Mines and Money 2015: Financiers urged to have patience with mining investments

By Laura Syrett, Liz Gyekye
Published: Monday, 21 December 2015

Investors told not to run out on good projects; cycle favouring low-cost, low-risk assets.

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 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". 

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., 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" projects

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 development strategies.

"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 consider.

"Previously we would look at greenfield [sites], but not anymore – maybe [we will] again in the future," he said.

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 said.

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 to do.

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 jurisdictions.

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, said.

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.