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The Role of Private Equity in Mining Finance
Jasper Bertisen and Michael Rowe – Resource Capital Funds
FEMP Reunion – Venlo November 2013
PAGE 2
How I Ended up with Resource Capital Funds
PAGE 3
“Is Private Equity eyeing the mining sector?” – Financial Post (April 29, 2013)
“Upheaval in mining sector a test for Private Equity” – Reuters (April 30, 2013)
“Private Equity – the last basIon of mining finance” – Industrial Minerals (May 8, 2013)
“Mine sales in bear market brings Private Equity on prowl” – Bloomberg (May 9, 2013)
“Is mining the next big thing for Private Equity?” – PE Hub Canada (June 24, 2013)
“Davis leads line as Private Equity mulls mining” – Mining MX (June 28, 2013)
PAGE 4
v SECTION I -‐ WHAT IS PRIVATE EQUITY?
v SECTION II -‐ AN INTRODUCTION TO RESOURCE CAPITAL FUNDS
v SECTION III -‐ RCF INVESTMENT STRATEGY – THE GLOBAL PICTURE
v SECTION IV -‐ RCF INVESTMENT CRITERIA AND DUE DILIGENCE PROCESS
v SECTION V -‐ RCF INDUSTRY SUPPORT
Contents
WHAT IS PRIVATE EQUITY? SECTION I
PORT OF LONGVIEW, AMBRE ENERGY, WASHINGTON
PAGE 6
v A broad term that is more descrip7ve of structure than investment style
Partnership where capital is sourced from long term, pa7ent investors termed Limited Partners or “LPs”
v Long lived, closed-‐end funds, oEen with a 10 year life and a 5 year investment period
v Capital is commiJed up front and is drawn down pro rata as investments are entered into. Exit proceeds are returned directly to LPs
v Generally illiquid investment with LPs unable to withdraw commiJed capital and limited secondary market to transact LP interests
v Investment manager manages the fund and receives a management fee to do so
v Investment manager contributes its own money to the fund and receives a carried interest in gains made by the fund
WHAT IS PRIVATE EQUITY?
PAGE 7
v U7lizes a range of strategies
§ Equity, conver7ble debt, bridge and mezzanine financings, rollups, buyouts, etc.
§ Generally privately nego7ated with companies
§ Can be in public or private companies
§ Generally want some level of involvement
v Targets “equity type” returns
§ Targets mul7ples of current valua7on over 3 to 5 year period
§ Returns typically expected through re-‐ra7ng and de-‐risking of companies and projects
In the business of building companies and crea7ng value for shareholders
WHAT IS PRIVATE EQUITY?
PAGE 8
WHAT IS PRIVATE EQUITY?
PAGE 9
GLOBAL PRIVATE EQUITY DRY POWDER
Source: Preqin
AN INTODUCTION TO RESOURCE CAPITAL FUNDS (RCF) SECTION II
GREENBUSHES MINE, TALISON LITHIUM, AUSTRALIA
PAGE 11
RESOURCE CAPTAL FUNDS
ESTABLISHED TRACK RECORD
EXPERIENCED VALUE INVESTOR
TRUSTED PARTNER
WHO WE ARE î Dedicated professionals with appropriate industry, sector and geographic experience
î Experienced mining industry investment specialists with a well-‐established track record
î A trusted partner that operates with integrity
î RCF was established in 1998 and has a global presence with offices in Denver, Perth, New York and Toronto
WHAT WE BRING î Experience with development, construc7on and opera7on of mining assets across a broad range of minerals
î Innova7ve, adaptable and diverse investment strategies
î Provide long-‐term strategic thinking and discipline
î Extensive industry and finance networks
HOW WE WORK î Seek to iden7fy and invest in public and private mining assets with strong fundamentals and appropriate valua7ons
î Pa7ent, stable investor focused on crea7ng long-‐ term sustainable value
î Rigorous due diligence process with a controlled risk approach
PAGE 12
5% 5% 8%
42%
33%
7%
Africa Asia Europe North America Oceania South America
21%
8%
23% 18%
13%
13% 4%
Energy (Coal/Uranium) Industrial Minerals Minor Metals Base Metals Precious Metals Bulk Service
Public Private Private to Public Core Strategic Strategic to Core
RCF MANAGES A DIVERSIFIED PORTFOLIO
50 deals
MINERALS
GEOGRAPHY
PUBLIC AND PRIVATE
STRONG FOCUS ON CORE DEALS
79 deals
79 deals
35 deals 23 deals
12 deals
55 deals
59 deals
53 deals
9 deals
AT EXIT /CURRENT
AT INVESTMENT
AT EXIT /CURRENT
Based on Total Invested Capital across all RCF Funds as of 6/30/13
AT INVESTMENT
# of commodi7es 27 # of countries 39
RCF INVESTMENT STRATEGY – THE GLOBAL PICTURE SECTION III
SANTA RITA MINE, MIRABELA NICKEL, BRAZIL
PAGE 14
0 2 4 6 8
10 12 14 16 18 20
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Germany USA Japan China India Brazil S. Korea
Copper selected by way of example. Demand will vary by mineral and may be higher or lower than the demand for copper.
