Private equity funds rule junior mining’s financial roost - The future of mining may lie in the hands of private equity investors, declares a diverse panel of experts.
As institutional money “is not buying public gold company lottery tickets”, the future of mining may lie in the hands of private equity investors, a diverse panel of experts declared Thursday during a panel at the American Exploration & Mining Association meeting in Sparks, Nevada.
However, the panel, which included an investment banker, the “mercenary geologist”, an attorney, and a “boutique” merchant banker were absolutely bullish about the prospects for financing mining projects through private equity.
In the past year, private equity is showing an interest in mining, along with sovereign wealth funds, as funds for mining become increasingly scarce or almost non-existent on public equity markets. Private equity, strategic and royalty companies have replaced the institutional investor in supporting the mining sector, the panelists observed.
Investment banker Joel Schneyer, managing director, mineral, capital and advisory, for Denver’s Headwaters MB, observed that a lot of money can be found for mining in private equity—citing mining investment vehicles launched by former mining CEOs Aaron Regent and Mick Davis as examples.
Several of the panelists cited private equity firm Resource Capital Funds as among the best in the business when it comes to evaluating, providing financial support for, and partnering with mining companies.
Schneyer said he believes the mining industry isn’t necessarily getting smaller, but its companies are reporting to different masters, as it is not worth the time or energy for junior mining companies to go public.
Having examined the trading pattern of development stage gold companies, Schneyer observed that once a project enters the Development Investment Analysis Phase (Prefeasibility or Feasibility) “the sponsor company can see a very long period of erosion in share price, reflecting the extended real world timeline and great uncertainty associated with mining project permitting.”
While private equity groups like to invest in mining projects at the feasibility and pre-feasibility stages, they remain “very nervous” about projects which lack a strong social license to develop a mining project or don’t have project permits in hand, he stressed.
“Mercenary Geologist” Mickey Fulp observed that junior resource companies are high risk-reward speculation. “Potential financiers and investors evaluate them using three criteria: Share structure, people and projects,” he said.
The outspoken Fulp says he believes “most junior resources company are mining the stock market,” instead of concentrating on developing mining projects. He stressed that private equity companies and other investors must be very careful and perform considerable due diligence to be successful in investing in junior mining companies.
“Proper selection of a target commodity and deposit type for acquisition is crucial,” he declared.
David Chaney, managing director, industrial investment banking for Wells Fargo Securities Metals and Mining group, admitted that “markets today aren’t great, but that doesn’t mean that money can’t be raised” for mining projects.
The more work a small mining or junior mining company can get done on technical, pre-feasibility and feasibility studies, the lower the cost of the capital which must be raised through financings, he noted.
Noting that Confidentially Market Public Offering Markets (CMPO) and Private Investments in Public Equity (PIPE) provide much needed capital for mining projects, Chaney cautioned that these type of investors still remain concerned about risk, stressing that the risks contained within developmental mining projects “has increased substantially.”
Benjamin Cox, managing director and founder of the “boutique” merchant banker firm Oren, Inc., of Vancouver, Washington, is particularly proud of his publicly traded mineral exploration company, Aston Bay Holdings, focused on the Aston Bay Property located on northwest Somerset Island in Nunavut, Canada.
On December 1st, Aston Bay Holdings announced it had entered into a Definitive Earn-In Agreement with a wholly owned subsidiary of Antofagasta in which Antofagasta may earn up to a 70% interest in the Aston Bay Properties including the Storm Copper Project.
Nevertheless, he cautioned, the reality of what is going on for most junior mining or exploration companies includes the fact a number of those companies are now literally going to pot, chasing marijuana distribution investment dollars. He estimated that the TSX is now down to 1,050 junior mining companies and is losing five to eight juniors a week.
Cox specializes in seeking the types of minerals and metals projects that are currently out of favor with traditional mining investors, such as iron ore and coking coal.
He feels that junior companies are being forced to build mines to attract capital instead of concentrating on their real expertise of exploration.
Many of those juniors are finding the only real option for them to obtain capital is “painful restructuring,” including turning management of their companies over to private equity investors and often losing the original team that is working to develop a prospective project, Cox observed.
In fact, Cox asserted that many geologists who start junior companies “are fundamentally delusional” because it is in the geologist’s nature to always be optimistic and thinking their next exploration target is the next big mining find.
He suggested that junior companies undergo a self-examination type of exercise, asking themselves:
1) Why should someone do a deal with you?
2) Do you have something special in your project?
3) Is there a clear path forward to paying debts?
4) Are you willing to issue shares for investors who will help pay that company’s debts?
Despite the risks, Cox stressed that “a lot of money is sitting on the sidelines for the right people.”
Cox also express his enthusiasm for the Canadian Securities Exchange as a potential market for junior companies, citing the decision of the family of Robert Friedland to list their GoviEx Uranium company on the CSE, rather than the TSX. |
