I am not a geologist by trade or a mining engineer. I have learned to invest, structure and capitalise natural resource investments from the point of view of an investment principal through an operating vehicle of the Seligman family office, being The RBS Investment Group. We look to co-invest along with other family offices interested in the natural resources space.
Through our experience, we have learned what to look for and look out for in making mining investments and how best to reap the benefits associated with investing in the global mining market.
The Industry and the Investment Process
The mining world is global in nature and the typical headline participants for diversified mining include BHP (the world’s biggest mining company), Rio Tinto, Vale, AngloAmerican, Xstrata and other national champions, such asMTIvanhoe in Mongolia or Privat Group in Ukraine. There are also asset-specific champions such as Barrick Gold (the world’s biggest gold miner based in Canada) or CODELCO (the world’s largest copper miner based in Chile) or Potash Corporation of Saskatchewan, Canada, the world’s largest potash producer.
Generally speaking miners focus on extracting typically non-renewable, economically viable minerals that range from base metals (such as iron, nickel, zinc and lead), precious metals (including gold, silver, platinum and palladium) and other minerals like uranium, diamonds, coal and potash.
The larger mining companies, some of which are noted above, are referred to as Majors and hold a substantial degree of influence over market prices based on their control of the production of certain minerals. Take iron ore as an example: about 1 billion metric tons of raw ore are produced every year and approximately 95% of this is used as feedstock for blast furnaces used for steel manufacturing. In this critically important market there are three companies that control approximately 70% of the world production of iron ore: BHP, Rio Tinto and Vale.
Understanding the opportunities
In September, 2009 the Wall Street Journal reported that BHP Billiton has built up about $18 billion in cash during the last year and expects to use some of it, along with additional borrowings, to acquire large rivals, possibly setting in motion a new round of acquisitions in the mining sector. With about $10 billion set aside for the fiscal year for development of new projects and expansion of existing ones, BHP is particularly interested in iron ore, copper, coking coal, petroleum and potash in locations such as Australia, U.S., Canada, Chile, Indonesia and Colombia.
Generally speaking this view from a Major such as BHP could be used to gauge the type of mining assets expected to be in favour and could be considered ‘safe bets’ at a macroeconomic level in mining terms.
Developing a mine is conceptually similar to developing a property, where a mine sponsor must perform similar roles to that of a real estate developer. The site must first be identified for the project and an option agreement is typically negotiated to conduct some initial studies and sampling to verify the proposed project is feasible. The land must then be converted from its current ‘zoning’ or land status to obtain the necessary exploration permits to conduct further assays, drilling, tunnelling, environmental impact assessments and surveys to finally secure the relevant exploitation permits from local authorities prior to commissioning a mine for production. As commissioning a mine can take from one to eight years, mining speculators, similar to real estate speculators, will look to ‘flip’ their mines as soon as the sampling conducted on the mining property indicates sufficiently interesting grades
to sell this asset to an interested group. Valuations, depending on the findings, can reach exponential multiples to investment amounts but are also dependent on the market sentiment surrounding the particular mineral at the point when it is sold in the market – for instance gold assets are often in favour during recessionary periods.
While the global geography and terrain is diverse and multiple considerations exist for making an investment directly into mines or mining operating companies, the following criteria are typically considered when evaluating the viability of extraction of a mineral resource:
The Project Owner(s):
Who owns the mining rights or concessions and in what state are they?
Meaning, are they exploration or exploitation licenses? What is the degree of difficulty in negotiating an equitable deal structure with the owners, securing or pledging the licenses for the mining assets and developing the property with the right government approvals? Typically the surface rights and rights to the underground for mining will be separate and the government of most countries will usually give the priority for the lands to the owners of the mineral rights (or underground). This means if a resource is of economic significance and of interest for the government to approve development, typically the owners to the surface rights will be compensated and relocated, although for the most part, mining takes place in generally uninhabited places.
The Project Location:
Where are the mining assets located, what is the distance from the nearest towns, roads and exporting ports and what is the security situation like the country?
Every country will have its own mining code and the degree to which it respects mining rights of private owners and avoids the nationalisation of privatised resources is an area of concern for potential investors. For instance, the approval process for the Ivanhoe copper-gold Oyu Tolgoi Mongolian mines was held up for several years by the Mongolian government as the magnitude of the deposit led them to classify the deposit a matter of strategic importance to the country.
The Access to Mine and Logistics:
Do roads/rails already exist? Are they public? What are the costs to use the logistics?
Do roads or rails need to be built/adapted/ extended? What is the distance to port(s)? Which port? What is the capacity of the port? Are there congestions at the port? Will there be any problems to get space allocated at port and how much will it cost to load material onto the vessel? What size of vessels can the port take for each you plan to use? Are roads available and in good condition?
Whether the product is shipped, railed or trucked will greatly impact the cost of the material. Typically trucking is the most expensive, followed by rail, and then by vessel.
The Description of Product and Reserves:
What is the chemical composition of the mineral body? Is there any independent surveyor analysis available? Is the resource considered Indicated, Inferred, Proven & Probable or a Reserve and is it compliant with a Canadian NI 43-101 standard or an Australian JORC standard? What methods of survey were applied?
These questions are more technical in nature and simply speaking, the lower the grade, the higher the cost of extracting and processing the material. Also the more advanced the delineation of a mineral resource is, the higher the certainty is of the commercial viability of the asset.
Every resource type will have a critical level to ensure it is economically attractive for commercial purposes. For instance the minimum grade content of processed material for manganese ore is 38% and for iron ore at least 58% iron content is required in a deposit. In the case of gold, and depending on the type of formation, the minimum content is at least 1 gram per tonne.
The Environment & Material Disposal:
Where should waste material be dumped? Is it necessary to purchase dumping land? What are the environmental considerations?
Typically a country will not authorise a mining license unless an Environmental Impact Assessment is undertaken and for this they specifically look at whether water is polluted, whether local inhabitants are affected and how the environment is affected at large. Surprisingly most mining operations are less detrimental to the environment than many might think. For instance in Carajas, the mining town in Para State where Vale’s Brazilian operation is headquartered, the lands controlled by Vale are largely lush and protected, while outside of this controlled area, local farmers have deforrestated millions of hectares for grazing land for cattle.
The Staffing Requirements:
How many people in statutory staff are needed to operate a mine? At what stage do they have to be hired? What costs are budgeted? Who will operate the mine? What is their experience and track record of the management?
An experienced operator and mining team is priceless since they will need to deal with local authorities, the community, the investors concerns and those concerns of other local stake holders. For this reason working with proven teams with a visible track record is essential to develop a mining operation.
