The unprecedented number of private equity firms represented at the Prospectors and Developers Association of Canada’s (PDAC) convention in Toronto earlier this month confirmed how quickly this “alternative” source of mine financing is going mainstream.
The growth is exemplified by Resource Capital Funds (RCF), one of the first private equity firms to enter the mining space. RCF was launched in 1998 with a $40 mn fund and is currently investing its sixth fund with $2 bn in capital. The Denver-based company has spread to New York, Toronto, Perth and now Santiago, Chile.
RCF’s Ross Bhappu estimates that the total pool of private capital available is at least $10 bn and as much as $30 bn. “Until a year or two ago, you would never hear “mining” and “private equity “ in the same sentence,” he told his PDAC audience. “Now, private equity is taking a much more active role in financing mining companies.”
Who needs them?
Investor appetite for publicly-listed mining companies has dwindled in recent years, leaving several companies unable to finance their projects. Bhappu has observed that even positive feasibility studies tend to backfire, leading to a market sell-off as investors question the company’s ability to raise the funds needed to build a mine.
As a result, there is a wide gap between the market capitalizations of companies that have advanced stage projects and the money they need to develop them. RCF has identified 524 projects with capital costs of less than $1 bn that would collectively require $69 bn to build. But a market capitalization of a typical company with a $700-800 mn project is just 10% of the capital cost.
What are they looking for?
Most of the private equity firms entering into mining have expressed an interest in large, advanced stage projects. RCF is open to junior to mid-tier companies, but only those with at least enough drill hole data to declare a resource.
But, despite the characterization of private capital being too risk averse for mining, some of the big firms are willing to fund district-scale exploration concepts under the right circumstances. Their “patient money” approach could provide a solution for sophisticated exploration teams currently beholden to the fickleness of equity markets and/or their senior joint venture partners.
Teams, not individual projects
Boston-based Denham Capital Management, for instance, is willing to absorb exploration risk in exchange for a team with a track record of success and a willingness to invest its own capital.
“We’re looking for multidisciplinary teams that are able to develop several projects at one time. Typically there is an element of project churn,” Denham’s Caroline Donally told the PDAC audience. “We appreciate that not every single exploration property is going to work.”
She says a typical financing of, say, $150 mn would cover the team’s entire exploration and development plan, including 5-6 projects within a target district or belt that would be subject to drilling and feasibility studies. Funding is determined at the outset and then distributed on an as needed basis.
“This frees up the management to execute the business plan rather than spending their time trying to raise capital,” says Donally. “There is no need for investor road shows, and minimal time spent on compliance and corporate affairs.”
For example, Denham invested $200 mn in Pangea Exploration, a team based in South Africa that has been successful in discovering, developing, and selling mining projects continent-wide. Pangea currently has five projects at different stages of exploration and/or development. Another example is Lima-based Stellar Mining ($175 mn), which targets small to mid-sized polymetallic deposits typically owned by families.
A lack of mining expertise and an aversion to risk within many private equity firms remain obstacles to investments in the mining space. But these challenges are being resolved with new hires from the industry and a broader outlook. Even if public equity investors return to mining, private equity is becoming a formidable, patient alternative to traditional financing models, a positive sign for the future of the whole sector.