Nichole McCulloch: How has the financing journey for juniors changed, and why are the players and processes different in this bull cycle?
David Street: It’s changed a huge amount. 30 years ago, if a junior company was developing a project, it was with equity, debt, or a mezzanine. Today, there’s a subset of streaming and royalty companies who take an interest in revenue from projects directly. Debt providers now are different. There are a lot of funds who can put together a debt package on their own, rather than a syndicate of lenders. There’s been a lot of end users in the last few years. OEMs like GM, Stellantis, and CATL, who are directly investing, initially through off-take, but now directly in equity in projects.
The challenge for small companies is navigating their path through all the financing sources. When to bring them on in the right order, how to fit them all together, and establishing the inter-creditor issues between all of them. The regular equity piece of the jigsaw is one of the harder pieces to fill these days in the current market. We look to provide strategic equity positions for small companies. There’s a lot of players providing other types of capital, not so much straight equity in the current market.
Bert Koth: The equity portion of the development financing for most companies is still very difficult to raise. Earlier stage de-risking capital is readily forthcoming from the public markets, but development financing is not usually forthcoming. That is the purpose of funds like us – to step into that financing need.
Nichole McCulloch: What role do you think London plays now with investment strategies becoming cautious over stock specific risk. Do you think liquidity is coming back in mining and in what form?
Alison Turner: London still represents a deep pool of capital, both institutionally and privately. It has capital, and the appetite to take risk is there, but there is a disconnect in the traditional equity markets where risk capital is struggling to find its way to those investments. Fund managers are often concerned about liquidity and taking stock specific risk at an early stage in companies that have a binary outcome as to whether they may be successful, and what reputational risk that then confers onto the fund manager if that goes wrong. The kind of risk that people are willing to take has dampened, but the capital is still there. Elsewhere in the world now, a lot of M&A is happening and there is more excitement in the junior mining sector. I think London will follow to some extent.
Investors tend to follow the momentum, and when things are hot they pile in. So, some of that liquidity will probably come back.
Nichole McCulloch: Are there specific jurisdictions that you feel are coming back?
Alison Turner: The Australian market is mixed. It’s found specific sub-sectors that have had strong runs, but the liquidity has been problematic in other areas; this is also the case in Canada. The US has not traditionally embraced mining in a huge way and that’s still the case. There’s more interest in the downstream processing side.
Pim Kalisvaart: The generalists haven’t trickled down to embracing juniors. I’m not sure whether we are going to see that or what the catalyst is for that.
London has the benefit of having a lot of people that understand mining and mining finance. In the early 2000s, there were many mining companies listed in London, but there are much less now. The few that have ventured and tried haven’t helped London raise its profile; a couple of them have been unsuccessful and that hasn’t gone unnoticed. London is becoming, as a stock market, less prolific than Toronto or Australia, but remains a knowledge base and a source of capital.
David Street: There isn’t the same pool of capital for very junior companies in the UK. The AIM market has never taken off for mining. Although there is a lot of infrastructure and funds here, they can invest in Australian or Canadian companies. Only a couple of our investments have been listed in the UK.
Bert Koth: There are a lot of successful companies that have 30 or 40 years Life of Mine that are trading at four or five times EBITDA multiples, compared to some technology companies who are trading at 50-80. The reason for that is the generalist investor pool willing to mobilize real liquidity into mining stocks is relatively low. As a result, companies that are very successful trade at low multiples.
Pim Kalisvaart: We need to do a better job promoting the industry, but there are a few characteristics that make us very different from the tech industry. We’re unique in that we have an ability to see massive margin expansion if a commodity price is booming. But, we don’t have moats. Even if revenue is low, and if as a technology company you are able to ring-fence a technology, you can put a moat around it and the sky is the limit. Finding a good answer to investors as to why our industry is so exciting is a challenge.
We’ve proven that there is value to be created by a lot of companies, but we must show that through rigorous technical work and by going through various steps of development. We need to become better at articulating why a generalist would want to invest in the industry, especially now with the EV transition.
Comment from the audience: Companies like Rio Tinto and Anglo are churning out billions a year in investment. They can help a lot in the equity space. As the gold price goes up over $2,200, there’s going to be so much cash coming out that even mid-tier companies will be financing smaller juniors. Is this the way it might go?
Alison Turner: That is correct at the very early stage. In contrast to previous cycles, the majors have been absent, doing very little M&A. In the base metals and specialty minerals, the M&A that they have been doing has been concentrated primarily on producing assets and not on major development projects. So, if you have a project that needs a billion dollars to develop, the majors haven’t been stepping in to grab those projects. We’re not seeing that boom of investment from the majors that we saw in previous cycles.
Bert Koth: For a junior mining company, it’s a big decision to take a larger mining company on the books as a shareholder because in many cases you lose option value for the future, because typically this is a major having rights of first refusal. So, if there is a major mining company as a shareholder on your books, that might not be good for the remaining shareholders.
Pim Kalisvaart: Like Bert, I ran a venture fund, Xstrata, and had the same set of challenges to convince a company. You’re taking an entity that typically operates at an oil tanker speed, where you really need speedboat decision making. That’s not what they’re well-equipped to do if you must go through various committees to decide to sign an NDA, let alone match your stake. It was a challenging set of circumstances to operate in. There is space for it, but it is not the be all and end all.
Nichole McCulloch: Would you agree that the speed of decision making is problematic when working with the majors?