MINING IS A GROWTH STORY
Copper demand is steadily growing and is forecast to increase to over 32Mt
by 2026, a 4% CAGR
Intensity of consump7on increasing in emerging markets driven by urbaniza7on /
infrastructure development
Source: AME
Source: AME
COPPER DEMAND (Mt)
2011
COPPER INTENSITY OF USE (KG/CAPITA/YR)
0
5
10
15
20
25
30
35
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
North America Central & South America Europe CIS Middle East Africa Asia Oceania
Millions
PAGE 15
î Absolute capital cost increases and intensity
î OperaXng costs increasing
î Regulatory constraints
§ Permikng 7metables § Green / NGO issues § Poli7cal risk (tax, royal7es, contracts) § Land access
î Infrastructure requirements
î Financing
î Human resources
§ Skills shortages
î Engagement with local populaXons
MINING SUPPLY ISSUES
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
2002
2004
2006
2008
2010
2012
US$/tpa Cu
CAPITAL COST INTENSITY FOR COPPER MINES
Source: In7erra / RCF 151 copper projects at various stages
PAGE 16
LONG TERM PRICES?
* Assumes average mine life of 15 years and straight line deprecia7on, costs aEer by-‐product credits
Source: AME/RCF
CUMULATIVE COPPER MINE CASH COSTS*
FUNDAMENTALS SUGGEST COMMODITY PRICES WILL NEED TO SETTLE AT A LEVEL SUFFICIENT TO SUPPORT NEW SUPPLY
Copper selected by way of example, pricing and produc7on for other minerals will vary and may be higher or lower than that of copper.
-‐¢200
-‐¢100
¢0
¢100
¢200
¢300
¢400
¢500
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
US¢/lb
Cu
% of Total Copper (Cu) Produc7on
2012 Cash Costs
2011 Copper Price Trailing 10yr Avg.
2012 Cost + 15% IRR *
Apr 2012 Copper Price
2005 Cash Costs
2005 Copper Price Trailing 10yr avg.
PAGE 17
43 22
3 22 22
0
100
200
300
# of Com
panies
2,700 2,660
* Listed mining companies on TSX, NYSE, ASX & LSE stock exchanges – Market Capitaliza7on 6/30/13
INDUSTRY FUNDING GAP
Range US$B < 0.5 0.5 – 1.0 1.0 – 1.5 1.5 – 2.0 2.0 -‐ 5.0 5.0 +
Aggregate US$B 61 30 26 5 67 513
Aggregate US$B 69 75 42 40 130 122
RCF target market capitaliza7on range
Source: Bloomberg
Source: In7erra
US$144B required to develop 658 projects with announced capital costs of less than US$1.0B
CAPITAL COST
MARKET CAPITALIZATION*
COMPANY
PROJECT
524
134
42 31 48 19
0
150
300
450
600
# of Projects
Range US$B < 0.5 0.5 – 1.0 1.0 – 1.5 1.5 – 2.0 2.0 -‐ 5.0 5.0 +
PAGE 18
TARGET PROJECT PARAMETERS Project Status: Scoping, Pre-‐feasibility and Feasibility Company Market CapitalizaXon: >US$10M and <US$1B Project Capital Requirement: >US$50M and <US$1B
Source: Bloomberg/In7erra/RCF
MARKET CAPITALIZATION* RELATIVE TO PROJECT FUNDING REQUIREMENT
*Market capitaliza7on 6/30/13
Source: Bloomberg/In7erra
0
2
4
6
8
10
12
< 10
0
100 -‐ 2
00
200 -‐ 3
00
300 -‐ 4
00
400 -‐ 5
00
500 -‐ 6
00
600 -‐ 7
00
700 -‐ 8
00
800 -‐ 9
00
900 -‐ 1
000
US$B
Capital Requirement Range (US$B)
Capital Required Market Capitaliza7on
-‐
10
20
30
40
50
60
70
80
< 1x
1x -‐ 5x
5x -‐ 10x
10x -‐ 1
5x
15x -‐ 2
0x
20x -‐ 2
5x
25x -‐ 3
0x
30x -‐ 3
5x
35x -‐ 4
0x
40x -‐ 1
00x
# Co
mpanies
Capital Required / Market Capitaliza7on
RCF INVESTMENT CRITERIA AND DUE DILIGENCE PROCESS SECTION IV
MOUNTAIN PASS MINE, MOLYCORP INC., CALIFORNIA
PAGE 20
EssenXal
v Appropriate valuaXon
v Good quality resource iden7fied
v Favorable indica7ons on metallurgy, product quality and markeXng
v JurisdicXons where:
§ Title is secure
§ Business can be conducted
§ Projects can be permiJed
Beneficial
v Quality management (mo7vated / skin in game)
v More advanced engineering / market studies
v Sound vehicle (public lis7ng good, but not essen7al)
v Strong upside potenXal (resource, metallurgy, commodity price, etc.)
