Mining investment: portfolio strategies, working through COVID-19 and ESG risks and opportunities

Charles Bond:Thanks and welcome to our panellists and thanks very much for taking time out. I know the people who are watching this video will be really grateful, especially fuel insight at this very unique time in the market. I suspect none of us have really seen a market like this before, despite our collective age, so I know that it really does present some disadvantages, but also no doubt there are many opportunities out there, and I guess that's what we're all interested in.

So with that in mind, we've put together some questions for you, really just to gauge your feelings. And the first one is where do you see the risk of reward in the market at this point in time. 

I'm conscious that last year, private equity group investment was relatively down compared to the previous year in 2108. There may have been various reasons for that, it may have been that there was quite a lot of fundraising going on and by the funds but the general feeling is now that the funds have got significant amount of cash behind them, so in theory you all should be in a good position being cashed up, ready to make investments, an opportunity, opportunistic investments at this point of time.

So I guess the question to all of you is, is now the right time to grab a bargain and if so, where do you think those bargains might be.

So maybe if I'm just because of the shape of my screen, I'll start with David first and maybe David you can comment on where you think we are in the market and what are those opportunities.

David Street: Oh thanks Charles. Look I think it is a very unusual time as you said, and I think more broadly across equity markets, markets have bounced back actually in quite a resilient way, given the amount of central bank and government impetus that has been put in place.

I think it's difficult to generalize across the mining markets because obviously gold shares have performed pretty well this year, and the gold crisis looks to be on an upward trajectory, it's doing well gold stocks are doing well, partly because of the gold price, partly because of ethics, sort of currency effects as well which is helping a number of companies and low oil prices, which obviously also helps a number of companies.

I think there's probably, you know, whilst I am actually very bullish about the gold price at this point, I think there's probably more interesting things from us on a longer term, for us on a longer term perspective, in terms of some of the base metals and other metals at the moment.

I think broadly over the next sort of medium-term period of time, we would be pretty bullish across the commodity complex. I think we're going to see a lot of stimulus from governments and whilst I think overall markets and pricing in a sort of v-shaped recovery at the moment, I think in the medium term I wouldn't be pretty bullish across most metals at the moment. So I think it's clear there are some opportunities around.

And from your point of views, are you similar bullish. I mean one of the things I was reading this morning, was the drop in consumer demand, for example it's going to have a big impact on copper, so do you see that all the different metals are going to be on an upward trajectory, or is it only a handful.

Verne Grinstead: Well I'd agree with David regarding gold and gold certainly is having one of its periodic good moments. Both investors buying the metal as well as gold equities which could be in an outperform phase which happens every now and then and which the Canadians, the Sprotts and the others tend to try and catch those particular waves and generally have done pretty well out of it.

But certainly base metals, China's back on stream, the economy's opened up. Copper, the red metal is broadly of interest, including for EV's and battery storage and the like, and so I think the continuing love affair with copper will continue. 

Some of the other base metals are a bit more problematic, in terms of supply and demand but nickel has its day from time to time. Lead zinc etc. come into and out of focus, but we should also remember fertilizer type products - potash, phosphates and the like which are relevant to agriculture and are growing global population.

I would basically agree that right now is not a bad time to be in mining PE. It's surprisingly good actually compared to other sectors out there which are - because of COVID on their backs, except for of course the big momentum driven tech-fangs and similar stocks, where Tech is having a big day in the Sun at the moment.

Charles: Yeah and Vera, from your point of view I know you look all of African investments for example, but do you feel that there's a similar trend?

Vera Ivanova: Yes and no, You asked if it's a good time to grab a bargain and grabbing a bargain, it implies acting very quickly and getting something really quickly, I think typical private equity model assumes at least a few months of due diligence, and given where we are in the market it's quite unpredictable what's going to happen in the two/three months, so we have to almost pretend like nothing is happening and believe in long-term fundamentals of demand and supply and look at what was hot before COVID and believe that this will continue so that goes back again to copper which both of my colleagues here have discussed already and the battery metals of course will remain to be fought.