David Street: Yes they’re very different styles of companies. There was a misallocation of capital by the majors the last time around. Some of their shareholders and the very big funds are still actively putting them off transformative or large M&A projects with very large capital expenditure tickets. You see that more so in gold, which is a much more fragmented industry. You can make a good case for gold companies merging. That will continue to happen, but shareholders of, for example, BHP or Rio, are not looking for them to buy a monster development project, they already have a lot of these projects in their own portfolios that they don’t get a lot of value for.
Question from the audience: Would you care to comment on non-London, non-traditional sources of capital for the junior mining industry?
David Street: In the current geopolitical environment, there is a big push from governments to incentivize projects through grants, subsidies, etc. This is happening in the US with the Inflation Reduction Act, and in Canada, Australia, and other places. It is challenging for small companies to finance these projects, and it’s important to have the right people in those companies to assess the types of grants or local funding that is increasingly available.
Pim Kalisvaart: What I would like to see much more of, as opposed to more capital, is a clearer path to permitting, particularly in the jurisdictions that are less traditional in mining, that now want to have their own source of raw materials.
It’s the important hurdle of understanding how a project can be permitted that prevents people from investing. I don’t think it’s necessarily the case that locals need to come to bear for it all to be fine. Where the locals can help most is creating a clear path to permitting.
Nichole McCulloch: Do you think deals are available despite high inflation? Who is providing risk capital to early stage?
Pim Kalisvaart: Look at the variety of the risks. I can price in inflation and construction risk, with the right team and management risk. We have a good handle on geological risk and upside. With all of that we can come to view which projects we’d like to invest in. So, capital is available, but we need to have an ability to evaluate many of those risks, and a lot of the projects would be assisted materially if the politicians could show us a clearer pathway on some of those items as opposed to some of the statements that we’re currently hearing.
David Street: There is a disconnect between money being handed down by governments and to projects that won’t get permitted. But we’re in an inflationary period, interest rates stay higher for longer. The cost of capital has gone up over the last couple of years, and an inflationary environment is more difficult to build projects in.
Bert Koth: There’s the argument that a producing mining asset, once it’s up and running, is a powerful inflation hedge in an investors’ portfolio. That is not true for development assets and early-stage assets, but for producing assets. Typically, the metal prices significantly overshoot the operating cost in the inflationary cycle. If you’re confident that you can handle the construction risk and you can price the inflation into the development capital, you can generate a powerful inflation hedge for investors.
Nichole McCulloch: Do you think government mandated capital helps plug finance gaps and are there wider tax incentives or catalysts for mining activity more broadly?
Bert Koth: Yes, especially if you look at the energy transition metals today, you have the deposit that you need, but there’s a very complicated downstream associated with that. The job of a mining investor is not to build a lithium hydroxide plant, or an ore separation plant, or a battery manganese refinery. These are very complicated. Mining investors can handle the mining upstream risk. You need a pathway to permitting, but you need money from the government to enable the downstream because the execution risk is alien to most metals and mining investors.
Alison Turner: What we are seeing quite an interesting development where governments are incentivizing local production. They’re not just incentivizing an alternative value chain, which arguably goes from the best deposit in the world that might be in, East Africa, into a plant in Europe. They’re trying hard to incentivize the whole value chain to be in their country. In certain cases it is not the best deposits that are the ones that get moved towards, that’s something to be aware of.
Question from the audience: If you look at auto manufacturers, and also the Middle Eastern sovereign wealth funds, do you see the risk profile of mining investing changing out of necessity when these guys get involved in order to remain relevant?
David Street: It is an interesting development. A few years ago those players felt that they could source enough raw material just through doing off-take deals, and that’s not where they sit today. At a mining conference today, there’ll be many people from OEM companies looking to invest significant amounts of dollars.
Bert Koth: I totally agree, but a bigger concern is when you have naïve investors entering the room who don’t understand the sector, they’re prone to significant misallocation of capital. The temptation is going to be very strong for some of these parties to invest in projects that are ultimately going to fail, because they didn’t understand the technical risks in the first place. This can destroy the necessary capital formation further down the track.
Once we show a good path to permitting, the capital will follow.
Nichole McCulloch: We’re going to finish with bull or bear. What would you say your bullish or bearish on commodity-wise at the minute?
David Street: Everyone’s bullish about copper in the long term, and were bullish on gold given the inflationary environment currently. We have been bullish on uranium for some time, given energy transition, renaissance of nuclear, and smaller scale nuclear power plants. We hope that has further to run.
Pim Kalisvaart: I don’t have the capabilities of understanding which battery technology is going to triumph, but they need to go over the same copper cable. Copper does seem to be a comfortable place to be and to be insulated from those risks, which is good enough. Gold, for the same reasons, is something we have in the portfolio that I would add to the list.
Alison Turner: We are bullish on platinum. People have underestimated the shift from palladium into platinum and the supply side risks in South Africa. We are bearish on the short-term outlook for copper, in contrast to the other guys.
Bert Koth: We don’t make calls on the outlook of commodities because we finance the development of mines, and by the time they are in production, we’ll have been through two further cycles. For us, as long as it’s low cost, long life, and scale, we don’t care what commodities are going to do in the next 12 to 18 months.
Panellists:
Nichole McCulloch, Managing Partner, Stratum International David Street, Co-Founder and CEO, Tembo Capital
Alison Turner, Portfolio Advisor, Umbono Global Mining Fund Bert Koth, Portfolio Manager, Denham Capital
Pim Kalisvaart, Portfolio Manager, Hawke’s Point Capital
