The second day of this year's Mines and Money conference in London (MML) revolved around money, in particular equity financing, the role of private-equity firms, winning new investors and attracting ESG (environmental, social and corporate governance) funds.
The discussions kicked off with a panel debate on whether equity financing was dead. Peter Grosskopf, the CEO of Sprott Inc, described a "dichotomy" in mining at the moment, where funding was available for those companies in stock-exchange indexes but sparse for those that were not. He estimated that three-quarters of all mergers and takeover transactions in the past few years had been underwritten by strategic investors (major mining companies and private equity), and that equity investors had largely disappeared.
Michael White, the president of IBK Capital, agreed that markets were "challenging" for exploration companies, with a "risk off" attitude from many generalist investors. Indeed, he estimated that there were only a "handful" of Canadian generalist investors in the sector at the moment.
Bert Koth, the managing director of Denham Capital, and a regular speaker at MML, warned that there had been an "ideological withdrawal" of significant capital from the sector, and he could not see how this trend could be reversed. He conceded that private equity firms, such as his own, could not fill this gap, and he estimated that there was only US$5 billion of new funds that could be deployed from this source, and perhaps only half of that would be available for funding exploration rather than strategic acquisitions.
Julian Treger, the CEO of royalty company Anglo Pacific, agreed that there had been a withdrawal of public funds, and, from a UK perspective, the uncertainty caused by Brexit hadn't helped.
Nevertheless, the mood amongst speakers was surprisingly optimistic, with White saying, "money is coming back" and, despite challenges, we are "heading into a bull market". He predicted a "waterfall of investment" when "big winners" start appearing in the sector. Treger agreed, saying "smart money" was "positioning itself".
Every speaker agreed, however, that ESG was a big problem in attracting investment into the sector. This specific topic was discussed in a fireside chat with Adam Matthews, the director of ethics and engagement for the Church of England Pensions Board, which has some US$3 billion under management.
Matthews talked at some length about the implications of the Brumadinho dam failure in Brazil at the beginning of January that killed over 250 people (barely three years after the Mariana dam disaster killed 19 people in the same country). He said the industry "shouldn't be in this position", and blamed previous failures to identify it as a systemic, rather than corporate, issue. Dam building, and waste management generally, was not, be stressed, to be treated as an externality, and new global standards were required for new dams, and measures found to alleviate the danger of existing structures.
Matthews, who recognises society's need for metals, and is a strong supporter of the mining sector, was critical of industry associations, many of which, he said, are not doing their client companies any favours by not aligning themselves with the Paris Accord on climate change.
The mining industry, Matthews told delegates, has moved from the need to demonstrate transparency to the need to demonstrate action. He warned that our lobbying groups are holding the sector back.
A panel on 'M&A mania' discussed whether the huge recent gold deals (Barrick-Randgold and Newmont-Goldcorp) signalled the start of a trend for the rest of the industry. "Too soon to say", according to Peter Marrone, the chairman of Yamana Gold, who argued that these deals were very specific (he described them as "fit for purpose"), and these conditions did not necessarily apply across the industry.
Marrone described corporate amalgamations as complicated, and not something to be lightly entered into, so he was not convinced that there would be a rising number of transactions. Karim-Michel Nasr, the CEO of La Mancha, emphasised that buyers must be convinced that they can improve the asset being acquired, and that it fits with their own assets.
Mark Burridge, the managing partner of Baker Steel Capital, noted that most M&A transactions will still involve a change of ownership premium, and that arbitrage means that the acquirer's equity will inevitably fall after the takeover (as happened this week to Kirkland Lake Gold following the announcement of its takeover of Detour Gold). As a result, takeovers must be "fit for purpose". Marrone added that even deals that appeared to be zero premium were not if one company traded at a greater multiple than the other.
BMO Capital Markets' Pascal Lussier Duquette said that there was more discipline in transactions than in the past. The reduced "exuberance" has resulted in fewer overpayments, which has been a significant problem in the past, and one of the main reasons for the withdrawal of generalist investors.
The need to get generalist investors back was addressed by Ross Bhappu of Resource Capital Funds. He stressed that "we can attract the generalist investor", and listed six imperatives.
1. Miners, he said, "need to get it right" with regard to delivering projects on time and on budget (and with realistic price assumptions).
2. The industry needs to sell itself much better, particularly with regard to sustainable development.
3. Much more needs to be aired about metals, particularly copper, being 'green'.
4. The general public needs to be convinced that mining is necessary.
5. The role of gold as an asset hedge and catalyst of growth (and jobs) ought to be emphasised.
6. The industry needs to seize the counter-cyclical investment opportunity that is looming.