Tips for students looking to break into mining investment

I caught up with Caroline Donally, Managing Director at Denham Capital, to ask her what advice she has for students looking to enter into the "real world" of mining investment, her thoughts on the outlook for the mining sector, and how she evaluates geopolitical risk in a project.

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Caroline Donally is a Managing Director at Denham Capital, a global private equity firm with more than $9bn under management. She has over 20 years of experience in the Mining sector, originating, analyzing, structuring and executing investments across the globe, in a variety of commodities.

Since joining Denham's Mining team in 2011, she's been responsible for new equity and debt investments and managing ongoing investments in various stages of their lifecycles across North and South America and Africa, including copper, zinc, silver, lead, niobium, tin and rare earth elements. She was responsible for originating, monitoring and exiting the investment in JDS Silver that was successfully sold to Coeur Mining in 2017.  

What is your outlook for the mining sector in the next 12 months?

Canadian equity markets are really quiet at the moment, although there is a bit more life in Australian equity markets. We’re seeing very little cash injection from investors in these markets.

What we are seeing is more activity by corporates and specifically more M&A activity, as they come out of their shell. Corporates are looking for assets, keen to build their pipelines to make up for a lack of investment in exploration, cost cutting and balance sheet repairs in previous years.

So, do you expect the amount of PE funding into mining projects to increase or decrease?

We’ve been active of late, helped by the quiet equity markets and falling base metal prices, which is an area we focus on. I suspect this is true of other PE firms as we have seen more some others buying assets.

A number of PE funds have closed over the past 18 months and are seek to deploy their capital.

You’ve just launched your Denham Capital Mining Fund. Can you tell us a little bit about this?

We closed our fund at the end of June, raising US$560m. What’s different about this fund is that it is solely focused on mining.

Historically our global funds invested in three sectors, power, Oil and gas alongside mining. However, we believe having a fund solely focused on mining suits our investors and their style of investing.

We have already closed a number of deals. Geographically we are targeting Canadian, Australian, and Latin American projects. Commodity wise we like base metals, but also met coal and speciality metals, However, we are cautious on lithium and cobalt projects. We tend to find that people are more interested in the cobalt or lithium product rather than the project. As a PE fund we always need to think about our exit strategy and where we see interest in the project itself.

So, when you invest are you always thinking about how you can exit?

Yes.  This is a key consideration for Denham. 

We are always thinking who will buy this project? We specifically look at ensuring it has a reasonable size and scale. By that I mean we don’t want to have projects that are so large it limits the amount of end buyers.

What are your other key investment considerations?

We also have a preference for private assets rather than public markets, where we often find assets reflecting sentiment rather than the real value of the asset.

When we look at assets, we want them to be close to producing cashflow. I’ll still meet good management teams with a good project at an earlier stage, but we tend to only investwhen an asset has been substantially de-risked.

We then take a detailed look at the quality of the management team, and determine whether they are the right management team to take the asset forward.

How should mining projects best pitch you?

I like an elevator pitch which has been prepared and planned. In 5 minutes I want a management team to tell me why I should invest in them. Within that I want to hear about their teams’ skills and expertise and more critically, how those skills  are related to the asset. I want to hear how they can progress the asset and take it to the next level. Finally, I want to know about timing and costs. For me it’s always people first, then assets.

How to you evaluate and mitigate geopolitical risk?

For us it’s much wider than just geopolitical risk. It’s also about dealing with local authorities, permitting risk, security risk, community risk and logistics risk.

We do have some investments in jurisdictions with geopolitical risk. However again it comes back to management teams. We need teams who have previous experience of doing business in that jurisdiction. A proven management team in Chile will for example, add little value if you suddenly put them in charge of a project in Mongolia.

Past experience of a strong management team goes a substantial way to mitigating risk in all its forms. Political risk insurance is very rarely a panacea.

What base metals are you focusing on?

We still are looking at some zinc projects. We also have a significant part of our portfolio invested in met coal.

We like copper, partly due to the EV story, but also because copper prices have come down, there is a supply / demand imbalance, and there are still not enough good mining projects out there.

Finally, we also are interested in polymetallic projects such as zinc, lead and silver or copper and gold, although I should add that precious metals are not a core focus for us.

What advice would you give to a smart, driven college student about to enter the “real world” of mining investment?

Learn as much as you can from those around you to avoid making the same mistakes that they did. Piggyback onto their experience. As a PE investor we make long-term investments so I always urge caution before getting into a deal, as PE transactions are not always easy to exit. You need to understand that before you enter the deal, you must be prepared to enter a long-term partnership with the management team. If you are having doubts at the early stages of the deal negotiation, then you probably shouldn’t be going forward with the deal.

Returning to an earlier theme, don’t try and reinvent yourself. If you are excellent at iron ore projects in Australia, don’t try your luck with gold in West Africa.

Marcel De Groot is a speaker at Mines and Money London 2019, taking place 25-27 November at the Business Design Centre. 

Mines and Money London

Andrew Thake

Head of Content, Mines and Money