World Bank just issued a report saying the demand for the basket will go up five times until 2030, so these metals will, of course, remain very interesting.

But however, again our good assets are never a bargain and they are not the bargain now after COVID.

So there's still a lot of people piling up and doing their investigations on their good assets, so they are never cheap and they are never under-priced unfortunately, so that's one observation.

In terms of - the only one newcomer real newcomer I see after this new reality, again is actually iron ore and related commodities such as ferrite ores and that comes from - well the fact that there's 12 trillion plus, of stimuluses which are coming from every direction and a lot of it is going to be spent on infrastructure.

So I think this is one of the only metals that I can see that might have this systemic shift caused by COVID-19, specifically and that systemic shift might last longer than short-term V-shape sort of kind of reaction, so I am bullish on iron ore believe it or not.

Charles: What about one of the other metals, I've heard on various conference calls with people, having a bit of a resurgence is uranium.   Do you think that's just a short-term reaction to the shutdown of the various producers, or is that more of a long-term trend.

Vera: Look, it's tough for me to say because we don't have uranium on our target list and in my mind again it's probably short-lived. We never invested in uranium due to certain complexities which come with owning an asset, you know invest in developing and operating  so it's difficult to comment on the rest of the market. This is not - uranium is not on our target list.  

Charles: Verne/David do you have a view on uranium?

Verne: Well a couple of years ago they floated in London this uranium company, what's it called?  'Yellow something'? Yellow K. Yeah I haven't looked at the price recently but for a while after, it seemed to perform quite well.

There are a couple of U.S. listed uranium companies as well. Amir Adnani is the CEO and founder of one of them. They come and go but it's not a sec typically which private equity looks at, in terms of mining private equity - they tend to look at precious metals, base metals, perhaps you know potash and fertilizer type minerals, if you look at most of the portfolios.

But perhaps one day uranium will have its day in the Sun as it were.

Charles: and Verne mentioned - I think it's a very good point - about the speed at which private equity can move. Does that mean that if - it's often not the case I think with miners - someone said the other day, or one of the podcasts that the junior miner community are like cockroaches. That they hang around for ages, really difficult to get rid of them - even in a financial crisis.

So is the likelihood of you seeing any distressed assets, for example, that you can move on quickly. You're not seeing anybody in particular distress or where there's a fire sale.

Vera: Well the thing is I think. Assets that are distressed now were probably becoming distressed before COVID-19 and - for reasons other than COVID-19 - which is mis-management, it's not very good assets, running out of funds anyway so there's no buffer to go to the storm. 

By definition then, you probably wouldn't want to invest in distressed asset now, because there are reasons other than COVID which brought them to this state. Companies that I see that are really really distressed in this situation - they were in this situation before - New Year for instance.

Verne: I mean you could imagine some deals that were advanced and had gone through - I see at the PE funds and COVID may of course, some downward ratcheting of the valuations and the PE firms might try to take advantage of that and the sellers may be nervy about the future, given the very significant economic downturn that we're all going to be facing shortly. So you could imagine some re‑pricing occurring.

But as Vera says the IC process of a private equity firm is to not just be based on price and rapidity. It's like this, but our charter, will it generate our returns, and have we professionally and correctly gone through all the DD to result in a final sale and purchase agreement or investment.

David: Yeah. I think that's right. I think the difference between their current events in the market and the period after the credit crunch. I mean obviously the mining company balance sheets are in a much more stable and stronger position now than they were then and so you're not seeing kind of distressed sale of assets really very much at all in from what I can see. 

We have seen a few things which are kind of mid-ramp up or coming into production which is a difficult time in the life of most mining assets and that's it's obviously unfortunate I think if company's been halfway through building a project and this this happened now I think that's a difficult spot. 

I think where companies are doing feasibility studies and things like that, it's obviously much easier to scale back spending a little bit and do remotely and add value to things remotely, so I agree with Vera, I don't think we've seen the kind of levels of distress that we have in previous crises.

Yeah, the point you make about feasibility is a good one. I mean from when you're looking at companies and doing your due diligence at the moment, how are you dealing with the practicalities of that in the current situation.

