Despite surging commodity prices across the board for metals and minerals on the back of rebounding global economies post-COVID-19, institutional investors and fund managers remain cautious when conducting their due diligence before investing capital into mining projects.
This means that raising the much needed capital to develop mining projects remains a hurdle for most junior miners, writes CHANTELLE KOTZE.
It’s no secret that demand for natural resources is increasing, with analysts forecasting widening deficits in the metals and minerals needed to drive the creation of a low carbon economy. For supply to fill the increasing demand gap, new resources must be discovered and projects developed – an impossible feat when explorers and junior mining companies are constrained for capital.
A project with good margin is critical
Speaking during a panel discussion at the virtually-held Junior Indaba conference in June, Caroline Donally, managing partner at specialised mining capital provider Sprott Resource Streaming and Royalty (a new arm within Sprott’s resource financing division which undertook its first investment in March 2020) said that critical to royalty and streaming companies, is projects that have good grades with good margins.
“While [the project] does not have to be the highest grade project in the world we want to see the ability to generate good margins at somewhat sensible commodity prices,” she says.
Donally says that royalty and streaming transactions are relatively new to the South African mining sector. Royalty and streaming transactions that have taken place in South Africa includes the transaction by Triple Flag, which closed a US$145 million gold stream with Royal Bafokeng Platinum in 2020 and Orion Mine Finance which also invested in South Africa.
She explains that royalty and streaming transactions usually take place at the prefeasibility study stage, at which point the company has already confirmed the economics of its project and has a relatively good idea of the project’s resource potential.
Furthermore, projects should be relatively well advanced in terms of permitting and have a strong and experienced management team that can do what they say they can do, she says.
Donally cautions that at times like these, with some commodity prices trading at record highs, investors are unlikely to run these projects at the spot price and will revise these prices down slightly to ensure that the margins are realistic and reasonable.
In the process of finalising a transaction in South Africa, Donally says there is lots of money to be had in streaming and royalties and believes there are investable projects in South Africa, which bodes well for companies considering to raise money via royalty and streaming transactions.
“Although South Africa is not without its challenges, it is a well-established mining jurisdiction, and you can invest in the country with the right risk mitigation strategies in place,” she says.
ESG considerations are non-negotiable
Donally says environment, social and governance (ESG) considerations form a critical part of the investment decision but people often forget that ESG considerations have been a critical component of mining projects for decades now.
“Mining companies have not been able to operate mining projects in some of the more challenging and remote locations without having the appropriate ESG considerations in place,” she points out.
The challenge we now face is that ESG has in some instances garnered more attention by the mining industry than ensuring that a project is able to operate at a good margin with a strong enough management team to bring it into production.
On the whole, while ESG is often relatively well covered by mining companies, mining companies often fail to communicate to investors what they do on the ESG front, but this seems to be changing, she says.
“As part of our due diligence process when investing, we will look at ESG from a variety of angles, such as from a legal perspective (permitting), technical perspective (environmental aspects such as tailings and water treatment) and the overall involvement with surrounding communities. In some instances we may hire an independent ESG consultants to undertake an ESG report in addition to our due diligence if necessary, she says.
Package your project for the right investor
Also speaking on the panel was Mametja Moshe, Founder and CEO of investment and advisory firm Moshe Capital, who encouraged investors to be frank about what they will or will not invest in.
Moshe, who in her role as an investor, is looking to invest in precious metals and the critical resources needed in the fourth industrial revolution, notes that junior miners in South Africa already have to contend with macro-economic risks within the country that investors factor into their investment decisions, which makes it even more important for juniors to have the right commodity and a project that is far enough down the cost curve before trying to attract funding.
In her role as adviser, Moshe explains that the foreign direct investment landscape has changed. It has contracted 45% from where it was in 2019 – with very limited FDI flowing into South Africa. Because access to capital is limited, she advises juniors to package themselves attractively for the specific investor they are trying to entice. “Investors are looking for different things, so be sure to focus on the one thing that the investor you are targeting is looking for,” she says.
Iterating the need to have a sound management team with sound technical expertise, Moshe adds that building industry connections and networking is also an important factor in building relationships and making yourself known, when looking to raise capital.
Moshe is encouraged by the collaboration between miners and regulators taking place in in South Africa on finding solutions and ironing out the challenges that the junior mining sector faces in the country.
The larger the scale the easier for investors to exit
David Twist, partner at AMED Funds (African Mineral Exploration & Development Fund) says AMED Funds looks for scale early on in the project. “The rationale being that larger projects are easier to exit,” says Twist, noting that it looks to exit around the five-year mark.
Projects in the lowest cost quartile or relatively close to the lowest cost quartile is also a non-negotiable for AMED Funds, says Twist. “While doing our due diligence studies, we tend to pass on anything that does not meet this right from the start. Because the industry is so cyclical, projects in the highest cost quartiles tend to be shelved when commodity prices begin to fall,” he explains.