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.
Speaking at the Mines and Money 2015 conference in London in
December, 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 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 a company’s market cap
is going 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 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," 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 seeking 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.
"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 against weaker
local currencies had been to "keep the undead alive", he
explained, meaning that many unviable mining projects that
should have been forced to close have been kept in
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
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
Frank Holmes, CEO of US Global Investors Inc., suggested
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.
Cash still available for "good"
Despite the tough financing climate, funding is available
for first class mining projects, particularly for those in
Africa that can show acceptable risk management and credible
"It is difficult, but not impossible, to raise money for
mining projects in Africa," said Ross Harvey, senior researcher
for the Governance of Africa’s Resources Programme
at the South African Institute of International Affairs.
Rudolph de Bruin, founding partner of Africa-focused private
equity group AMED, said that from a buy-side perspective, it is
"very difficult to find good projects to invest in".
"The money is there," de Bruin said, but conceded that AMED,
which is involved in Sepfluor Ltd’s Nokeng
fluorspar mine in South Africa and World Titanium Resources
Ltd’s Toliara mineral sands project in Madagascar,
as well as potash, coal and nickel projects, is now very
prescriptive about the type of development it will
"Previously we would look at greenfield [sites], but not
anymore – maybe [we will] again in the future," he
Harvey said that companies had to be honest about the
political risks associated with African developments. "From a
government perspective, it is difficult to invest in a
transparent way," he said, noting that major and listed mining
companies have more reputational constraints and are subject to
greater scrutiny than smaller or private businesses. Public
companies can see their assets "flipped from under them" if
they have not taken steps to manage the risk in advance, Harvey
He also pointed out that, in a low commodity price
environment, it is in the interests of mining companies to
hoard their assets – a practice that is in direct
opposition to what many African national governments want them
Ludivine Wouters, managing partner at London-based
investment and advisory firm, Latitude Five, said that not all
African governments should be tarred with the same risk brush
but agreed that there was a general lack of flexibility in the
way African governments handle their mining sectors. "Investors
are very particular about how risks are managed," she said,
noting that what used to be "box ticking" exercises for
resources companies are now areas that have to be given special
care and attention to satisfy potential partners.
The flip side of this, she suggested, is that Indian and
South Korean companies are now moving into the African mining
sector and picking up projects passed over by Western
operators, owing to the "different attitude to risk" in these
As well as risk mitigation, low commodity prices are
favouring the prospects of cheaper projects. "Obviously cost
curves move up and down through various cycles but you have to
have the ability to operate in those cycles. Good projects
which can do this will always attract capital," Richard
Crookes, investment director at Australia-based EMR Capital,
Mark Tyler, senior investment banker at London-based Nedbank
Capital, echoed Crookes views. "The project
doesn’t need to be in the lowest quartile, it just
needs to be a good project. It also needs to be able to survive
in its commodity production environment and have an experienced
management team," he said.