The appearance of a number of new, well-funded Private Equity firms investing in mining in the mid-2010s was a much needed shot in the arm for developing mine projects. After the boom years of the Supercycle exploded, taking wider Wealth Management and Pension Fund money out of the sector to an alarming degree, alternative sources of investment were desperately needed.
Private Equity firms raised substantial capital mainly from US Endowment Funds. The funds were usually around USD 250-300 million, and the management teams were predominantly experienced mining people from large mining groups with a strong project development background; an area that large mining companies had stopped pursuing.
The nature of their funding had a couple of drawbacks. US Endowment funds didn’t much take to uranium or coal, and there was little foresight of the emergence of battery metals as a serious investment. This didn’t matter much as the PE managers tended to have experience in base metals and gold. Besides, there would clearly be enough high-quality projects worldwide to invest in without bothering with those commodities.
Jurisdiction would also be a factor for the investors. When your money comes from a long-established Family Office or university, it isn’t good to be seen to be investing in places like the DRC, Zimbabwe, the former Soviet Union, or parts of the Middle East, no matter how discreet your funds may be.
Nevertheless, the heady days of Private Equity optimism were great to behold.
Brokers walked every junior mining company around St. James’ until they were dizzy, and funds started to be deployed.
So successful was the deployment that, before we knew it, these PE teams were raising second and then third funds. This was a model of success, and there were noticeable improvements in the standard of their office spaces.
However, as time went by, a certain amount of trial and error led to investments becoming much more risk averse. PE became more reluctant to invest in the development phase, preferring projects that would generate cash flow much more quickly.
The pool of investible projects that initially looked deep and wide eventually turned out to be too shallow for everyone to swim in, and PE houses found themselves competing for the same investment.
The PE elephant in the room
However, Private Equity money’s main drawback was ignored for too long.
PE money inevitably lent itself to a shorter-term investment horizon than is needed in the resources space. Significant returns and an exit strategy needed to be generated within ten years.
The nature of a lot of their investments warrants some scrutiny too.
Investments came directly through personal and professional contacts rather than stockbroking intermediaries, furthering the decline of stock liquidity and independent research in the sector.
Moreover, a lot of projects came directly out of the disposal strategies of larger mining groups.
Sure, we all got the argument that these projects were non-core, but they were non-core for a reason.
Investments tended to be relatively passive with the funds taking control of 20% of the stock, meaning PE investors had board representation without taking full control.
Management of the projects themselves was left in the hands of management of the invested companies, often leading to frustrations and conflicts when there were inevitable delays or egos clashed.
One of the issues we see at Cygnet is that management teams and boards remain static even when the business is evolving.
A good CEO and a strong board may have successfully attracted seed investment to start a project. They may have had the right skills to develop a convincing resource; they may have been able to attract development capital, but are these then the right people to take a project through construction, commissioning and into production? Why would they be?
A board should evolve with the project, and we at Swann advise regular board reviews to ensure the right skills are in place at the right time (see also our white paper: Board Rigid).
It looks likely that even with PE investment, too few companies that attracted the investment had the right teams to take them forward.
PE, in many cases, was too hands-off until it was too late. What should have been a portfolio of targeted smart investments ended up looking like a classic ragbag of ‘basket investments’ where one or two worked, most plodded on achieving little, and the remainder would be written off entirely.
All the time, the clock was ticking. Most of the first funds raised in London are now firmly within the asset disposal timeline. Money needs to be harvested and handed back.
But who are the buyers?
By ignoring the equity capital markets and being oblivious to the decline of the sector among the wider investment community, there looks to be little appetite to sell the investments into the marketplace. Few assets have been developed to a scale that would appeal to big mining groups, and the intermediate-sized mining groups were the ones who sold them off in the first place.
It will be interesting to see how PE managers cope with these problems.
In reality, very little new PE money has been raised over the last three to four years.
Private Capital has replaced Private Equity. Funds that had looked to enter the PE fray have been more comfortable offering finance to miners than direct equity involvement.
On the whole, Private Capital Funds have prospered over the past few years. There is a lot more competition in this space than seen before, although this competition, rather like the credit card or personal loan market, does not seem to have led to competition in rates. This is expensive money.
The most interesting trend to have emerged recently is that of much longer-term money, and this strategically makes much more sense.
A good mining project will have a minimum mine life of 20 to 30 years, while big mining groups look for assets they can mine for much longer than that. The return on investment once a mine is up and running can be significant, often reaching 20-30% per annum for years.
Grandiose visions of growth have dominated the sector, but the sentiment is starting to feel old fashioned. The model of building a portfolio for growth and selling on at a profit before full value is realised hasn’t worked.
We are witnessing a return to what mining investment used to be: invest for the long term, build the mine, pay off debt, run for cash and close down.
Several funds to have emerged recently can follow this long-term model.
These have been a mixture of direct Family Office involvement and investment management.
Family Office funds, where the owners have a historical understanding of the sector, have built a stronger and more sustainable suite of investments unconstrained by the pressures of exit strategies. Likewise, a number of funds have been raised directly from the same large investment management companies and pension funds that have realised their experiment in portfolio-building for themselves during the Supercycle was a mistake.
Pension Fund money is deep; they invest in management groups who can run a portfolio of assets for them, it’s effectively Fund of Funds money. These managers share the expertise of the Private Equity funds but are less constrained by a short-term exit strategy. They are increasingly pursuing investment strategies aligned with the new technologies of battery-powered electric vehicles and clean energy. This expertise is hard-come by, and as more funds are raised, the challenge will be to find the right people to make the investment analysis.
It is heartening to see these new funds emerge. We will need them more now than ever as the world embraces new technologies. It will be sticky money, strategically deployed with little fanfare and excitement.
It really is a case of back to the future for mining investment.
Jonathan Williams – Director of Business Development
Image (c) Shutterstock | Olivier Le Moal