How to Pitch to Private Equity Companies
Ahead of his presentation at Mines and Money London, Ross Bhappu, partner and head of Private Equity Funds at Resource Capital Funds, explains where the investment opportunities are in metals and mining, and what he looks for when financing a project.
Resource Capital Funds (RCF) is celebrating its 20th anniversary this year, and during that time has invested in 51 countries and 30 commodities. Ross Bhappu has been with the company for almost 18 years (there were only six employees when he joined) and has been involved in the mining sector for some 30 years. With experience investing through several market cycles, Dr Bhappu provides valuable insight into the current market environment and the investment opportunities that are available to international investors.
With BSc and MSc degrees in metallurgical engineering from Arizona University, and a PhD in mineral economics from Colorado School of Mines, Dr Bhappu is certainly academically well qualified. Moreover, prior to joining RCF in 2001 he had served as president of a development-stage copper company (GTN Copper Corp.), director of business development at Newmont Mining Corp. and had served in various technical and financial roles at Cyprus Minerals Co.
Mining Beacon (MB) caught up with Dr Bhappu to ask him how markets today compared with those prevailing when he joined RCF?
Ross Bhappu (RB): Similar to the mining and metals sector today, it was a tough time in the market when I joined RCF, and commodity prices were depressed. Like now, it was a particularly difficult time for junior mining companies to raise money. RCF recognises, however, that this is a cyclical business and that the market will improve. The value of private equity firms is that we continue to invest in projects through good times and bad times. Being patient, and supportive of our portfolio companies, is an important characteristic that is valued by both our investors and portfolio companies.
MB: In October 2010, Forbes wrote about your decision to invest in rare earths in general, and Molycorp in particular, and said you "look like a genius". What was the trigger for this investment?
RB: Well, as a child I spent my summers hanging around Molycorp's mines while my father, a metallurgical engineering professor, did consulting work for the company. We started pursuing Chevron regarding Molycorp in late 2005 (which had ended up with control of the company after acquiring Unocal that year) and secured the company during the financial crisis when prices for rare earth elements tumbled.
MB: Do you remain as enthused by the rare-earth story?
RB: I do remain bullish for the rare earth sector but also remain concerned by China and their very slow process of cleaning up the poor environmental standards of the existing rare earth mines and their lack of controls over illegal production of rare earths. This creates a significant overhang to the RE space and makes it difficult for new mines to be financed outside of China. It is important that non-Chinese consumers step up and commit to long-term offtake contracts with non-Chinese mines to assist in financing these projects.
MB: RCF has offices in Denver, Perth, Toronto, New York and Santiago. As a diversely-based investor, what is your main observation of the current investment scene?
RB: The most interesting one at the moment is in North America, where retail investors have largely abandoned the risk-reward attractions of exploration companies for cannabis and, before that, the cryptocurrencies. There are worrying parallels with the Dot.com boom of the late 1990s because many of these retail investors will not fully understand these markets, or the risks they are assuming. The same can be said, however, of some retail investors in the mining sector.
MB: You are described as being "passionate" about mergers and acquisitions (M&A); do you think a boom in M&A activity is coming for mining?
RB: Yes; consolidation has already started, and I expect some more to come. Exploration fell off a cliff, of course, when metals prices fell between 2011 and the start of 2016, so there is a shortage of deposits ready to be developed. For the majors, this can only be rectified through M&A. Markets are improving, and finance is available for good-quality projects, but an important consideration is that risk is appropriately priced.
MB: Do you see private equity companies as 'alternative' finance, or is it now a main-stream source for junior companies?
RB: With the share prices of so many development stage mining companies being weak, there are great opportunities for private equity firms. There is also a role for streaming and royalty companies, but the dilutive effects of these funding methods should be taken properly into account by the recipient companies. I am not sure that management teams always appreciate the indirect dilutive impact of streaming and royalties. That being said, RCF does use streaming and royalties as part of our investment strategy. We strove to find a balance that is acceptable to boards and management teams that we can all be comfortable with.
MB: What is your outlook for the mining sector in the next 12 months?
RB: The cycle is turning, and I think money will start flowing back into the industry. I look at it as a 12-24 months recovery period with some commodities starting to emerge more quickly than others.
MB: So, do you expect the amount of private equity funding into mining projects to increase?
RB: Yes, I anticipate that financing from all sources of private capital including private equity will rise over the next few years until there is a rebound on the ASX, TSX and AIM exchanges.
MB: When you invest are you always thinking about how you can exit?
RB: When we invest we are usually taking a three to seven-year position, with an average of around five years. Yes, we consider various exit strategies (IPO, sale to strategic partner or a joint venture) when we go into an investment, but we try to remain flexible and position our portfolio companies to be prepared to take liquidity when it presents itself throughout the life of our investment. We always try to remain flexible in our position with the goal of being nimble to evolving market conditions.
MB: What are your other key investment considerations?
RB: Country risk is important (especially with regard to staff safety) but RCF's investment decisions are always driven by the project. The key for us is a high-quality resource – it all starts there.
MB: How should exploration companies best pitch their projects to you?
RB: As mentioned, the deposit comes first, followed by a thorough technical and commercial understanding of the project. But we also like to know about the skills of management. RCF applies a 'skills matrix', and we work hard with the management teams to ensure that any deficiency in skills is filled with qualified individuals. Of key importance here is the sensitivity of management teams to ESG related issues – how are they going about gaining the social license to operate?
MB: What metals are you focusing on?
RB: I would describe RCF as opportunistic, but with a number of commodities of particular interest. We have a commodities economist on staff who is constantly evaluating the sector and looking for imbalances that may create future opportunities. We have invested in 30 different commodities in the past including many battery metals. We continue to monitor opportunities in this space but have concerns about certain individual metals. At the moment we are invested in gold, zinc, nickel, copper coal (both metallurgical and thermal) and other interesting commodities. The key for us is to have a high-quality resource married up with a high-quality management team.
MB: Your family has set up an education and mining trust, what advice would you give to a college student considering mining as a career?
RB: Yes, we have a family foundation to support education and mining, but the 'education' and 'mining' aspects of it are separate. Nevertheless, I think the mining industry offers a wonderful career. It has certainly created an exciting career for me and I recommend a mining education to any student that may have an interest in the field. Unfortunately, mining is not prevalent in the US, so educating young minds here about the sector and the career opportunities it provides is important.
MB: Many thanks.