Can you give us a quick overview of Sprott Natural Resource Investment Partners?
Sprott Natural Resource Investment Partners is a leading global financier to the metals and mining sector and was founded in 2010 to provide flexible and comprehensive structured investments to junior and mid-tier metals and mining companies. We manage committed institutional capital on behalf of pension plans, retirement systems, insurance companies, foundations, and endowments within Sprott Inc.’s broader private strategy business.
While our investment strategy is focused on project financing, M&A financing, term loans, recapitalizations, and special situations, we are involved throughout the capital stack offering bespoke capital solutions. Since 2010, we have made more than 85 investments worth approximately US$4B. We have helped launch leading mining companies including G Mining Ventures Corp. Champion Iron Limited, Equinox Gold Corp., and Emerald Resources NL, to name a few. Sprott Natural Resource Investment Partners is part of Sprott Inc., a global alternative asset manager with over US$28B in AUM as of 31 December 2023.
Where are some of the biggest funding gaps for the metals and mining industry that you’re seeing at the moment? What role do you see for alternative capital to fill the funding gap?
We continue to view the lack of traditional equity capital available to the sector as the biggest funding gap, most notably for exploration and development stage companies. Despite near-record highs for some commodity prices, mining equity performance has lagged largely due to a lack of inflows into the market, an exodus of generalist funds, high interest rates, and cost inflation. In 2023 alone, we saw net outflows of US$14.7B from gold ETFs globally (according to the World Gold Council) despite gold increasing by over 13% during this period. Additionally, we have seen a global erosion of mining specialist equity funds, with only a handful remaining in North America. These specialist funds have been taken over by passive ETFs.
The question now is, how does the funding gap get filled? While some commercial banks are active in the space, they are selective and typically focused on multi-asset producers. We believe this funding gap will be filled by alternative capital, including structured finance, streams, and royalties.
Alternative capital providers are private capital funds that can provide companies with more flexible and innovative capital to advance projects. This capital is filling the void left by declining availability of more traditional forms of financing, such as equity and commercial banks. This is our core business at Sprott Natural Resource Investment Partners.
Is there a positive response or new strategies coming from the investment sector to increase funding to these areas?
Yes, we see alternative capital as one of the key solutions to the funding gap in the sector. The mining sector is a capital-intensive industry requiring significant investment to advance projects. This has been amplified by the global energy transition to a net-zero world. We believe the commodities needed for this transition also require a clear, transparent path to permitting within the regulatory framework to help attract additional capital. With this in mind, we do acknowledge that there are unique risks and skills required to invest in the mining sector, which creates some barriers for new investors to enter the market. At Sprott Natural Resource Investment Partners, and across Sprott Inc., approximately 30% of all investment professionals have a technical background, providing invaluable insight, knowledge, and relationships to draw upon. We believe this is one of our strengths given that we are solely focused on the metals and mining sector.
Let’s look at regional funding considerations. How do you assess jurisdictional risk? How does this impact your investment decision-making?
We assess jurisdictional risk on a case-by-case basis, rather than taking a blanket approach. Sprott Natural Resource Investment Partners does an in-depth country assessment and often discovers that facts do not align with general perceptions that can be outdated. It’s important to assess jurisdictional risk for a specific country, and even states and provinces within those jurisdictions.
Countries within Africa or individual states within the US must be evaluated independently to appropriately assess the risks and determine how to manage those risks accordingly. Jurisdictional risk is one important aspect of our investment decision-making process, notably, how to mitigate or structure around those specific risks. In some circumstances, if the jurisdictional risk is too high and can’t be mitigated through either political risk insurance or structure, then we will not proceed.
Alternative capital providers are private capital funds that can provide companies with more flexible and innovative capital to advance projects. This capital is filling the void left by declining availability of more traditional forms of financing, such as equity and commercial banks.
However, looking at jurisdictional risk on a case-by-case basis and understanding the on-the-ground situation has differentiated our approach to risk mitigation, rather than the more traditional one-dimensional view. As an example, we financed Emerald Resources NL’s Okvau gold project, located in Cambodia. The general view was that Cambodia was a difficult jurisdiction to invest. However, Sprott Natural Resource Investment Partners worked with the project sponsor (Emerald Resources NL) and completed in-depth jurisdictional due diligence. In the end, our conclusion was that Cambodia was an investable country with the appropriate risk mitigations in place. Emerald Resources NL successfully commissioned the Okvau gold project, and the stock has increased from A$0.47 per share in April 2020 to A$3.30 per share as of April 2024, an increase of over 600%.
In terms of commodity focus, where is your attention focused at the moment?
We are fairly commodity agnostic when it comes to our portfolio, though we tend to focus on more liquid and transparent commodities with terminal markets (e.g., LME). However, we do prefer some commodities over others, including copper and gold. Both are liquid and have transparent markets.
The most important factor for us is where the asset sits on the industry cost curve. We look for projects that sit in the first or second quartile, meaning that over 50% of the industry projects need to lose money first, likely making the project more resilient to commodity price volatility.
We’ve been hearing a lot of warnings of impending supply deficits in the key transition metals moving forward. Do you see a positive response from the Canadian investment space?
We have certainly seen positive remarks by both federal and provincial governments, supporting, and enticing the advancement of critical minerals projects. In our view, ensuring a clear and transparent permitting path within a regulatory framework would likely help in attracting capital. The equity side of the business is still reticent to fund and advance some of these projects. It is vital that early exploration-stage companies have access to capital. Without exploration and early development, projects cannot be advanced and brought online to meet the growing demand for critical minerals.
Finally, any thoughts or predictions for the coming years for the industry? What can we be looking forward to or on the lookout for?
Over the coming years, we believe a big focus for the industry and governments will be establishing and growing a critical minerals value chain, upstream to midstream to downstream, and back to recycling. Vertical integration of the value chain will help countries become less reliant on imports of critical minerals and proprietary technology. This will require a significant amount of capital and expertise to execute, but we believe there is a path. Access to capital will be one of the key drivers to establishing this value chain. The industry will need equity, alternative capital, and government agencies to be actively involved.