Charles: When you can't do site visits, so it's all desktop analysis at the moment in relationship investments?

Vera: Yeah it's very - I can answer - They have a very good example. One of our company's portfolio is finalizing a BFS and we cannot get some of the tests work, which has commenced before the lockdown in South Africa. However, the contractor can write pretty much all of the upfront section of report and including doing a financial model and all that comes with that. 

Now the only thing which is remaining is to slow them the results which will be available pretty quickly now that the lockdown in South Africa is lifted. So certainly it was possible to front-load some of the desktop analysis which was acceptable to desktop analysis. 

And then the lockdowns being lifted in some of the jurisdictions, we are just sort of finalizing work streams which we're supposed to - which cannot be done desktop.

Charles:  I guess moving a little bit. We're talking about investments, but when you're looking at the lifecycle of funds, some of the commentators say that now you may be five, six, seven years into your original funds from when they started. As well as looking investments, are any of you also looking at the disposal round or other funds out there. Is this a time to be disposing of investments?

Verne: If I could touch on that. Some funds have deal by deal carry exit arrangements others, have a European-style where it's at the end of the fund life. So certainly the former, but maybe the latter as well are always in salvo - you know, PE firms exist now to exit and so, I think there's a constant level of interest in what you can exit at, provided it achieves your target MOIC and ORs and if you happen to invest pre-IPO and the company IPOs, you're going to exit or if you can achieve your return multiples or if you can't, you'll bide your time.

But it may be that that funds that are rear-ended in terms of carry payment, they may be more patient and may time their exits, or have more luxury to wait for better markets to exit. Whereas those that are deal by deal are looking all the time at can they get when?

David: Yeah I think that's right. I mean typically funds have different vintages of funds. We've exited some investments from our first fund, for example Torre Gold, last year for example, was sold too and resolute. So we've been, I think, quite active and quite successful on the exits that we've made over the last few years but as Verne said, you're perennially looking at new things and exiting things as time goes along.

Verne: And obviously if you can get some successful exits and multiples that helps your case when you go to fund two or three or fund four. In a sense you have to have had at least one or two decent exits to go from fund one to fund two and then so on.

Charles: Is now an easy time to raise money or do you think people will be looking to put more money into funds at the moment.

Verne:  well I'll defer to David on that he's more live than I am on that front.

David: Yeah. I think it's that period of the market where all the investors are looking at their portfolios and what their positions are, but I think there are some good opportunities around so, I think it will be possible to raise money in the current market. 

Yeah well I think everything going to be slower isn't it? Yeah, yeah.

I think project development will be slower, pretty much everything across the board.

I looking at the real acid bucket that the LPs - look at mining and metals versus oil and gas versus agriculture versus Timberland. I think there's significant backing off from PE investments related to oil and gas and fossil fuels. If you look at PreQuinn's most recent natural resources review, something like 90%25 of private equity funds raised in the natural resources sector has gone into energy.

And so mining in some respects is a niche industry it's like 3%25 of the funds raised. So it's quite possible that LPS may transfer to the mining and metal side, some of the fire power and lessen the oil and gas fracking investments that they made to date.

Yeah, renewables returns ironically in the private equity sphere have not been that stunning at all, but a lot of money is looking to go into it and I'm aware of at least one African targeted PE fund that's raising right now to invest in African renewable energy and they've got some good cornerstone investors for that. Big well-known names.

But another theme is, indeed, ESG/ impact investing which has become pretty big and whereas perhaps the old ESG page used to be the third loss page in your slide deck, it's now perhaps the third page in your slide deck and LPS are wanting evidence that the metals and minerals that you're producing is going into end-user applications that could be viewed as impact positive, impact outcomes and it can be such as components of wind turbines, components of solar panels etc. but they're more focused on that than they used to be.

Verne: I attended a webinar recently where they were focusing on this topic and something like thirty trillion dollars of LP money has gone into sustainable/impact investing in the last couple of years. Ten and a half billion dollars has gone to 300 ESG funds in the US alone in Q1, so it's happening and so the question and challenge for mining PE is how do you position yourselves rather than just pay lip service to it. 

