Investors see opportunity as miners seek alternative finance
BANGALORE/LONDON (Reuters) - From fund giant BlackRock to activist shareholder Julian Treger, mining investors seeking predictable returns and better cash flows are stepping into mine finance.
Mine developers often face funding gaps because of a shortage of bank finance and lacklustre public markets. This has left alternative sources of financing - royalty deals, stake sales or debt that converts into shares - accounting for an increasingly significant proportion.
Among the alternatives are mine royalty agreements - favoured by BlackRock and the focus of UK-listed Anglo Pacific (APF.L), which Treger is now running. These deals offer cash in exchange for a share of future revenues.
"The scarcity of capital today... has created a huge opportunity for non-traditional sources of finance," said Catherine Raw, portfolio manager for the BlackRock World Mining Trust (BRWM.L). "That is where we step in."
For investors, a royalty deal means regular future payments and the ability to benefit from a rise in commodity prices, an increase in reserves or better production capacity. All with arguably less risk than a share investment and no exposure to pitfalls like poor dividends, or cost inflation.
For miners, the advantage is a source of upfront cash with less dilution than through selling shares at depressed prices.
North American firms like Franco Nevada (FNV.TO) or Silver Wheaton (SLW.TO) have long struck streaming deals, providing cash for future production in return for exposure to by-products. These deals have been for precious metals, particularly when they are produced as a by-product by big miners focused on base metals or bulk commodities.
Royalties though were less attractive in better times, as miners sought to avoid eating into revenues from their mines and set tough terms. They are now within reach for investors.
BlackRock secured its first royalty agreement last year, with a deal that paid London Mining LOND.L $110 million in exchange for 2 percent of iron ore revenues from its Marampa mine in Sierra Leone. The deal became one of the World Mining Trust's biggest investments, just below its equity investment in copper miner First Quantum (FM.TO).
It is also finalising a more modest, $12 million deal with copper and gold firm Avanco Resources (AVB.AX).
"You are getting a slightly more interesting risk/reward scenario through investing in royalties," Raw said.
And BlackRock, the world's largest asset manager, is pushing further into royalties. In August, it sought approval from investors in its one billion pound World Mining Trust to increase its ability to invest in non-quoted investments, specifically in order to bet further on mining royalty deals.
These already make up almost 10 percent of the trust portfolio, but the portion can now be doubled.
In a further reflection of the growing interest in royalties, Treger last week took the reins as chief executive of Anglo Pacific, the only UK-listed royalty firm. He also took a roughly 1 percent stake in the firm, which in 2012 reported 11 employees, 4 of whom are executive directors.
Treger made his name as an activist investor who played hardball with executives at firms including British department store Liberty.
"I think this is a very interesting time...because there's obviously a shortage of capital both equity and debt in the mining space," he told Reuters in an interview.
"Therefore together with a significant amount of disposals occurring by the majors, I think there is a real opportunity to do some very interesting transactions."
Alternative finance remains a tiny sliver of the financing used by the industry, which still relies more heavily on traditional options like equity, debt, bank financing. Royalties and streaming deals - similar to royalties but more frequently relating to by-products - also face competition from increased interest from strategic investors and private equity.
According to consultants PwC, in 2012 only 1.1 percent of all money raised was from royalty and streaming, compared to 0.8 percent in 2011 and even smaller slices before that.
But there is room for growth.
Treger - co-founder of Audley Capital and known for using initially small stakes to push for change, as with Western Coal, a deal that netted sale proceeds of more than $700 million - sees opportunity to refocus and scale up Anglo Pacific, whose core asset is currently a slice of royalty receipts from Rio Tinto's Kestrel coal mine in Australia.
Last week, it struck a partnership deal with FlowStream, a streaming and royalty firm focused on oil and gas.
There are shortcomings, of course.
Royalty deals are not liquid - unlike shares - and cannot be sold on by investors. For miners, there is an effective limit to how much revenue they can hive off in advance, without hurting the ability to raise debt or equity in future.
"There is only a certain level of royalty that a project can support before you're using all your profit margins and you're not returning anything to shareholders," said Dan Betts, chief executive of Hummingbird Resources (HUMR.L), which last year struck a $15 million royalty financing deal with Anglo Pacific to fund its Dugbe 1 gold project in Liberia.
"I think that in every project there's a balance."
(Editing by Janet McBride)
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