There has been a massive shift over the past decade in how mining companies secure funding to develop their projects. This is no surprise given that capital has become increasingly difficult to come by, especially for publicly-listed junior mining companies looking to raise money on the stock markets, despite having a good project in the bag.
CHANTELLE KOTZE spoke to CAROLINE DONALLY, MD at global energy and resource-focused private equity firm Denham Capital on the sidelines of the Investing in African Mining Indaba.
The global pullback in investor risk appetite has had the greatest effect on the mining industry, with no return on investment made on mining stocks for a number of years.
Donally explains that this may be because publicly-listed mining companies have not been achieving higher valuations on their shares, either as a function of the malaise in the market or a lack of confidence in the management teams of these mining companies.
As a result, mining companies have begun to run the risk of share dilution in a bid to raise equity to develop their projects.
Most affected have been junior mining companies and pre-production companies with exploration assets.
“The junior mining sector appears to be completely risk-off for traditional equity investors and generalist funds, which have completely pulled back from the stock market, making it extremely difficult for mining companies to raise capital, with very sporadic interest in a handful of mining companies – who are the only companies able to raise any substantial capital,” says Donally.
Historically, publicly-listed junior mining companies would raise the majority of their funds from capital markets, with private equity accounting for a small subset within the total equity raising.
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Nowadays, the picture looks very different given the increasing demand for private equity resulting from a dramatic drop in equity being raised on the public markets.
This has prompted a significant rise in alternative types of equity including royalties and streaming, private debt funds, as well as equity for private companies.
Most interestingly, there has also been a return by some of the major banks, which were historically key funders in a number of mining projects.
Having closed its first stand-alone mining fund – the Denham Mining Fund – in June 2018, at US$558 million, the amount of invested and committed capital under Denham’s management is currently approximately $9.8 billion, across its nine fund vehicles.
It is Denham Capital’s strategy to partner with local management teams with proven track records and superior technical experience and regional knowledge to acquire companies and assets in the metals and minerals sectors, that are close to or already in production.
With one-third of its asset portfolio on the African continent, Donally says that Africa benefits from its incredibly rich mineral endowment, with certain countries being host to some of the world’s highest grade ore bodies.
Many African countries also have a rich history of mining and has therefore become home to a number of management teams that understand the requirements of doing business in Africa.
Owing to this, Donally believes that while Africa ticks many of the investment criteria boxes, consistency in the legal framework is a key piece of the puzzle when it comes to making an investment decision and is therefore an equally important investment criteria for Denham Capital.
Bullish on base metals
“At Denham Capital, we start with the end in mind, and look to invest in assets that will in future be attractive to potential buyers in the next five to 10 years,” says Donally.
She therefore encourages mining companies to think about their longer-term strategy before pitching to private equity firms for funding. In line with this is the need for management teams to have a clear strategy on how they plan to expand and grow their management team as the project develops.
A corporate budget, which indicates the funds needed to get them from where the companies are now to where they would like to be in future is also advantageous to equity investors.
When making an investment decision, Denham Capital also considers the current supply and demand fundamentals of commodities and invests in commodities with neutral to positive fundamentals, which may result in supply deficits in future.
“For example, while there may be a step change in battery metals technology in future, which could cause these metals to increase in demand, we do not bank this into our investment thesis,” says Donally.
Predominantly base metals focused, having invested in copper, zinc and lead projects in the past, Denham Capital is selective when investing in speciality metals or niche metals, such as battery metals or ‘metals of the future’.
Donally says that when looking at these metals, the company looks for assets that are very low on the cost curve, and in the case of projects that are not yet permitted, that they are indeed ‘permittable’ in future.
The assets or projects also need to have enough of the right quality and specification of metals that offtakers actually want in terms of concentration and purity, without flooding the market when they come into production,” she explains.
One such project that Denham Capital has invested in is Alphamin Resources’ Bisie tin project in the Democratic Republic of Congo, in which the private equity firm is a 48% shareholder through its subsidiary, Tremont Master Holdings.
While an understated metal of the future, tin is the metal most likely to be positively affected by future technology.
Primarily used for soldering circuit boards, tin also has the potential to be the material of choice for the next generation of energy-generating and energy storage devices, making tin a vital component in the manufacturing of electric vehicles, advanced robotics, renewable energies, and advanced computing.
Apart from Bisie, Denham Capital is invested in a number of other minor and speciality metal markets, in assets that conform with the above-mentioned criteria.
Denham Capital is particularly bullish on copper at the moment says Donally, owing to its good fundamentals, which indicate a supply shortage in the metals in the next three to five years as well its use in electrification technologies, including renewable energy systems and electric vehicles.