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South Africa: Investing in junior mining is a game of patience

Although a new day is dawning for commodities as a result of technological advances and an increased appetite for base metals in particular, investment opportunities for junior miners are still dependent on creating a more enabling environment.

“The failure and under performance of many past investments has resulted in investors taking a cautious and selective approach to mining investments,” states Mike Seeger, founder of MX Mining Capital Advisors (MX).

AUTHOR: Sascha-Lee Solomons, content editor at Mining Review Africa

He points out that it takes time to develop a solid business case for investment.

Most juniors start with an incomplete investment case and have to spend time (two to five years) and effort to make their business case “investable”.

This article first appeared in Mining Review Africa Issue 7, 2018

Securing licences, attracting a strong team, compilation of the Competent Persons Report, and securing a market for the product, developing and aligning a mine plan to meet the market demand, designing a mineral process plant design and securing a logistics path to market all takes time.

“Different investors enter and exit their investments in mining projects at different project development stages. “It’s about attracting the right investor for the right project stage,” he adds.

Challenging the juniors

Seeger mentions that many banks have limited interest to finance mining projects and have reduced their mining teams in this business area.

Finance is available from mining focused equity funds as well as streaming and off take companies where there is a strong business case.

He mentions that key criteria’s are the mining asset, the licence to mine, the team, the market and the logistics path.

Larger mining contractors are also seeking partnerships with juniors and are prepared to vendor finance the start-up of the mine, where there is a solid commercial business case.

MX Mining Capital Advisors founder Dr Mike Seeger

The challenge for the junior lies in developing the fundable business case.

Equipment finance is available for projects that are production ready with a market and a strong mining team he reiterates, adding that commodities of interest at present are nickel, titanium, tin, vanadium, cobalt, copper, bauxite, and coking coal.

“Gold is always of interest to metals streaming companies. Thermal coal projects can be financed in South Africa if the business case is sound, typically by coal traders and select mining contractors,” he adds.

Another challenge for junior miners is legislation uncertainty.

The erratic mining legislation dynamics around the Mining Charter in South Africa in particular have caused major mining companies to reduce exploration and mine planning activities ahead of the current mining operations.

This has reduced the inventory for mining, with resultant declines in production.

Further, some large, well-capitalised major mining companies have decided to reduce their footprint in South Africa and move to host countries with more investment-friendly policies.

This means there is less capital available to develop large mines and the skills base is deployed elsewhere.

“The new junior miners stepping into this void are eager and motivated but under capitalised and under-skilled.”

Governmental role

Government should realise that its role is that of an enabler of investment and create policies that remain constant in the long-term, enabling an exploration project to be developed to a producing mine under a consistent policy regime.

He illustrates that the stats are tough for mine developers. As a rule of thumb, 1 000 identified geological anomalies, lead to 100 exploration projects, which result in 10 000  feasibility studies – which ultimately leads to one producing mine.

“Government must begin to realise that capital can choose its destination and it should create policies and systems that attract investment. I believe the South African government and its recent investment drive is beginning to realise this.

“Mining is one of the few sectors where a large number of jobs can be created and South Africa still remains one of the most well-endowed mineral countries. Where can you acquire world class gold, platinum, chrome and coal assets all within a radius of 200 km from Johannesburg? And the prospect of modern commodities such as nickel and copper is good in this mineral field,” he emphasises.

Advice for junior miners

  • Look at projects where there is historical data to capitalise on it
  • A good start is a project where there is a producing mine nearby
  • Attract an experienced mining team to assist in the development of the project – incentivise them
  • Create partnerships with commodity traders and mining contractors
  • Take care of the environment
  • Don’t enter the game unless you are 100% funded. Starting mines with a compromised budget will lead to the collapse of a venture
  • Be willing to dilute to a minority for the sake of getting the project operational
  • Look at smaller projects where there are opportunities for modular mineral processing and pending commodity, smelting opportunities to enhance the value of commodity

The numbers are scary!

1 000 identified geological anomalies, lead to 100 exploration projects, which result in  10  feasibility studies which ultimately leads to one producing mine.

This article first appeared in Mining Review Africa Issue 7, 2018