The mood could best be described as practical at this year’s Prospectors & Developers Association of Canada’s (PDAC) annual convention, which took place March 4 in Toronto. Capital for development has become scarce as more investors withdraw from the mining market and the financing that is available now comes with a considerable amount of “adult” supervision.
Nowhere was this stiff dose of reality more apparent than the PDAC panel luncheon. The theme of the discussion was Funding Challenges: The benefits of alternative investment funds including private equity in the mining sector. Rick Rule, chairman, Sprott U.S. Holdings, moderated a panel discussion that included David Harquail, president and CEO, Franco-Nevada Corp.; Doug Silver, fund manager, Orion Mine Finance; and Caroline Donally, director Denham Capital. Franco-Nevada is a large publicly traded company that provides capital for mines in exchange for a gold royalty (percentage) or a gold stream at a fixed price. Spun off from Red Kite 18 months ago, Orion is a metals trading group with $1.8 billion that provides a wide range of lending options for mines. Denham Capital is a private equity firm with more than $7.9 billion invested in oil and gas, power and mining industries.
The opening conversation set the tone for the discussion. Harquail explained that mining is a long-term prospect and the only way to be successful is to have permanent capital. Funds with short-term money are doomed in the mining business, Harquail said. Silver said that mining CEOs create value and the investor’s job is to recognize value. That’s not happening today. Investors have no clue as far as value creation in the mining sector and private equity has had to step in to fill this funding gap. Donally advised developers to look at the entire project. “To raise $5 million for an exploration drilling program, only to return next year and ask for another $5 million—that’s akin to paying your mortgage with a credit card,” Donally said. It’s neither practical nor sustainable.
Considering the current state of the market, it didn’t take long for the conversation to become predatory. Donally explained that Denham is looking for low-cost assets. “The cycle is our friend,” Harquail said. When the value returns to mining equities, the mining companies are not going to want or need money from these funds, Silver explained. “For now, the cost of capital has gone up,” Silver said.
Financing for mining projects began to unravel shortly after the global financial crisis in 2008. At the time, a group of 10 to 20 banks were lending tens of billions of dollars to the mining sector. More than half of that disappeared when margin requirements increased. The private equity firms have been filling the gaps in $50 million to $150 million increments. But, there are still huge financing gaps. The days where funds or institutional investors would cut a check for $5 or $10 million based on a 30-minute presentation are gone for now. “We spend months looking at a company and its management team before we invest,” Silver said. As Rule pointed out tongue-in-cheek, Denham could back a team and acquire assets then do an offtake deal with Orion who could sell the gold to Franco-Nevada. The audience was not amused.
Steve Fiscor, E&MJ Editor-in-Chief