It's not just building a local school and a village water pump, it's more than that.

Vera: I think now, as you said Verne, it's actually a prerequisite to even get through the door to make sure that you are ESG compliant, that you have full cognisance of the need to decarbonize etcetera. But in my mind LP still have - well because a lot of the funds which had went into ESG and into various technology wave -  actually a lot of them are oil and gas related and LP communities are yet to wake up to the carbonization of the mining industry and ESG over mining industry. 

A lot of a focus so far and funds available so far, related to oil and gas and renewables. So for mining there are plenty that - Valley had a very interesting presentation - it is available publicly and they have a whole page on considering multiple technologies to clean up their the entire value chain from - obviously from safety of the operations to autonomous working to ESG, but also the carbonization type of technologies in iron-ore processing.

I think it's going to - still LPS need to - a lot of education to make up for that, because most of it, the education has been done towards an oil and gas sector.

Verne: But they're also interesting geopolitical elements here - where China produces and consumers over 90%25 of rare earths of the relevant economically viable rare earths - magnet metals etc. and the environmental impact of those productions are receiving increasing attention from Chinese authorities as they should, but it's interesting how in the U.S. in particular, they're beginning to look to try and become somewhat self-sufficient having run down their rare earth stockpiles dramatically.

As US/China tensions develop, an interesting thing will be with this impact, this focus of 30  trillion dollars on impact investing and ESG in mining - in due course will get its focus as well from these investors, is if you need a certain type of rare earth and it can only produce in pretty bad environmentally impacting ways. What do you do? Is there such a thing as Blood Diamonds in metals? Where investors want to shy away from them?

Charles: Well I guess we saw this week didn't we, the Norwegian - they're big oil and gas funded - have now pulled out of a lot of the major, so I think Glencore, Anglo - because the cold-related thresholds were being hit so maybe we'll see some more of that type of action.

Verne:  Yeah they're all out of the big oil and gas stocks. The largest cap U.S. listed oil major has a market cap below where it was a quarter of a century ago. 

David: It will filter down definitely from the big companies who are already seeing a lot of scrutiny on this on these types of issues, but I think, importantly for us, we need to make sure that the companies that we're investing in that we're advancing projects, that they are attractive from an ESG and footprint point of view, because ultimately one of the exits that maybe we're looking to down the road is that the asset might be bought by a bigger company and those facets are so important now for the big companies that it's crucial that you've done the right ESG environmental work and studies etc.

Charles: Yeah, that was one of the questions for the corporates listening and looking - or already have, and looking to supplement their investments from private equity investors. Is that ESG slide got to be the first one in their deck and they have got to be able to convince you pretty quickly that they're going to meet certain standards. What do you look for in those types of corporates?

Vera: I think it's not necessary first slide. I believe it just now assumed it's all in order, so it's one of those prerequisites - you have to have it to present to us. So it goes without saying, I think the fundamentals of the asset - addressable market, the position on the cash cost curve still remains, of course, number one factor to choose from.

Compliance of ESG is, for us, it's becoming a given. Right? So we don't even - it's not going to be - it's a tick and we need - it's not a tick, it's more than that, but they have to have it to even come to us.

Charles: What would be your kind of typical ESG? What would really pull you in for a company? We talked about CSR and building schools, hospitals etc. but most of the juniors and the mid-caps are kind of doing that already. What more do they have to do to step-up to the mark. Is it about decarbonisation? Is it about having solar on site? What really gets you excited on the ESG ticking the box?

Vera: For instance I get quite excited, if you like, about appropriate waste disposal and that's on everyone's forefront - sort of thinking. Making sure that they're the pilings are not pumped in the middle of nowhere but they are dry stacked according to all the best industry standards. 

Rehabilitation - that that I think is quite fundamental and yes, it's more expensive, but I think as David said, then you try to exit this asset something that - the tailings disposal, for instance, is going to be something that any mining company will look at very carefully.

It's got to be a best practice. You line the dam, you don't just not line it. You pay the extra to   potentially gold-plate whatever you're doing in terms of remediation and impact on the local environment and water sources and the like. But for most of the PE firms now subscribed to the UN PRI, as well as the World Bank IFC criteria - they sign up to that and they are audited on that, which is good, certainly at the UN.