RCF INVESTMENT CRITERIA
PAGE 21
PROJECT VALUATION RANGES
RCF INVESTMENT SPECTRUM
EXPLORATION (1-‐3)
RESOURCE DEFINITION
(1-‐2)
SCOPING STUDY (1)
PRE-‐FEASIBILITY STUDY (1)
FEASIBILITY STUDY (1-‐2)
PERMITTING FINANCING
(1-‐2) CONSTRUCTION
(1-‐2) OPERATION (ONGOING)
2x
1x
NPV
/ Share Mul7p
le
Phase of Project (Approximate Years)
HIGH RANGE
DEVELOPMENT CONSTRUCTION OPERATION
RCF INVESTS AT VARIOUS STAGES OF THE DEVELOPMENT CYCLE, AVOIDING EARLY EXPLORATION STAGE COMPANIES.
PAGE 22
DUE DILIGENCE PROCESS
RISK / OPPORTUNITY ASSESSMENT
TECHNICAL DUE DILIGENCE
STOCHASTIC MODELLING VALUATIONS
COMMERCIAL AND LEGAL TERMS
Each potenXal investment is individually analyzed using a rigorous and
integrated due diligence process.
RCF INDUSTRY SUPPORT SECTION V
DECKER MINE, AMBRE ENERGY, MONTANA
PAGE 24
EducaXonal support: Holis7c, long term view on suppor7ng the mining industry to develop high quality leaders
v Colorado School of Mines -‐ Fellowship established in 2003, with up to two internships offered each year
v University of Western Australia -‐ Mining Leaders Scholarship Endowment established in 2007 by RCF’s Managing Partner James McClements together with RCF related mining en77es and individuals
v FederaXon of European Mineral Programs -‐ Long standing supporter of the FEMP programs, including sponsorship of the reunion and student trips
v York University, Schulich Business School – Created the first scholarship for a new Mining MBA program established in 2012
v University of Toronto, Rotman Business School – RCF offers one scholarship per annum
RCF FoundaXon: Supports projects in areas that RCF poryolio companies are ac7ve in as well as chari7es in which RCF employees have a personal interest
RCF INDUSTRY SUPPORT
QUESTIONS?
PAGE 26
The information provided is for general knowledge, as presented, relating to options when structuring company financing. The information contained herein should not be relied upon for any investment making decision and is not an offer or solicitation of any securities or investment services.
DISCLAIMER
PAGE 27
www.resourcecapitalfunds.com
RCF Management L.L.C. 1400 Sixteenth Street, Suite 200
Denver, CO 80202, USA Tel. +1 720 946 1444
RCF Management (Toronto) Inc. 25 York Street, Suite 610
Toronto, Ontario M5J2V5, Canada Tel. +1 647 726 0642
Resource Capital Funds Management Pty Ltd
Level 3, 24 Kings Park Road West Perth, WA 6005, Australia
Tel. +61 8 9476 1900
RCF Management L.L.C. 224 Wall Street, Suite 202 Hun7ngton, NY 11743, USA
Tel. +1 631 692 0043
MINING FINANCE MASTERCLASS Gavin Ferrar
Introduction • Providers of finance and types of finance available to
miners • Example Structures • Evaluation and Risk Analysis • Application of finance • Example deals
Typical Sources of Funding for Mining • Public equity markets • Private Equity • Banks • Debt Capital Markets • Streaming/Royalty Companies • Development Finance Institutions (IFC; FMO; DEG etc.) • Export Credit Agencies • Equipment Suppliers e.g. Caterpillar
Emerging Trends in Mining Finance • Traditional brokered equity finance depressed • Bank appetite diminished
• Fewer banks • Tighter lending criteria • Increased regulation = less credit available
• The Emergence of Private Equity • $billions being raised raised for PE investment into mining • Large existing players becoming involved (e.g. Carlyle)
• “Streaming” payments • Commodity Traders
• Desire to control the underlying commodity • Mining Companies
• Opportunistic M&A
Life Cycle of a Mining Project
Time
Sha
re V
alue
Grassroots exploration
Mature Production Pre-feasibility and
Feasibility Study
Discovery!
