VANCOUVER (miningweekly.com) – Generalist investment funds are having a hard time keeping up with the success private capital lenders have enjoyed in the mining space in recent quarters, with private equity firms carving out their niche by being specialists at their game.

The generalist funds are underwriting real estate and mining deals and they have difficulty understanding the volatile nature of commodities, Waterton Global Resource Management partner Cheryl Brandon pointed out on a recent panel discussion on private equity investment in mining, in Toronto.

Denham Capital MD Caroline Donally agreed, saying every project is different and that the generalists cannot find examples from other projects to find the value, because they are not specialists. The comparables are not the same, she said.

Rio Tinto Ventures head Andrew Latham noted that the general scarcity of capital is worsened by generalist funds looking at mining opportunities in 2016 – at a time when there was a clear value proposition, according to him – yet they could not see the drivers that would crystallise the investment. “They want to see the line to the exit, but are unsure where that is with the cyclical market, and where it would be down the line.”

Donally said the commodity cycle is clearly heading up, but pointed out that there is still not enough inflow of capital. She sees a split in the market, which is marked by a lot of confidence, but little capital. “We see the good entrepreneurs getting fed up with the ‘drip-feed money’ model. They want to get to an exit point because they want to make money.

“This implies that values are depressed. But because we don’t deal with public markets, share prices are not really relevant. But at least we’re not entering from very high valuations,” Donally said.

Latham believes one should look out for synchronised growth around the world as a key sign to determine how long the up cycle can last. “It is unwise to place hopes in another Chinese induced upcycle, but rather simultaneous growth around the world.”

Brandon noted that the Waterton team was surprised that valuations are still lagging behind the broadly improved prices. “Assessing projects has become even more critical since capital has become so scarce.”

Orion Resource Partners Douglas Silver argued that one cannot be in private equity without being long in metal prices. “We have a metals trading desk that lives and breathes the prices, and we are bullish that the world will have a supply crunch. Our jobs are to cherry pick the most promising projects. We are very discriminating on the projects we choose to fund to operation,” he stated.

CAPITAL PLIGHT
Brandon noted that there has been a 75% drop in assets under management in mining. There is a global shift towards passive fund management and this is, she says, bad news for primary market investment, since it reduces the number of sources of funding available for juniors and miners.

Last year, 55% of capital raised was by mid and senior miners.

This is where private equity is stepping in and this could lead to increased investment from institutional investors, Silver, whose firm tends to work together with other private equity firms to form syndications, said.

“The market has turned. When we get out of depth, it goes hyperbolic and frothy. This time I expect to see more restraint and a more gradual build-up. The investors that usually spend discretionary funds in the junior mining space have shifted out to [cryptocurrencies] and weed.”

He sees no major driver in the gold space for investment “because no one except the most ardent gold bulls believe that it will go anywhere”.

Orion typically looks for a seven-year plan, spending four years to build a project and three years to harvest returns. “We just announced a new fund, but we’ll be creating more streams going forward. We get it feathered in with equity and other models. We expect more of the same but tweaked to the specific needs of projects and proponents,” Silver said.

Brandon added that Waterton is excited about the electric vehicle (EV) revolution and what that means for the Dumont project, in Quebec. “Dumont became very interesting with the run up in the EV market. The industry is just begging for more cobalt and we effectively own 19% of the deposit, which is roughly split 90% nickel/10% cobalt and considered one of the largest resources of its kind in the world.”

Rio Tinto Ventures has the advantage of being baked into a major. It allows the company to take a different view than bulk commodities such as iron, copper and aluminium. “We are not in the business of pursuing frothy business deals, but sensible deals,” Latham cautioned.

“We are comfortable for short and long term deals. We are spending lots of time looking at deals, before acting. It is no different from basic policy of Rio. We have a lot to bring in terms of skills, money and network,” Latham advised.

He noted that none of the “new commodities” act as the main commodities they are used to – requiring a different way of doing business. “We want to bring the power of Rio, but want to be more flexible.”

DUE DILIGENCE
Donally and her team had their first round trip for capital in mining with the JDS Silver deal that closed in September. Denham has about $9.5-billion under management, with about $1.5-billion in the mining business.

Coeur Mining – the largest US-based primary silver producer – in a transaction worth up to $250-million, recently bought a 100% stake in JDS to gain access to the high-grade Silvertip silver/zinc/lead mine, in northern British Columbia, as well as a foothold in one of the best mining-friendly jurisdictions in the world.

In its first Canadian foray, Denham agreed to back the private project developer JDS in September 2016, providing $65-million to complete construction and bring into production the Silvertip mine.

“It proves that private equity does work. We took an equity position and backed the management team. “Coeur liked the fact that it was kept private. We sold quicker than anticipated – we would have wanted to keep the asset up to a year after it ramped up.”

She underlined that Denham’s approach entails writing clear project strategy upfront, stipulating when money will be funded and that if there is no performance, no one gets paid.

“We start with the exit in mind. We approach investments thinking about potential target buyers at the end of the window.

“We have our technical teams in countries we are active in. We manage risk by diversifying commodities, geographies and with a view to cash flow in the near term,” she explained.

Orion has a record of diligently providing funding for shovel ready projects. “Our investors are looking for returns in about a year to three,” Silver said.

Brandon explained that Waterton takes an earlier-stage approach. It looks at drilled-out projects were it can evaluate project data independently to formulate plans. "We have teams of geologists looking at these development-stage assets.

“We don’t have a lot of competition from institutional investors at this stage.”

Waterton builds models from scratch in parallel with the investee and hope to arrive at the same results on the other end. “We create scoping studies in three weeks using the company’s raw data. We have our own way of making assumptions and it fits with our underwriting and valuation process,” Brandon said.

Latham added that Rio is looking for what unique elements it can add to the projects. “There are circumstances where we believe that we are the only party suitable to fund projects and those are the ones we look for.”

“The key is we need to exit in order to make money. Our processes take three to six months and clients should not expect quick answers by having a road show and expect them to cut a cheque at the end of the week,” he quipped.

Most of the panelists steer clear of leverage to do deals, and will often take on debt and syndicate it to banks and keep equity portions. However, Latham pointed out that debt is sometimes a very useful tool. “When appropriate we’ll use debt to enhance returns but not as a means to get into deals.”