managers are reviewing portfolios under current trying market conditions suggested that investors are sometimes too quick to follow the vagaries of the market.

Neil Gregson, managing director of global resources at JP Morgan asset management, said that fund managers tend to put money into a venture when "the market thinks it has found something" and the market cap goes up, but few are prepared to see their bets through when valuations start to decline.

"We never knowingly kiss a frog. We always kiss the princesses and sometimes they turn into frogs," he said, admitting that not all investments would come good, but hinting that withdrawing support after only a short period of time can hasten the demise of promising projects.

According to Jamie Horvat, director of global equities at M&G Investments, the mining sector has been all but abandoned by the investment community.

"This whole area of investment space has been forgotten about – nobody wants to be in mining right now," he said. Horvat likened the current trough in project financing to the situation seen between 1997 and 1999, when mining was going through its last major downturn and investors were fleeing to the havens of technology and healthcare stocks.

Joe Wickwire, portfolio manager at Fidelity Investment Management, said that investors were looking for management teams they could trust with their money. 

"They are looking for managers that recognise the need to run their business as a business, rather than just a production vehicle," he said.

"In the commodities space, I think we are seeing a resizing across all of the industries," Wickwire added, noting that the necessary shrinkage of the supply side had been delayed by currency movements. The effect of the strong US dollar set against weaker lower currencies had been to "keep the undead alive", Wickwire explained, meaning that many unviable mining projects that should have been forced to close have been kept in production.

To stream or not to stream?

Alternative financing options such as streaming were also debated, with speakers disagreeing over whether such funding channels were really in the best interests of the industry.

"If you’re a mining company and you choose to sell a stream in the current market, I think that’s a very foolish thing to do," said Rob McEwen, CEO of TSX-listed gold and silver miner, McEwan Mining Inc.

He explained that the attraction of streaming to many companies was the fact that it was non-dilutive, but likened streaming companies to "sirens on a rock, selling a Faustian bargain". 

"When you get into production, you find that what you’ve given to your shareholders, you’ve given away," he said.

Pierre Lassonde, chairman of Canada-based royalty and streaming business, Franco Nevada Corp., disagreed, saying that it was not in a streaming company’s interest to burden a miner to the point that they keeled over shortly after entering production.

Frank Holmes, CEO of US Global Investors Inc., also said that streaming could have a beneficial impact on a company, besides providing them with much needed cash. He said that signing up to a streaming or royalties deal prior to entering production meant that companies often tended to be far more disciplined in their operations and that option to buy back royalties at a premium meant that miners were not saddled with such deals for life.

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