Financing; Construction and Ramp-up
• Typically 8-10 years from discovery to production
Equity • Risk Capital • Exploration = high risk • Typically all pre-construction project development has
been equity funded • Sources of equity funding:
• Friends and Family • Private Investors (HNW) • Retail Investors (via Brokers) • Family Offices • Institutions/Fund Managers • Private Equity Houses • Strategic Investors/JV Partners
Typical Elements of Equity Finance
Public Market
• Listing Prospectus • Describes the intended
activities of the company • Introduces Management • Use of proceeds of fund
raising • Competent Persons’ Report • Large Investor may get
board seat • Risk of being an Insider
• Recourse via Legal Action
Private Equity
• Large amount of equity committed
• Extensive due diligence on assets and management
• Tranched Investments on milestones
• Partnership approach • Influence over management
and expenditure
Equity Evaluation Methods • Discounted Cash Flow (NPV)
• Discount Rate • Commodity Prices
• Comparable Analysis • EV/Resource • In situ resource/reserve valuation
• P/NAV • Discount to NAV vs. Position on Development Curve
• Earnings Multiples • Most applicable to diversified companies (but also used for single
asset producers) • EBITDA • FCF • EPS • PER
What’s in a discount rate? • Commodity • Location • Technical Complexity • In other words: Risk of project execution and delivery • Typical range is 5-20%
Commodity Streaming • A forward purchase contract by another name • Life of project contracts • Typically by-product derived revenue, e.g. gold from
copper mines. • Metals bought at deep discounts to spot prices, e.g.
$500/oz gold • Some upside participation for producer, e.g. >$1,450/oz
gold • Lack of control? • Very large size, e.g. +$1 billion to Vale • Similar to, but more complex than, Royalty Financing
Types of Debt Finance • Corporate Loans
• Revolving Credit Facilities • Term Loans • Acquisition Finance
• Debt Capital Market Issues • Investment grade bonds • High Yield Bonds • Convertible Bonds
• Structured Debt • Project Finance • Commodity Trade Finance/Pre-Export Finance • Convertible Notes • Mezzanine Finance • Metal-linked Notes
Typical Elements of Debt Finance • Security
• Fixed Charge/Floating Charge/Liens • Guarantees
• Parent/Subsidiaries (Upstream) • Covenants
• Financial • Net Debt:EBITDA • Gearing (Debt:Equity) • Interest Cover
• Project Ratios (Debt Service Cover Ratio/ • Loan Life Cover Ratio/Reserve Ratio) • Reporting Covenants • Technical Restrictions – LOM Plan
• Direct Agreements • Independent Technical Audit • Completion Test
Typically Project Finance
Example Loan Structure
Parent Company
Project Co.
Lenders
Loan
€50M
Gua
rant
ee
Finance SPV
Project/Mine
€50M
Gua
rant
ee
Sha
re
Sec
urity
Ass
et
Sec
urity
Offtake plus Debt Issue Example
5 years
Listed Co. Offtaker
Project Co.
Bond Holders
€50M
€5
0M
35%
65%
Project 10
0%
Listed Co. Offtaker
Project Co.
Bond Holders
€50M
Bon
ds
€50M
S’h
olde
r Lo
an
€27M
Con
verti
ble
Not
e (2
nd R
ank)
Project
100%
G’te
e
Risk Analysis I • Technical
• Geology • Mining • Metallurgy • Geotechnical • Tailings Management • Construction (EPC/LSTK vs EPCM)
• Legal • “Title is Vital” • Documentation
• Concessions/Licences • Loans • Contracts
Risk Analysis II • Management
• Track record • Competence • Alignment of interest in compensation
• Socio-Environmental
• “License to Operate” • Equator Principles
• Political Risk
• Royalties and taxes • Government carry • Expropriation • PRI availability
Risk Analysis III • Infrastructure
• For both construction and operation • Commodity Price
• Macro fundamentals • Volatility • Substitution
• Project Cost • Capital Cost Inflation • Operating Cost
• Financing Risk • Total Project Cost vs Market Capitalisation • Availability of credit • Market conditions • Valuation
Approach to Risk Analysis • Individuals each have a different appetite for risk • Therefore risk is difficult to quantify • As a result it is difficult to be consistent in our assessment
of risk • Consistent across commodity • Consistent across geography • Consistent between team members
• A tool to use: • Likelihood – what is the probability of an event occurring?; and • Consequence – what is the cost impact or outcome of an event?
