Private equity firms say they will boost investments in battery metal projects this year as depressed company valuations, plunging commodity prices and slumbering stock market financing create opportunities.
London-based Appian Capital Advisory, with US$3.6 billion in assets under management, Resource Capital Funds, which manages $US$2.5 billion from Denver, and Kinterra Capital of Toronto controlling US$565 million are among mining-focused private equity investors saying they’re preparing for more deals.
“There’s an over-selling of commodities given interest rate perspectives and China’s slowdown,” Appian CEO Michael Scherb told The Northern Miner by phone from London. “It’s a great time as a long-term investor to be deploying capital, so you’ll see Appian probably be the most active out of all the funds out there in terms of capital deployment this year and next year.”
For almost a decade, a widening gap between commodity prices such as gold and mining company valuations has made buying stock in junior miners less attractive for investors. At the same time, some large lenders such as banks and pension funds have pulled back from the industry over environmental, social and governance concerns. The S&P/TSX Global Mining Index is down 13% over the past year.
“Ideally, when everyone else is flooding out is when the market starts to get a bit more interesting for us,” Jacqueline Murray, manager of the Resource Capital Fund VIII, said by phone from Denver. “The risk-reward trade off starts to become interesting in some of those metals that were potentially valued a bit lofty just even a couple of months ago.”
Battery metals lithium and nickel have plummeted 82% and 46%, respectively, over the past 12 months. Copper is down about 9%, cobalt 40%. Meantime, the gold price increased about 5% to US$2,022 an oz. by Friday.
Passive funds
The amount held by passive investment funds, such as exchange-traded and mutual funds which track large-cap stocks on market indexes, overtook active manager-directed funds that can invest in smaller companies in 2018, according to Bloomberg. Kinterra co-managing partner Cheryl Brandon says there are fewer active funds focused on resource investing and most passive funds skip companies valued at less than US$2 billion.
“Unfortunately, it’s leaving the junior mining sector orphaned,” Brandon said by phone in Toronto. “The generalist investors are nowhere to be found. The commodity specific resource-oriented investors – those funds have disappeared – and a lot of the capital has gone passive.”
It’s all forced some project owners to seek development financing from alternative sources such as royalties, streaming, debt and private equity.
Mining industry private equity deals soared in last year’s third quarter to US$5.2 billion from US$352 million three months earlier, according to London-based GlobalData, although the asset class is difficult to quantify because many deals aren’t disclosed. One of the quarter’s largest deals was US$1.6 billion for H2 Green Steel, a Swedish low-carbon steelmaking start-up, from a group of funds including the Singapore government’s GIC and Temasek.
Vertical integration
In October, Appian invested a “significant” amount in graphite processor Urbix in Arizona so it can be fed the material from Appian’s Graphcoa mine in Brazil as the investor advances vertical integration. The same month, Appian bought mineral sands deposits and infrastructure in Virginia for an undisclosed amount from Iluka Resources (ASX: ILU). The site is geared to produce ilmenite and zircon after further construction.
Last month the investor committed US$230 million to U.S. Strategic Metals to develop an underground cobalt-nickel mine and battery metals recycling plant in Missouri.
“We like the fact that it’s a brownfield project, it’s likely to attain government support and subsidies, it’s near-term production,” Scherb said. “It suits our credit strategy really well in a part of the world we want exposure to.”
Appian isn’t focused on battery metals but recognizes certain commodities are forecast to be in short supply. An asset’s quality and the likelihood of improving its efficiencies – what Scherb calls technical arbitrage – are more important than gaining a market increase in a commodity, or beta value, when the fund invests three to five years before a project is even slated to start production, he said.
The longer-term horizon insulates private equity companies in general from the volatility of commodities, and the stability can be attractive for some mining companies. Even so, private equity can have a reputation of heartless dismemberment of a founder’s concept, an unwavering focus on profit and illiquidity as a privately-held operation vs widely available shares on a stock market. One benefit can be freedom from market expectations.
“Whenever a CEO is tired of perhaps the short-termism of the markets over-punishing bad news or putting pressures on management teams and geologists to put out sexy drill results frequently, all that stuff is irrelevant to us,” Scherb said. “We have a medium- to long-term view and we’re going to be backing a project all the way through to production, good times or bad.”
Growth vs value
Resource Capital Funds typically makes three large investments a year in the $50 million to $100 million range, Murray said. The company divides its strategy between growth – developing projects – and value – capturing an asset that may be in distress or needs capital to advance. It can be appropriate to lend to companies when their cash flows are strong, so risk is lower. Equity investing would target companies with lower valuations, she said.
Battery metals can’t be treated all the same since the lithium market is much smaller and shows impacts much quicker than the far larger copper market, for instance, Murray said. RCF invested US$54 million in Pilbara Minerals (ASX: PLS) in 2020 before lithium prices rose quickly.
“Companies then were not dissimilar to what we’re seeing right now with some going on care and maintenance or having to pare back costs,” she said. “That company, it had a good balance sheet, was managed well. We funded it to acquire its neighbour that was in financial distress, creating synergies, lots of value-add.”
RCF used a growth strategy on Khoemacau Copper in Botswana where it invested US$72 million for a 11.9% stake and Chinese miner MMG bought the whole operation for US$1.9 billion in November.
“There’s not as many copper mines coming into production,” Murray said. “That’s the right time to fund a growth project that’s going through construction and create a company that once it’s operating, there’ll be lots of other companies interested in it.”
Quebec nickel
Kinterra invested an undisclosed amount in Nion Nickel which is advancing the fully-permitted Dumont project in Quebec towards a construction decision next year. The project might produce 39,000 tonnes a year of nickel in sulphide concentrate for 30 years, enough for about 780,000 electric vehicles annually. The project combines the stable jurisdiction the investor seeks and a combination of post-exploration risk, large scale assets at low cost and downstream potential.
“We are not competing with BHP (NYSE: BHP; LSE: BHP; ASX: BHP) and Rio Tinto (NYSE: RIO; LSE: RIO; ASX: RIO) to buy the tier-one assets that exist in the world because that’s not feasible,” Brandon said. “But we are looking to buy the higher quality next tier down assets and be opportunistic about that.”
Kinterra co-managing partner Kamal Toor sums up the current battery metals market for private equity.
“We see a lack of capital upstream and we see a fundamental, strong, developing demand long-term downstream,” Toor said. “That makes for an exceptionally compelling opportunity.”
https://www.northernminer.com/financial-matters/private-equity-firms-are-poised-to-invest-billions-in-battery-metals/1003863255/
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