And those set out basic principles which are kind of logical but if you sign up to them and you're audited and you have to produce a half inch they report every year to a UN body, it focuses the mind.

Verne: It's good for business if you're in some Central African country, you want to make sure that you're good for the local community and that you're producing tax for the country and that you're a good corporate citizen. It's not like some major new discovery – ESG.

Charles: yeah it's just been rebranded more important.

Verne: Some years ago, Anglo American was viewed as gold plating everything? and then a new management came into Anglo American to try and cut costs and  improve margins and that led to maybe some slippage and people used to say, Oh Anglo they always gold plate stuff unnecessarily, in fact probably they were doing the right thing! 

Charles:  okay I'm going to move on a little bit from ESG and just move on to the financing side and just to see whether the types of structures of financing that you're looking at have changed at all because of the situation we're in? Or whether it's a mixture of equity - I don't know if any of you have debt funds or if you're looking at royalties or alternative streaming arrangements. Is there any particular favour at the moment or is it very much asset dependent?

David: It is asset dependent really but I think we're largely, as before, we're strategic equity investors -public and private companies. We're quite like a convertible boat. We may look at other types of structures - maybe at asset level - but it's the same type of equity approach.

We don't have a debt - sort of straight senior debt fund - so much more on the equity side.

Vera: I think we are very similar strategy and we work across very similar spectrum as David's firm. I personally quite like convertible debt because you sort of have best of both worlds. We don't do pure debt.

I think royalties will become a more frequent way of getting our return and especially when you look at exits and if the oil industries are staged and so that can be all incorporated. It's sort of a back-end of life cycle of investment, so we definitely would look at royalty now. But overall, the private equity fund.

Verne: Yeah I mean there are quite a number of mining finance firms now - Orion Taurus etc. are okay and certainly the large listed royalty companies' trade at significant premiums to mining companies. It's clearly an attractive investment for investors to get good royalties and then streaming.

And interestingly on the on the debt side, Sprott have recently closed an 850 million dollar Sprott lending, mining lending fund too. I think they targeted a billion but they closed it at 850 and in that they brought in for the first time ever, a well-known West Coast LP who'd never done any mining type commitment with a couple hundred million of commitment there.

And then Sprott have also launched a royalty and streaming fund. Perhaps for 4/500 million dollars, which was cornerstoned by another well-known high-profile, but never investing in mining before, West Coast institution.

There's plenty of firepower now for credit and royalty and streaming for mining juniors, although typically the target is a listed entity rather than a private entity.

Charles: I noticed – is it Franko-Nevada have put a hundred billion into solid gold this week. I'm assuming that's by way of a royalty.

Verne: mm-hmm.

Vera: I guess a flipside of credit funds is that this is very - quite expensive funding and again there is competition - as we discussed - good assets in a rare and for this good assets, these credit funds will be competing with your BMP Paribas, SOCGENs. The type of institutions who will lend at much lower margins. This new crane funds may also - they will have to join the race let's put this way, for from the margin.

Verne: Yeah.

David: Yeah, I agree with that that's right.

Charles: What would you - I guess the one-to-one certainly, as normally as every year there'll be a lot of juniors out there. Some will be Greenfield, some will be in development. How do you see the kind of post COVID landscape for the juniors? Is it going to continue to be a very difficult time for them to raise capital? Or do you think now is actually not a bad time to be entering the race?

Verne:  well interestingly the equity markets are relatively open for juniors at the moment   You see Hanneman partners just raised 14 million in a placing for that phosphates company as crops. And there been other placings in the last month or two in in the gold and junior areas, so they seem to be having not a bad time in the Sun at the moment.

How long that continues we'll see but the   juniors still trundle on.  I suspect a handful will go to the wall in the next three to six months because there have been a number of listed juniors that just are long-term viable. That probably will happen or they'll be absorbed in other companies that are using this opportunity to expand a bit. 