Risk Matrix
Insignificant Minor Moderate Major Catastrophic
Rare Low Low Moderate Significant Significant
Unlikely Low
Low
Moderate
Significant
High
Possible Low
Moderate
Significant
High
High
Likely Moderate
Significant
Significant
High
High
Almost Certain Significant
Significant
High
High
High
CONSEQUENCE
LIK
ELI
HO
OD
Commodity Price Volatility
Hedging • Contract to receive/deliver a commodity at a fixed price at a
certain point in the future • Futures and Options
• Priced according to volatility and credit risk • Applies to so-called Terminal Market Commodities
• Gold • Base Metals + Steel + Moly • Coal – API2; API4; GlobalCoal • Iron Ore
• Banks and Commodity Traders will provide contracts (members of relevant exchanges) • LME • NYMEX • COMEX • Shanghai
• Bespoke and Standard Contracts
Is “Hedging” a dirty word?
Benefits
• Locks in Commodity Price • Guarantees minimum
income • Smooth cash flows • Insurance against fall in
commodity price
Disadvantages
• Locks in Commodity Price!
• Margin requirements • Delivery risk • Committed Production • Over-hedging
Hedgebook Structuring • Strong linkage between:
• Quality of assets (operating cost/ life of mine); • Expected cash flow volatility; • Capital structure (amount of leverage); • Corporate objectives; and • Hedgebook structure.
• It is important to consider: • Level of hedging required by debt (should be related to smoothing cash
flow and insuring downside); • The Producer’s (typical) requirement to balance the level of hedging
and maximise upside price participation; • The minimisation of the risk of over-commitment; • Credit appetite of hedge counterparty; and • Market liquidity.
Major Influences on Type of Mining Finance • Position in life cycle • Commodity
• Terminal Market or exchange-traded commodities vs speciality commodity
• Bulks vs Others
• Capital Requirement • Jurisdiction
• Is it mining-friendly?
• Overall Risk/Return Profile
Appropriate Finance Through Project Reserve Development
Suitable for equity
Bankable Suitable for early
stage equity-linked debt
Investment Instruments Through Time
Time
Sha
re V
alue
Grassroots exploration
Mature Production Pre-feasibility and
Feasibility Study
Discovery!
Financing; Construction and Ramp-up Equity/Warrants
Equity/Convertibles
Equity/Debt/Streaming
Debt
When Mining Finance Goes Wrong! • Ashanti Goldfields, 1999-2004 • Tonopah Copper Mine, Nevada, 2001 • Kwale Mineral Sands, Kenya, 2006 • Baia Mare, Romania, 2000 • Antamina, Peru, 2002 • Lisheen Zinc, 2003 • Great Basin Gold, 2012
Ashanti Gold Price “Disaster”
Common Pitfalls • Capital Cost Underestimated
• Top-up funding in any form is expensive!
• Engineering Issues • Underfunding
• Use a sources and uses table Show example
• Capital Indiscipline • Dilution • Creation of share overhang • Documentation • Mismatch of currency of debt and earnings
Financial Careers in Mining • Mining Companies
• Senior Management: CEO/CFO/BD • Financial Institutions
• Fund Management (Public/Private Equity/Hedge Funds) • Banking (Lending, Commodities, Debt Capital Markets) • Equity Capital Markets • Equity analyst • Corporate Broking • Royalty and Streaming Companies
• Commodity Traders • Need access to the underlying metals for trade flows
• Advisory • Investment Banks • Boutiques • Technical Consultants
Useful Resources • Mining Journal • Metal Bulletin • News Websites • LME • LBMA • Company Websites and Press Releases • Broker notes • Talk to your peers!
Conclusions • Wide variety of mining finance options available • Mining is a risky business
• Focus on your risk analysis
• Match the instrument to the risk profile • Every financing is different. • There are always exceptions! • Remain curious
