Moderator:
Leo Stemp, 121 Group
Panellists:
Jamie Strauss, CEO, Digbee ESG
Hedley Widdup, Manager, Lion Selection Group
John Forwood, Investment Committee Member, Lowell Resources Fund Management
The following is an edited transcript of a recent 121 Group Panel Discussion. Topics covered include the new appetite for financing exploration, the impact of ESG on exploration, and how overall perceptions about mining have changed with the onset of the energy transition.
Leo: John, if you could just give us an indication of your fund at the moment in terms of its allocation to early stage exploration projects, what allocation do you give to exploration and how has that changed over time? Is it more or less than before?
John: We have always been largely focused on the pre-production part of the mining sector. So at the moment we’re about 70% in what we define as pre-feasibility or that’s grassroots exploration for companies that don’t have any resources on their books and then guys who are still exploring but have announced an initial resource or could be quite a substantial resource but still very much in the exploration phase. So we’re very heavily weighted towards that sector and that’s probably increased quite substantially over the last 12 to 18 months really as a result of market movement. I would say that a number of these companies that we’ve had exposure to have grown; either they’ve had exploration success or the market has rerated them – or both. So that’s a substantial allocation in our fund at the moment.
Leo: And when you’re talking to your investors in the fund, are they saying, I want more exploration or what are they saying at the moment?
John: Yeah, definitely I think that the risk appetite has increased substantially. That’s a theme that we’re seeing across the investment universe. We’re seeing appetite for the risk assets, whether it be Bitcoin or whether it be a junior explorer in Outback Kalgoorlie, and that’s in my view, largely driven by the extremely low cost of money and the loose financial conditions that we’ve got at the moment. So it doesn’t cost anything really to hold these very speculative assets and people are looking to see capital gain on them.
Leo: Absolutely. Hedley, what’s your experience with regard to investor interest in the exploration space?
Hedley: I’d echo many of the comments that John’s made there and we’re actually not too dissimilar in terms of a fund structure and focus to what John does at Lowell, and a lot of our investors have invested to have an exposure to the pre-mining space. At the moment, we don’t hold anything which is actually at mining stage so nothing that we’re invested in has been developed to a minor at the moment. Having said that, if I was to break it down further between exploring and advanced assessments or developing, I would say the allocations within the fund have actually gone more towards the exploration.
The market has gone from “please don’t explore; in fact, never do that again because it’s risky and you won’t find anything” in 2015 to where we are in 2021 and investors are piling into exploration IPOs. You couldn’t get an exploration IPO away in Australia, London, Canada, anywhere in 2015 but now all of a sudden you can.
Leo: And Jamie, looking at London, is your experience similar to Australia?
Jamie: I think it is Leo, but I think what’s interesting is we’ve not gone back to the days of 2003 to 2010 where hedge funds were obviously in dominance and where we saw a lot of the new money coming in. I think there’s a greater focus still going on which probably is still left over to some degree from the bear market and that hasn’t really bubbled out yet. But putting some of what John and Hedley had said into context because the first quarter of this year, I think we’ve raised in the exploration world $6.5B. That was five-and-a-half times greater than the first quarter of last year, notwithstanding the beginning of COVID-19 which was beginning to impact things last year.
I think London itself has not come to the fore to quite the same extent maybe as Australia, which is a bit more of a longer boom market because of the Aussie dollar and, to some extent, with the Canadian dollar not quite the same and therefore I think London is probably a little bit behind the curve and could probably catch up. But I think it’s the shifting sands of the whole structure and we’ve got to compare ourselves to where we were, particularly given the need to increase output for some of these battery related commodities over the course of the next 10 to 30 years.
Leo: How much more investment in, for example, copper exploration, do you think we need compared with the amount that is going in right now?
Jamie: I’m sure these brilliant fund managers will have the actual numbers to hand but my own view is it’s quite scary. I mean, if you look at the amount of the degradation over the last 30 to 40 years and the amount of output that is needed if you were to believe well, Robert Friedland or anybody with regards to the amount of copper that is needed in 30 or 40 years, there is a fundamental problem and therefore what’s the gap in terms of exploration spend to get there? I don’t think I could even have stab at it, but it’s huge.
Hedley: I think there’s a couple of factors that sit behind that as well. Richard Schodde from MinEx Consulting, John probably knows him, he’s another Melbourne based commentator on the space, puts out some really wonderful global research when he does papers on copper. He very frequently points out that, I think, every 25 years, the consumption of copper in terms of tons consumed within 25 years doubles or maybe it’s more than that. I think he said in 25 years, we have consumed as much copper as we had in our entire history, leading up to that and in the following 25 years, it’s going to go up by another incredible amount so not only is the consumption increasing, and surely there’ll be recycling and other things, but there is this huge appetite for consumption of copper.
The new spirit is there and I think it’s a really exciting place to be for the next 20 years
Leo: I’d like to talk about some regions which are attracting attention right now for exploration. Hedley, if we could start with you in terms of any regions that you find particularly exciting at the moment, what are your thoughts on that?
Hedley: Well, I think it’s an interesting discussion because risk is something which the market judges one way or another as time goes on and jurisdiction is a huge part of that risk. If the market is happy to explore, it’s then a case of where is it happy to explore and if we contrast the boom that we’re in with what happened in the ’90s, from late ’90s through to 2007 and even 2011, there were periods of time then where if you’re in a country that started with M that was incredibly hot, Mozambique and Mongolia were terrific places to be exploring and they had fabulous geology. They still do incidentally, it’s just that it’s become a lot harder to raise money to put it into those countries. So that was a cycle where jurisdictional risk fell away.
As time went on and investors were attracted to spectacularly good geology. What we’re seeing in this cycle, I think, is far more jurisdictionally biased and there has been a huge, I’d say even premium paid for the ability to explore in places like Australia or Nevada or Canada, and lots of the money which has been raised has gone into those places – be it for gold or for battery metals or anything else. There’s still some traditional jurisdictions that attract money, like if you want to look for copper, then lots of people will go to Chile, etc., but I think that we’ve seen a real jurisdictional bias in the market and to an extent that’s probably led by the industry.
I’ve seen some wonderful projects. We’ve got some in Indonesia where you need to have really trusted and first-class partners in order to be able to make those businesses work because it’s just very difficult to navigate the local bureaucracies and avoid the pitfalls that investors can sometimes fall into there. Mongolia is another one.
Leo: In summary, there are a lot of drivers driving finance into the exploration sector at the moment, the green revolution so to speak and also a lot of the majors building up a lot of cash with these high commodity prices, which they can then feed back into the exploration sector and the need for people to secure their own supply chain. So a lot of very interesting factors, a lot of strong drivers there giving confidence for the future of exploration after many years of underinvestment.
Hedley: I think you could say that exploration has restarted aggressively and it will keep growing until it stops but you’ve captured all the factors that are lending a hand to it increasingly.
Jamie: I would just say Leo, that this is an opportunity for an industry that has not always been the world’s best friend to have one of the great re-evaluations in a sector of a generation. We need to come together for this, but I think the money is there, the willpower is there, I think the new spirit is there and I think it’s a really exciting place to be for the next 20 years.
Leo: John, the final word.
John: I’m just delighted to see the renewed interest in the exploration sector. It was only a couple of years ago that we were saying, “Millennials will never invest in mining, it’s too dirty and old.” Well, it’s almost flipped on its head and become quite an environmentally friendly and necessary activity. So hopefully that will continue for some time to come.
