TORONTO (miningweekly.com) – Mining companies must have the right management team and business plan in place in order to attract private equity investment, Denham Capital metals and minerals director Caroline Donally told Mining Weekly Online.
“The team brings by far and away the most value to the execution of a project and, even prior to that, to the origination of unique opportunities,” she said.
Denham Capital is an energy and resources private equity firm, with more than $7.9-billion invested across the resource sector, including mining and metals. It provides capital through a partnership model that includes projects in the early-stage, near-production and production phases.
“On metals and mining, Denham has spent the past four to five years really focusing on the southern hemisphere: Latin America, Africa and, more recently, we are quite a way down the track with a team looking at the Australasia region,” Donally said, adding that she is also exploring opportunities in the US and Canada.
“Ideally, we’re looking for opportunities whereby we can find teams … or where we already have a team in place that can execute those opportunities,” she said. “In Chile, it’s copper/gold, while it’s polymetallic in Peru; in Brazil, it tends to be more niche-type metals and minerals; in Africa, we look across a broad spectrum of commodities.”
Current partners include Chile-focused Santiago Metals, Africa-focused Pangea and Brazil-focused Mining Ventures Brasil, among others.
GETTING TO KNOW YOU
Management teams will sometimes approach Denham or vice versa; the initial discussions starting with an analysis of the proposed objectives and project opportunities. “We spend a lot of time meeting with management and assessing the team’s capabilities, skills and experience. [We analyse] the team’s business plan to see whether we want to invest,” Donally said.
“There’s a lot of interaction between when we first meet a team and when we do a transaction,” she added. “It’s an interaction in terms of getting to understand people and how they are thinking about creating value.”
“It’s also about where they see the opportunities; their thought processes behind the broader business plan; why they think it is a good business plan; and why they think it could make money for everyone involved,” she continued.
Once an agreement is reached, Denham carefully tracks the progress being made. “We’re typically talking of a five- to seven-year timeframe. We need to assess the business plan on an ongoing basis as the markets move and the fundamentals change; we need to be sure that where we are heading is still valid,” Donally said.
“We are also looking at [projects] from a point of view that they can at least make money during a down cycle. So we are looking for typical low-cost producing assets or, if they are exploration assets, we will consider the assets with a rough estimate of the cost curve and what operating costs could be if they were brought into production,” she said.
“In all of our businesses and with various companies, we have the ability to assess earlier-stage exploration risks. [For example, we’re involved in] some assets where people are doing soil samples and digging trenches,” she added.
The business plan helps Denham formulate the amount of money it will seek to invest, when the tranches of investment are made, and a rough timeframe for when the firm will seek to divest.
“It’s an estimated guess at the beginning as to how much capital a team will need in order to go out and execute their business plan,” Donally said. “[If envisaged] production is on a smaller scale, then we might need something like $30-million to $40-million. In which case, we’ll try to structure a deal whereby that capital is agreed upfront and injected on them reaching certain milestones.”
“It is our strong preference to have milestones [embedded] as the trigger for investing the next tranche,” she continued. “Some projects are more successful than others as to having specific milestones that need to be met.”
The returns sought by Denham are computed on a project-by-project basis, with the development phase and risk perception seen as key factors. “If we get involved in a project at early-stage exploration, then clearly we’re taking on a lot more risk. For that reason, we’ll want to see a path to far greater returns,” Donally said.
“It also depends on the political risk that we are taking,” she added.
“What gives us a lot of comfort is that our teams are local and understand what needs to be done in order to operate locally,” she explained. “[This includes] knowing the permitting processes, understanding what the communities are looking for and the issues they face, [and] how to deal with changes in the political environment.”
“Having local people based in various jurisdictions gives us a huge edge and takes out a lot of the risk,” she added.
Overall, Denham is pleased to see more private equity firms moving towards the mining and metals sector. “It would be good to have more private equity players involved in the space so mining companies and mining teams will have a greater understanding of what it is that private equity does,” Donally said.
“[But] the type of business we do is quite different to the type of business a lot of other private equity groups are involved in. Our business is management team-driven first and foremost,” she added.
“It requires patient capital; it requires finding the right people and finding the right business plans. [Remember,] capital deployment can take time as the team builds up and then goes out and finds their projects,” she said. “So, for us, it’s all about the team; we believe fantastic people can do unbelievably brilliant things.”