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VANCOUVER (miningweekly.com) – As the global mining markets turn a corner from what can be termed the biggest commodity downturn in living memory, private equity firm Denham Capital has changed tack, opting to invest in later-stage projects rather than driving exploration.
Speaking to Mining Weekly Online from Houston, Texas, Denham Capital director Caroline Donally said Denham had moved away from its exploration-centric strategy to find assets higher up the value curve that were closer to production, which it could take through to production relatively easily.
A case in point is Denham’s recent first foray north of the US border, and its agreement to back private project developer JDS Silver by providing $65-million to complete construction and bring into production the Silvertip mine, in northern British Columbia.
“JDS is a group of mine builders who have done it before in Canada and understand the challenges,” Donally said, adding that Denham was looking to deploy more capital in Canada.
DIVERGENT STRATEGY
Denham is diverging from the trend. Other companies such as The Sentient Group had been increasing spending on early-stage exploration plays, Sentient investment manager Angelina Mehta told the recent Mines and Money conference, in Toronto.
“We’ve changed our strategy from hiring pure geologically minded professionals [to hiring] mining engineers, as we are able to tap into later-stage projects. Gone are the days where we had to assemble teams of geologists to generate projects,” noted Donally.
She added that Denham, which had traditionally placed great emphasis on the people it backed, now had a greater focus on finding people who could build assets, switching to more execution- and construction-focused people.
‘BEST ASSETS’
While Denham had primarily been engaged in exploration and project development work, Donally noted that, should the company do this early-stage work now, it would have to be a “really compelling” opportunity. “The current market still favours only the best assets on both the exploration and development side, with mediocre projects falling outside the purview of investors,” she said, adding that investors were picky, and the days of raising a lot of money by making a few phone calls were gone.
"While there are some [who believe] that private equity is sitting on the sidelines waiting to swoop in to save the day, they don’t realise that private equity also [comprises picky investors – they aren’t going to invest in projects just for the sake of deploying capital. We want to make sure we see where our returns will be coming from and what the return on value will be once in production before we make decisions," stated Donally.
According to her, the fact remains that many of the projects funded in the boom days should probably not have been funded at all.
However, Donally believes that, while the markets have not all completely opened up, private equity of a certain size and scale is quite active in the sector. Despite there being companies sitting with several billions of dollars in capital to deploy, Donally explained that they were typically competing in a market segment in which the majors already vied for producing assets – a completely different market than Denham’s current focus.
Private equity typically looks at a five- to seven-year timeframe to make money and get out, whereas producing mining companies will typically look towards longer time spans to acquire projects that could languish in the project pipeline for up to 20 years and still make sense for them. They are typically willing to pay significantly more than what private equity will typically consider.
“We changed our strategy to focus on assets we can quickly bring into production for exactly the reason we see producing assets currently garnering a lot of interest in the market,” concluded Donally.