David: Certainly quite a bit invested in gold at the moment and you're seeing a number of gold juniors raising money. There's been a few royalty, small royalty companies that have IPO'd in the last little while here. And certainly there's a lot of activity on the gold side and as Verne said, you're starting to see some investors who've not been traditional investors in mining they're looking at gold particularly, I think of money.

Verne: Yeah now I've heard of a number of Canadian specialist funds and some generalists that have been costing bread on the gold waters and buying bits and pieces of a range of different mining juniors, particularly gold – specific in fact. I don't know how much that's driven by Bammel talking about a three thousand dollar gold price in the next 18 months but that got attention that's for sure.

Charles: Yeah certainly a lot of the juniors attending the one-to-one, I know are gold based and from our own experience we're seeing a lot of activity in the M&A space around gold as well, so you could imagine with two companies coming together they need more funds, there's going to be likely more fundraising in that space. 

Vera: Definitely gold but I think times will be tougher for smaller niche commodities - graphite's, tungsten, vanadium maybe not. So I think if you are in the gold sector it probably - chances are you'll race if you have a half-decent asset. Well I think smaller, more niche noble metals, they might struggle and that's just because a lot of investors are distracted by gold now. That's number one. Yes.  

I think generally I can't see junior sector disappearing, it just will adapt like everybody else and the budgets will get stretched to the unimaginable length - which we're already seeing, it's possible. Which is actually positive - cost control and discipline, is something we welcome at all times. Yeah watch that space.

Charles:  For the juniors who are not listed companies yet, I know what you're going to say to this one, but is your advice still, that companies should prefer private capital over public markets?

Verne: Well sometimes you don't have a choice. I mean there's such a thing as a London mining-focused, junior stock-broking firm. They're in the business of doing public raises for the mining juniors and it's not that easy to persuade these hard-nosed private equity investors, who ae have lots of skin in the game and co-invest commitments themselves, to easily cut a check so fortunately, despite Miford two and all that, the London stock-broking community supports and researchers and raises capital for the juniors, is still around and a lot with them - their fellow travellers, such as the corporate law firms and so on, who actually put the whole thing together.

Interestingly, an example of this sort of plant - pond life if you like that keeps reinventing itself, is that Stifel, for example, who were not in the mining sector at all and were very big in the oil and gas sector in terms of equity research corporate broking and fundraising, have now gone back into mining and are very actively putting out mining equity research anew.

Charles: Yeah yeah.

Vera: Public to private dilemma, which a lot of the juniors are facing, I always felt that on junior miners often go to the public markets too early and the big funding comes toward the end and we need anchor investors and so what we often see is a goal green shoes for goalies, we can't attract private equity money, you can't attract proper development money to advance them to the construction phase d-list in Huntley's together yet, so it's a very typical sort of trend that we see.

Verne: So in my mind, sure listing is a fantastic option, but do it at the right time.

Collective: Yeah.

Charles: Well I mean, as private equity groups, will you look at taking a hundred percent of a company private and putting it under your own wing and developing it, then IPA'ing it at a later date, for example. Is that a business model that attracts you?

Vera: Yeah we've done it several times. At the right price.

Charles: Yeah. May be some comfort to those watching.

David: Yeah, we'll invest in both public and private companies Charles and we've had a few of our companies over the period, who at different points have IPO'd because it was the right time for them to do that and I think we don't have one at the moment, but if we were invested in a private gold company and we'd advanced it to a certain stage, you might think about listing it now, for example.

Charles: Well I guess we should probably just about wrap it up now I guess. Any final comments for where you see the market in six months' time? Are we all going to be still gold bugs or will you've turned your attention to something else? 

Vera: I'm really hoping for V-shape recovery definitely.

David: Certainly I would be positive on precious metals and in 12 months' time I'd be positive on most metals actually, across the board, particularly copper.

Verne: Yeah I'd agree with that. Precious metals are having a going to have a good six months and then after that copper, nickel etc. I think we'll come back into focus.

Charles: Perfect. Well thanks everyone for your experience and advice, for those watching is very grateful and have a good time at the conference if you're seeing people over the next few days.

Collective: Great thank you. Thank You Charles.